Monday, January 6, 2020

Understanding Equinor's Australian Bight play: Norway's climate change evangelising government  can see that  Australia's determination to transition to a carbon free economy will end in grief, and to increased reliance on fossil fuel revenues, with less restrictions 

by Ganesh Sahathevan

In mid-December the ABC (and others) reported

The National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) has accepted Equinor's environmental plan, the second of four approvals required before drilling activity can begin.
Drilling in the Bight has been fiercely opposed by environmental and community groups which are concerned about the threat of a catastrophic oil spill.
Under Commonwealth law, energy companies must have a petroleum title, accepted environmental plan, well operations management plan and facility safety case before they can undertake offshore oil and gas activity.
The environment approval process took eight months, with NOPSEMA reviewing more than 30,000 submissions and twice requiring Equinor to modify and resubmit its plans.
The company, which is majority owned by the Norwegian Government, plans to drill its Stromlo-1 exploration well about 372 kilometres south of the Nullarbor coastline.

The Norwegian Government is a leader in climate change initiatives but it does rely on oil and gas exploration in Norway to finance itself. 
The twin and contradictory positions means that the dirty but necessary business of oil and gas exploration must be increasingly conducted outside Norway. However, the pursuit of the Australian Bight lease is intriguing for given the environmental concerns even local players like BHP seem to have steered clear of the region for fear of  "green" protests.
The Norwegian's Australian Bight play can therefore be seen as a long-term bet on the prospect that at some point in the future Australian governments will, forced by growing deficits, have no choice but to relax environmental rules so as to generate relatively steady and certain cashflows from taxes on coal, oil, gas and resource companies. The taxes are likely to be high but Equinor is government owned and can readily seek cheap debt and equity finance from its shareholders.
The reason why future Australian governments might be desperate enough to abandon what are even today, by world standards, relatively strict environmental and cultural restrictions on the exploration and mining industry are obvious: unless the country's two party system collapses, it does seem likely that future governments will restrict mining activities (due to lobbying pressures from inner-city electorates) despite being reliant on the revenues from mining to finance government expenditure, which includes an ever growing social security bill.
Chart 1: Estimated Australian Government expenses on social security and welfare
At some point, rules will have to be relaxed, and anyone still left standing in the industry can make substantial profits. These are more likely than not to be government owned players like Equinor, and of course the Chinese state-owned players.

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