Mining companies show changes in exploration and capital expenditures

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In his Future Gas StrategyThe Australian Government emphasises the importance of exploration to enable access to new sources of gas supply.

They see increased production as a way to solve the energy problems of the coming decade, after 10 years of falling spending on oil and gas exploration. The decline in oil exploration came at a time when the world is flooded with gasand the global energy sector is investing almost twice as much in clean energy as is the case with fossil fuels.

The investment shift towards a more sustainable energy system has also been reflected in exploration spending in the mining industry. Mineral exploration spending has exceeded oil and gas exploration spending over the past seven years, while capital expenditure (capex) on mineral projects has exceeded oil and gas capex since 2018-19.

Data from the Australian Bureau of Statistics (ABS) shows that oil exploration in Australia fell to a 21-year low of AU$912.90 million (US$602 million) on a seasonal basis in the 2022-23 fiscal year to June 30. It was the lowest spending on exploration for new gas and oil prospects since AU$879.60 million was spent in 2001-02 and down 81% from the record AU$4.84 billion spent in 2013-14 – when Australia was in the midst of its biggest-ever liquefied natural gas (LNG) expansion.

Oil exploration spending rebounded in the first nine months of 2023-24, reaching a total of AU$964.50 million. If spending levels continue in the April-June quarter, total spending will reach 2019-20 levels of around AU$1.25 billion. However, this spending remains small compared to mineral exploration spending.

Money goes to minerals and metals

For companies mining metals, which are key to the energy transition, exploration budgets are rising. Exploration spending for copper, nickel, cobalt, lithium and other key minerals has outpaced spending on oil over the past four years, according to ABS data. This in turn contributed to record exploration of A$4.13 billion in fiscal 2022-23.

Figure 1: Australia’s resource expenditure, AU$ million

Source: ABS.

Higher spending on mineral exploration has led to the development of new supply of metals needed for the energy transition, along with increased capital expenditure. For the past five years, capital expenditure on metals production capacity has exceeded that on oil and gas production capacity. The change in capital expenditure has been dramatic. In 2013-14, capital expenditure on new oil and gas production capacity, which predominantly reflected new LNG capacity, was AU$60.71 billion. It then fell to a 12-year low of AU$7.42 billion in 2020-21 and was AU$12.41 billion in the first nine months of 2023-24. according to ABS.

Figure 2: Spending on metals projects outstrips spending on oil and gas projects, despite rising costs

Source: ABS.

This record spending on new LNG processing capacities in the first half of the last decade, it tripled its nameplate capacity to 88.2 million tonnes per annum (Mtpa). Record spending on additional gas supplies in fiscal 2013-14 was three times higher than the metals sector’s capital expenditure of AU$19.21 billion during the same period. Nine years laterThe metals sector spent AU$20.97 billion on new capacity last year, compared with AU$14.41 billion on oil and gas capacity. In 2023-24, spending on metals capacity is on track to exceed spending on oil and gas for the sixth year in a row (see figure 2).

Renewable energy demand drives metals investment

The surge in metals exploration and capital spending comes as global investment in renewable energy sources, which consume large amounts of copper, nickel, lithium and other key minerals, has outpaced investment in new fossil fuel capacity.

According to the International Energy Agency (IEA)Global energy investment is set to exceed US$3 trillion for the first time in 2024, with US$2 trillion earmarked for clean energy technologies and infrastructure. In its World Energy Investment 2024 report, the IEA states: “Clean energy investment has accelerated since 2020, with spending on renewable energy, networks and storage now higher than oil, gas and coal combined.”

Figure 3: Global Clean Energy and Fossil Fuel Investment, USD billion

Source: IEA.

The industry says one thing and does another

The decline in spending on oil – mainly on gas in Australia because we are dependent on imported petroleum products as fuel for road transport – is at odds with the industry narrative is that Australia needs more gasIf this were the case, one might assume that gas producers should spend more resources on exploration.

This is a point that the Office of the Chief Economist of Australia (OCE) raised in its latest report Resources and Energy Quarterly (REQ) March 2024 report: “Gas exploration has been consistently low over the past five years and there is a risk that the current pipeline of gas projects under development will be insufficient to offset declining reserves. Several projects are likely to start to deplete reserves in the next 5-10 years, including the large North West Shelf project in Western Australia. There is the potential for the North West Shelf to be supported by third-party gas, which operator Woodside and its partners are attempting to secure. However, declining reserves will impact a wider range of projects over time, and higher domestic gas consumption (driven by the closure of domestic coal-fired power stations) could put pressure on supplies.”

There is also the prospect of a global LNG glut from 2026 onwards, given that the world is undergoing its greatest expansion in history. IEEFA estimates that 193 Mtpa of new LNG supply capacity could be added globally from 2024 to 2028, an increase of 40% over that period. In addition, IEA predicts oil glut by the end of the decade, which in turn would affect gas prices, as most global LNG contracts are linked to the price of oil. A scenario of weaker gas prices and excess supply could affect future spending on gas exploration and development.

Figure 4: Global LNG supply expansion 2024–2028, Mtpa

Source: IEEFA estimates based on data from International Gas Union, International Liquefied Natural Gas Importers Group, Independent Commodity Intelligence Services, Kpler, Global Energy Monitor, company releases and financial statements, and press reports.

The gas production sector has shown reluctance to embrace the energy transition, instead opting for more gas production in Australia – despite about 80% of its production being exported as LNG or used to produce LNG. However, the government’s Future Gas Strategy Analytical Report notes that Australian LNG exporters will see most of their current long-term LNG contracts expire by 2036 (see figure 5).

The timeline for developing LNG projects from discovery to production is often measured in decades. Therefore, the lack of exploration spending suggests one of two possibilities. Either LNG producers believe they have sufficient undeveloped gas resources in their portfolios to meet existing contractual obligations and the option to continue production beyond the estimated contract expiration date. Or they are looking elsewhere because Australia has less than 2% of the world’s gas reservesand perhaps the best fields have already been developed.

Figure 5: Average Australian Contract Completion Date by Trading Partner

Source: Australian Government, Office of the Chief Economist. Note: Includes only contracts that are publicly available.

Perhaps the resource sector is taking advice from the International Atomic Energy Agencywhich says new gas deposits are not needed if the world is to meet its emissions targets – limiting global warming to 1.5°C by 2050. That is why they are investing more in metals that will be used in the energy transformation.

Australia is a key player in the metals sector in the context of the energy transition

Australia is a major producer of metals used in renewable energy infrastructure, including iron ore used in wind farms and transmission towers. Australia is a global eighth largest copper producer; this fifth largest nickel producer; and the largest, third largest and fourth largest producer lithium, cobalt and rare earth metals appropriately.

Queensland government has recently seen an increase in spending on base metals Budget 2024-25Base metals exploration spending in Queensland has increased in recent years, particularly for copper, with several new or expanded operations awaiting a final investment decision.

The Australian government intends to stimulate expenditure on metal exploration and development further through the 2024-25 Federal Budget under the Future Made in Australia policy. The Government is investing a 10% production tax credit, totalling A$7 billion over a decade across all 31 minerals nominated in the Critical Minerals Strategy, to drive critical minerals processing in Australia.

Given the challenges of the energy transition, Australia’s spending on metals exploration should remain stable to meet strong underlying demand. It is therefore important that government policies encouraging further exploration prioritise these key metals over oil and gas exploration.