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Policy patchwork makes political risk real for oil and gas sector

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The Northern Territory government made a landmark decision in April to lift its 18-month blanket ban on hydraulic fracturing, after findings from an independent scientific inquiry showed the risks of the industry could be mitigated, reduced or avoided.

fracking insuranceAdopting all 135 recommendations made by the inquiry while ensuring 49 per cent of the state would be off–limits to exploration, the decision was welcomed by the oil and gas industry as a victory for its own interests and for the territory’s economic future.

However, the decision was a reminder of just how dependent the industry is on both the political zeitgeist of the time and the government in power. It also contrasted with the other moratoriums or inquiries that are still ongoing in other states of Australia.

It’s a situation that has made common use of a term that would once seemed out of context to use in Australia, with a system that is the envy of the rest of the world.

Political risk.

Risky business?

From a risk management standpoint, the matrix of red, yellow and green lights that make up Australia’s current stance on oil and gas exploration at state and federal levels can be seen as a warning signal for the sector. The picture contains significant risk, not least because those signals can change as quickly as the outcome of an election.

“Having moratoriums on fracking could be seen as a political risk for Australia,” explains Gallagher account executive Teagan Musgrave. “We have had 16 different reviews on fracking in Western Australia alone that have come back with findings indicating it is a safe practice. What we are seeing is basically a stalling in our ability to utilise our national assets, which is making us more reliant on other countries around the world.”

At a Federal level, the Turnbull Government has encouraged state governments to work with the oil and gas industry to ensure continuous domestic supply is maintained, and economic benefits are realised. However, the states have a variety of approaches:

Victoria: The Andrews government in Victoria still declares it is proud of its ongoing ban on onshore CSG and conventional oil and gas exploration, although it has recently opened up offshore oil and gas reserves in the Otway Basin for exploration.

NSW: A freeze on new exploration licences since 2011 continues.  Under the NSW Gas Plan, a series of exclusion zones were established, and the government is pursuing a more ‘strategic’ ‘pause, reset and recommence’ approach of tougher regulation.

Queensland: A long-term leader in LNG and CSG, Queensland continues to favour sustainable growth in oil and gas, with more acreage recently opened up for projects that will increase domestic gas supply, with further tenders due in the future.

WA: A ban on fracking has been imposed for the Perth metropolitan, Peel and South-West regions after the election of the McGowan government, while a moratorium is in place for the rest of WA pending the outcome of a new scientific inquiry.

SA: The Fraser Institute Petroleum Survey ranked South Australia as the third most attractive small reserve holder jurisdiction in the world in 2017, thanks to its PACE exploration acceleration initiative. Newly elected government will continue this.

This roller coaster of legislative change is the opposite of what the industry has been seeking all along: a fracking insuranceregime that provides long-term regulatory certainty for corporates and investors. The same is the case for New Zealand, where a new government led by the progressive Prime Minister Jacinda Ardern has banned new offshore oil and gas exploration licenses, causing uncertainty over the future of existing licenses.

“New Zealand is now shifting focus from oil and gas to renewables, after previously promising new exploration,” Musgrave says. “There is as yet no clear plan of how they are going to achieve that - are they going to put $100m into developing a field with the future uncertain or being faced with limitations on what the government will allow?”

Inside the tent

The complex regional picture is making political risk real for the oil and gas industry, but the industry’s importance is not lost on government. The most recent official ABS data shows while total national petroleum exploration expenditure fell by 13.2 per cent in the December quarter 2017, it was still valued at A$254.3 million. Onshore exploration (which fell 22.8 per cent) contributed A$77.7 million to this total, while offshore exploration (down 7.7 per cent) is worth A$177.5 million. The industry is estimated by APPEA to employ 32,000 people, while creating 70,000 other jobs.

This means oil and gas is not powerless. The feedback from Gallagher’s clients is that, through working with local governments and the public favourable outcomes can be reached for future development. 

“Gallagher is a broker partner of our local oil and gas sector, and we are in the business of ensuring the risks our clients face are met with tailored insurance cover,” Musgrave says. “What our clients tell us is that, by being active in industry groups and by providing submissions when called for, they are ensuring the voice of the industry is heard, they are participating in the process. Here at Gallagher, we believe this is the right approach. It is important for the oil and gas industry to continue to meet the political risks around Australia to ensure that outcomes are reached that meet the interests of both the industry and the public,” she says.

That’s because use of our common resources is common sense, when it is done right.

“We have some of the most stringent and comprehensive practices in the world from an environmental standpoint. We want to focus on getting our resources out of the ground so we control the price in our domestic market more effectively?” Musgrave says.

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