Assessing the Impact of Rising Oil Prices on the Domestic Gas Production

  • Jan 19, 2020 AEDT
  • Team Kalkine
Assessing the Impact of Rising Oil Prices on the Domestic Gas Production

Oil prices and LNG production exhibit correlation depending upon the nature of oil and natural gas resources available in a particular geography, and while the oil prices are under focus it would be worth to analyse if the LNG production, in which Australia is currently holding the top spot would witness any dire impact ahead.

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Understanding Oil and Gas Reserves

Oil and gas both are a type of fossil fuel which originate from the decomposition of organic matter; however, the decomposition would take the shape of oil or natural gas depending upon certain factors such as heat and pressure.

Generally, both oil and gas reserves coexist; however, one type of commodity, i.e., either oil or gas, become primary in a reservoir and another one becomes secondary. Because of this interconnection, the prices of oil and gas production exhibit strong correlation.

Now, that correlation could either be positive or negative, which depends upon the nature of the oil & gas reserve.

Associated Reserves- When the oil and gas reserves are associated or interlinked an increase in the market price of one, increase the production of another in tandem.

On the contrary, when the reserves are non-associated the spike in prices of one commodity could limit the production of another by potentially transferring the economic resources to the development of the commodity, which is gaining momentum in the market.

Understanding Gas Reserves of Australia

Australia is a fossil fuel-rich continent, and it exports a large portion of energy as compared to its import. Most of the conventional gas resources in Australia are located in North-West Shelf offshore in the Carnarvon, Browse, Bonaparte and Gippsland basins.

Australia’s identified conventional gas resources had grown significantly since the discovery of over 10 trillion cubic feet and over 3 trillion cubic feet of gas fields in the 1970s, and the exploration of unconventional gas resources such as coal seam gas (or CSG), shale gas, and tight gas are widespread across the continent.

Also Read: LNG-Hero or Hubris for ASX Energy Stocks?

As per the Australia Energy Resources Assessment (or AERA), the country holds ~279,685 petajoules of total identified gas resources.

While gas reserves in Australia are large, the oil reserves are on a decline, and the majority of remaining petroleum liquid resources are condensate & LPG, are from offshore Browse and Carnarvon basins. The plunge in crude oil prices from over USD 100 a barrel in 2014 to USD 27 a barrel in 2016 had halted many exploration activities.

However, as the oil market is emerging back, and the black gold is reaching above USD 60 a barrel mark, there are now chances of increase in interest of oil exploration activities, which is why it becomes crucial for energy investors to understand the recovery in crude oil prices could impact their investment in the LNG/natural gas sector.

Suggested Read: ASX-Listed Oil & Gas Stocks- A Perfect Buy For Short-term Gains?

Gas-to-Oil Ratio (GOR Ratio)

Gas-to-oil ratio (or GOR) typically denotes the relation between the volume of gas generated during the production of oil. Typically, a reserve with low GOR (below two) represents oil as a primary resource with a little associated gas.

A reserve with GOR above 5 reflects gas as a primary resource with a little to no associated oil, while a GOR between 2 to 5 reflects gassy oil to wet gas depending upon the closeness to the lower or upper range of 2 to 5.

As per the database on Global Hydrocarbon Supply Chain Module on global resources:

  • Globally, oil is almost exclusively available at GORs lower than 5, and natural gas is available both at GORs below 5 and above 5.
  • The data also suggests that most of the oil is exclusively available at GORs below one.

GORs could be seen as a continuum variable with increasing trend reflecting an increase in primary oil resource, and vice versa.

A study by the United States Energy Information Administration suggests that Australia holds very fewer reserves below GOR of five while containing a large reserve with GORs above five; thus, it could be inferred that the extraction from Australia’s oil and gas reserves could easily rise or fall independent of a price change in each other.

Also, the presence of low GORs suggests that the oil and gas production in Australia are typically independent and witness variation in production depending upon the price of an individual commodity rather than the relative price change of each other.

Key Takeaways

  • Oil prices and LNG production exhibit correlation depending upon the nature resources available in a particular geography.
  • Oil and gas both are a type of fossil fuel which originate from the decomposition of organic matter; however, the decomposition would take the shape of oil or natural gas depends upon certain geographical factors such as heat and pressure.
  • Generally, both oil and gas reserves coexist and demonstrate interconnection, because of which, prices of oil and gas production exhibit strong correlation.
  • The correlation could either be positive or negative, which depends upon the nature of the oil & gas reserve.
  • Associated Reserves- When the oil and gas reserves are associated or interlinked an increase in the market price of one, increase the production of another in tandem.
  • Gas-to-oil ratio (or GOR) typically denotes the relation between the volume of gas generated during the production of oil.
  • Typically, a reserve with low GOR (below two) represents oil as a primary resource with a little associated gas.
  • GORs could be understand as a continuum variable with increasing trend reflecting an increase in primary oil resource, and vice versa.
  • A study by the United States Energy Information Administration suggests that Australia holds very fewer reserves below GOR of five while containing a large reserve with GORs above five.
  • The oil and gas production in Australia are typically independent and witness variation in the production, depending upon the price of an individual commodity rather than the relative price change of each other.

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