Growing Australia's Oil & Gas Supply Chain

Growing Australia’s Oil & Gas Supply Chain

2020

| 2 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Contents 04

AUSTRALIA’S O&G SUPPLY CHAIN IS A VALUABLE COMPLEMENT TO O&G EXTRACTION, GENERATING $38 BILLION IN 2016–17

06

AUSTRALIA’S O&G EXTRACTION INDUSTRY HAS ALMOST TRIPLED IN SIZE OVER THE PAST 15 YEARS, DRIVING DEMAND FOR A LARGE SUPPLY CHAIN

06

THE SIZE AND COMPOSITION OF THE SUPPLY CHAIN CHANGES SIGNIFICANTLY WITH THE O&G CYCLE

09

DOMESTIC SUPPLIERS CAPTURE ONLY A LIMITED SHARE OF SUPPLY CHAIN OPPORTUNITIES

12

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

14

DOMESTIC SUPPLIERS TEND TO PERFORM RELATIVELY LOW-COMPLEXITY, HIGHLY LOCALISED WORK FOR WHICH GROWTH OPPORTUNITIES ARE LIMITED

15

AUSTRALIA’S HIGH COSTS HAVE DAMPENED SUPPLIERS’ EXPORT POTENTIAL AND MADE IT HARDER FOR OPERATORS TO INVEST

19

IT IS DIFFICULT FOR SME SUPPLIERS TO START UP AND GROW DUE TO THE GLOBAL, MATURE AND COMPLEX NATURE OF O&G

22

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

26

AUSTRALIAN SUPPLIERS SHOULD DEVELOP MORE ADVANCED OFFERINGS, PARTICULARLY IN GROWTH SEGMENTS

26

BUYERS, GOVERNMENT AND RESEARCH ORGANISATIONS SHOULD SUPPORT AND ENCOURAGE LOCAL INNOVATION

32

BUYERS AND SME SUPPLIERS WOULD BENEFIT FROM JOINTLY ADDRESSING PRIORITIES AND PAIN POINTS

34

THE AUSTRALIAN O&G SUPPLY CHAIN COULD REACH $49 BILLION BY 2030 IF GROWTH BARRIERS ARE ADDRESSED

40

THE DOMESTIC SUPPLY CHAIN COULD GENERATE $40–42 BILLION OF GVA IN 2030 UNDER CURRENT CONDITIONS

41

A MORE MATURE, COMPETITIVE SUPPLY CHAIN HAS THE POTENTIAL TO REACH $47–49 BILLION IN THE NEXT DECADE

42

5

APPENDIX - METHODOLOGY

44

5.1.

ESTIMATING THE GVA OF THE OVERALL SUPPLY CHAIN FOR AUSTRALIA’S O&G EXTRACTION

44

ESTIMATING THE GVA OF THE AUSTRALIAN SUPPLY CHAIN FOR DOMESTIC AND INTERNATIONAL O&G EXTRACTION

46

1

1.1.

1.2.

1.3.

2 2.1.

2.2.

2.3.

3 3.1.

3.2.

3.3.

4 4.1.

4.2.

5.2.

| 3 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

EXECUTIVE SUMMARY

Executive Summary In 2016-17, Australia’s O&G industry purchased

| 4 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

$55 billion of goods and services to support its extraction of O&G.

The rapid growth of Australia’s oil and gas (O&G) extraction industry has given rise to a large and dynamic supply chain. Thousands of domestic O&G suppliers have emerged in the past two decades to compete alongside larger, more mature global firms. This domestic supply chain has been an important source of value to complement O&G extraction, and will be critical to the continued development of Australian O&G. However, the domestic supply chain is not yet meeting its full potential. This report, commissioned

by NERA (National Energy Resources Australia – the country’s Industry Growth Centre for energy resources), is the first to analyse the size and composition of the supply chain, its economic potential and its opportunities for growth. It finds that domestic suppliers can improve their market share, grow their exports and unlock new O&G extraction projects in Australia – if they are able to overcome key challenges that currently constrain their growth.

Australia’s domestic O&G supply chain contributes $38 billion to the economy In 2016–17, Australia’s O&G industry purchased $55 billion of goods and services to support its extraction of O&G, particularly conventional gas and coal seam gas (CSG). Around 70 percent of the value of these goods and services was added in Australia, while the rest was imported. This makes the domestic supply chain a significant contributor to the Australian economy. At $38 billion, it is approximately 1.2 times the size of the building construction sector and generates almost 2 percent of the nation’s gross domestic product (GDP).

The size and composition of the domestic O&G supply chain is shaped by the phases of the O&G production cycle. In 2013–14, in the middle of the construction boom, O&G operators spent $99 billion in the supply chain, purchasing heavy equipment, engineering services and other goods and services.

However, domestic suppliers captured less than half of this value. In the production phase that has followed, operators’ overall expenditure on the supply chain is lower, but a greater share of value is captured by domestic suppliers, particularly in operations and maintenance services.

The domestic O&G supply chain underperforms due to three key challenges Compared to global peers, Australian O&G suppliers are relatively young and capture a smaller share of both domestic and export markets throughout the O&G cycle. Based on analysis of national economic data and over 30 interviews with operators, suppliers, academia and industry bodies, this report finds there are three key challenges that limit opportunities for domestic suppliers in the medium to long term: 1. Domestic suppliers tend to focus on work that either must be conducted locally or involves low levels of technical expertise. Growth opportunities are limited as these goods and services are unlikely to be exported, and much of domestic demand has already been met.

2. Australia’s high costs have dampened suppliers’ export potential and made it harder for operators to invest.

3. It is difficult for small- to medium-sized suppliers to start up and grow in the O&G supply chain due to the global, mature and complex nature of the O&G industry.

A coordinated effort could triple the supply chain’s growth in the next decade In the next three years, O&G operators would likely commence new brownfield and greenfield projects to maintain their production levels. If conditions remain otherwise unchanged, demand from these projects will see the value added by the domestic supply chain reaching approximately $42 billion in 2030.

However, a stronger, more innovative supply chain could be worth $7 billion more in 2030, generating up to $49 billion by capturing a greater share of both domestic and export markets and enabling new Australian O&G projects to be commissioned.

O&G suppliers, operators, government and research organisations each have a key role in ensuring the domestic O&G supply chain reaches its full potential: 1. Suppliers should deepen areas of strength to develop more advanced offerings and improve global competitiveness, particularly in predictive maintenance, remote operations, and safety-enhanced tools and services.

2. Operators, large contractors, government and research organisations should support and encourage local innovation to lower costs and improve productivity.

3. Small and medium enterprises (SMEs) should improve their understanding of buyers’ priorities, while buyers should mitigate procurement barriers, for example by setting up alternative procurement pathways for SMEs. The domestic supply chain has developed unmatched capabilities to operate in Australia’s unique O&G extraction environment, but will need to look further afield to continue to grow. Understanding the supply chain, its challenges and opportunities is the first step. It will take a coordinated effort for Australia to overcome these challenges, enabling a stronger, more innovative supply chain that can capture new extraction opportunities, be more resilient throughout the O&G cycle and bring more Australian goods and services to the world.

01

AUSTRALIA’S O&G SUPPLY CHAIN IS A VALUABLE COMPLEMENT TO O&G EXTRACTION, GENERATING $38 BILLION IN 2016-17

Australia’s oil and gas (O&G) extraction industry has almost tripled in size in the past 15 years. Its growth has created demand for a large, dynamic supply chain, comprising a mix of overseas suppliers, large international firms with Australian arms, and younger Australian businesses. This overall supply chain provides a total of $55 billion of goods and services annually, with 70 percent of the value added domestically.

This report focuses on the domestic supply chain which, at $38 billion in GVA, is 1.2 times as large as Australia’s building construction sector and generates almost 2 percent of GDP.1 The value generated in the domestic O&G supply chain is a strong complement to the value generated from O&G extraction itself. However, the size and composition of the supply chain can change significantly with phases of the O&G cycle.

| 6 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

In 2013–14 during the construction boom, for example, operators spent a total of $99 billion on construction-related goods and services, with much of the value imported. While overall demand in the supply chain has halved since projects have moved into the production phase, domestic suppliers capture a larger share of the value from operators’ expenditure. It is important to understand the impact of these structural shifts in order to improve the capabilities and resilience of businesses in Australia’s domestic O&G supply chain, and enable greater opportunities for them.

1.1.

Australia’s O&G extraction industry has almost tripled in size over the past 15 years, driving demand for a large supply chain

The Australian O&G extraction industry is relatively young but has grown rapidly. The industry has almost tripled in size from $16 billion in 2003–04 to $46 billion 2018–19.2 Australia has shot up the world rankings of O&G production in that time, becoming the 34th largest oil producer and 7th largest natural gas producer in 2018.3 The rapid growth of Australian O&G extraction industry has been driven by strong global demand for LNG, and by demand from Asian countries in particular. In 2018, worldwide LNG exports grew by 27 million tonnes: a growth rate of approximately 10 percent year-on-year. Half of that growth came from Australia, where local extraction mostly took place in Queensland and Western Australia. Several operators, including Shell, expect LNG supplies to tighten in the mid-2020s, strengthening the growth outlook of the O&G extraction industry.4 1

ABS input output tables (2012-17), ABS (2016-17) cat. no. 5204, AlphaBeta analysis. Gross value added, or GVA, measures economic activity in the supply chain. It is the value of goods and services produced in a sector minus the cost of goods used in production.

2

ABS national accounts, AlphaBeta analysis

3

BP (2019), Statistical Review of World Energy 2019.

4

Shell (2019) ‘Shell LNG Outlook 2019’; International Gas Union (2019) ‘World LNG Report’; AlphaBeta analysis.

The growth of O&G extraction in Australia has also created demand for a large supply chain. In 2016–17, the O&G extraction industry consumed $55 billion of goods and services from construction, manufacturing, financial services and other industries (Exhibit 1). About $38 billion of the value of those goods and services was added by domestic firms, including both Australian-born businesses and the Australian branches of international firms. The rest was imported.5

Exhibit 1: Top 10 industries supplying to Australian O&G producers Total GVA of goods and services supplied to Australian oil and gas operators Gross value added, 2016-17, A$b, current prices(A) 22.9

10.2

2.3

2.2

1.8

3.0

1.6

1.2

0.8

)

s (C er th

(A)

Resources includes mining, O&G extraction, exploration and other support services. Natural gas is an input for LNG production.

(B)

Administrative and support services includes labour supply, office administration, and building & industrial cleaning services.

(C)

All other industries that supply inputs to O&G extraction

Source: ABS, AlphaBeta analysis

Within the domestic supply chain, the largest suppliers are typically “tier-one” contractors holding large contracts with operators to supply engineering, procurement, construction (EPC), operations and maintenance, and oil field services. Prominent examples of tier-one contractors include Schlumberger, Baker Hughes and Worley. Most tier-ones are international firms, although Worley is a notable exception as an Australian-born tier-one firm.

Smaller suppliers either operate as subcontractors for the tier-one contractors or supply directly to operators. They tend to provide more niche, specialised goods and services such as subsea robots for maintenance and repair.

Given the different technical demands of conventional and unconventional gas extraction, many small suppliers tend to focus either on conventional gas extraction that primarily takes place offshore, or unconventional gas extraction of CSG that is mostly onshore. Unconventional gas extraction specialists are generally located on Australia’s east coast, for proximity to CSG assets in Queensland. Meanwhile, most conventional gas extraction specialists are located on the west coast, where there are significant offshore assets.

5

Domestic firms means all firms that conduct operations in Australia, including firms that are owned and incorporated domestically as well as the Australian branches of multinational firms that perform economic activity in Australia.

| 7 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

O

Tr an ans d po W r ar t, P eh o Ad ou sta m si l ng i Su nis pp tra or tiv tS e er an vic d es 3

e ad Tr le sa le ho

Re n al tal Es , H ta iri te ng Se an rv d ic es

Re

on Pr

of

es

si

In

W

(B

s ce ur so Re

a Te l, S ch cie ni nt ca ifi lS ca er nd El vic ec es tr an icit d y, W Ga as s te , W Se at rv er ic es

)

4.0

su Fin ra an nc ci e al Se an rv d ic es

uf an M

Co

ns

tr

ac

uc

tu

tio

rin

n

g

5.1

01

AUSTRALIA’S O&G SUPPLY CHAIN IS A VALUABLE COMPLEMENT TO O&G EXTRACTION, GENERATING $38 BILLION IN 2016-17

Defining and measuring the O&G supply chain This report defines the O&G supply chain as firms supplying Australian oil and gas operators for upstream O&G extraction, including suppliers that sell directly to operators and the indirect suppliers further up the supply chain.

Exhibit 2 - GVA of the O&G supply chain

| 8 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Australian upstream O&G producer/ operator

E.g. subsea equip.

Oil and gas sector purchases goods & services from different suppliers across industries

Source: AlphaBeta analysis

Direct suppliers E.g. Heavy equip. manufacturer

E.g. blow out preventer

Indirect suppliers E.g Equipment wholesaler

E.g. valve seals

E.g Basic equip. manufacturer

Firm A

Firm A

Firm A

...

...

...

...

...

...

...

...

...

Firm N

Firm N

Firm N

• These suppliers provide goods and services directly to oil and gas • They also purchase goods and services from other suppliers

...

• These suppliers provide goods and services indirectly to oil and gas • They also purchase goods and services from other suppliers

Upstream O&G extraction involves the following economic activities: • Identification and exploration of O&G • Development and construction of O&G extraction assets • Operations and maintenance of O&G assets • Decommissioning of O&G assets This report also uses GVA as the key measurement of economic activity across the supply chain, as this can isolate where the value is added instead of focussing just on the final sale of the good or service to the O&G operator. For example, maintenance providers are paid by operators to supply and install replacement subsea valves, but the valves themselves are produced by equipment manufacturers. Therefore, the value of the valve itself is added by equipment manufacturers while the value of the installation service is added by maintenance providers.6 The supply chain provides a combination of intermediate and capital goods and services to O&G operators. Intermediate goods and services are inputs that are used up by operators in extracting O&G, including technician services for machinery operations in the extraction process.

Capital goods are assets that can be used over multiple years, e.g. Liquified Natural Gas (LNG) plant, gas rig and umbilical tube.

6

Note this is a simplified, illustrative example only.

1.2. The size and composition of the supply chain changes significantly with the O&G cycle The size and composition of the supply chain changes with phases of the O&G cycle. Projects generally demand more capital goods such as drills and rigs during the construction phase, and more intermediate goods and services such as consumables or maintenance services during the production phase.

| 9 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Exhibit 3 illustrates how the size and composition of the O&G supply chain changed in the five years to 2016–17, as major Australian O&G projects transitioned from construction to production. GVA of capital goods fell 47 percent over the period, driving a significant overall decline in total GVA of the supply chain.

While the GVA of intermediate goods and services increased by 21 percent in the same period, it was not enough to offset the decline in demand for capital goods and services.

AUSTRALIA’S O&G SUPPLY CHAIN IS A VALUABLE COMPLEMENT TO O&G EXTRACTION, GENERATING $38 BILLION IN 2016-17

01

Exhibit 3 - Demand for capital and intermediate goods by Australian O&G operators Australian demand for capital and intermediate goods from oil and gas supply chain Total GVA of supply chain, A$b, current prices

Capital goods

86

Intermediate goods

99

X

Total GVA of supply chain (A$b)

82

69

55

83 72

71

54

-47% 38

14

| 10 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

2012-13

16

2013-14

11

2014-15

17

15

2015-16

2016-17

Note: The completion of the 7 large LNG construction projects over the past 5 years were staggered from 2014-15 to 2017-18.

Source: AlphaBeta analysis, ABS, IBIS World, APPEA

+21%

O&G extraction is capital intensive: operators invest heavily in constructing and developing assets that take years to deliver a return. This means that GVA of the supply chain can exceed GVA of O&G extraction itself.

Exhibit 4 shows how the size of the O&G extraction industry and its supply chain have evolved during the transition from construction to production in the past five years. During the 2013–14 construction boom, the overall supply chain generated $99 billion of GVA — almost four times the GVA of the O&G extraction industry.

Under stable economic conditions, GVA of the O&G extraction industry should have increased strongly between 2014 and 2018, as production levels ramped up. However, a sharp fall in oil prices dampened the industry’s gains. Low oil prices have not suppressed demand on the supply chain so far, but could diminish the next phase of construction should they persist.

Exhibit 4 - Australia’s O&G extraction industry and its supply chain over time Total GVA of Australian oil and gas extraction industry and its supply chain Gross value added, A$b, current prices

Supply chain for Australian oil and gas extraction industry

100

Australian oil and gas extraction industry

99

Oil prices below US$60 per barrel

60

x3.8

55

40

34

27 20

0 2012-13

Source: AlphaBeta analysis, ABS

2013-14

2014-15

2015-16

2016-17

| 11 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

80

01

AUSTRALIA’S O&G SUPPLY CHAIN IS A VALUABLE COMPLEMENT TO O&G EXTRACTION, GENERATING $38 BILLION IN 2016-17

Both conventional and unconventional gas extraction projects cycle through construction and production phases; however, the frequencies of the cycles are different for each type of extraction. Conventional gas extraction facilities cost more to establish initially but the wells access larger fields, so facilities can have a production life of 10 or more years. Conversely, unconventional gas extraction including CSG requires less capital upfront as operations mostly occur on land and the wells accessing the smaller CSG fields are relatively shallow. Hundreds of new wells need to be drilled per year for an onshore operator to maintain production levels, requiring an ongoing stream of capital expenditure.

Understanding these changes is particularly important for suppliers looking to remain relevant in Australian O&G extraction. Moving forward, the total GVA of the supply chain should begin to increase as the decline in supply of capital goods slows and plateaus, and the supply of intermediate goods gradually increases.

1.3. Domestic suppliers capture only a limited share of supply chain opportunities

This additional market share could add

$6 billion | 12 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

of value to Australian suppliers.8

Australian suppliers capture a larger share of supply chain opportunities during the production phase of O&G projects than during the construction phase. This is because international suppliers currently dominate the supply of manufactured goods, while domestic suppliers have a proximity advantage in providing operations and maintenance workers.

Australia’s domestic suppliers captured less than half of the supply chain opportunities during the construction phase, and 69 percent of supply chain opportunities in 2016–17 when many Australian projects were in production.7 In Norway, which has a more mature O&G market, the domestic participation rate is 10 percentage points higher. An additional market share of this magnitude could add $6 billion of value to Australian suppliers.8

Domestic O&G suppliers provide less than 60 percent of specialised goods and services in the supply chain Domestic O&G suppliers are more successful in supplying generic, non-specialised goods and services, such as buildings, roads and financial services, than specialised inputs designed specifically for the O&G industry. In 2016–17, the domestic supply chain provided almost 90 percent of non-specialised inputs but only 60 percent of specialised inputs to the O&G extraction industry.9 The relative immaturity of Australia’s O&G supply chain has meant that few domestic suppliers have the experience and technical expertise to develop globally competitive specialised offerings.

However, specialised goods and services, which include subsea pipelines and CSG rigs, are vital for the domestic supply chain’s future growth. Operators require more specialised than non-specialised inputs overall, and specialised inputs are also more likely to be exportable.10 The remaining chapters of this report discuss how the domestic O&G supply chain can improve its provision of specialised goods and services to lift its market share in Australia and overseas.

7

Expert interviews and benchmarking with peer countries. Exceptional cases such as Gorgon and Wheatstone had higher domestic participation due to the large amount of new infrastructure required in the area, such as accommodation, wharves and power networks.

8

Norad, Institute for Research in Economics and Business Administration (2008), ‘Local Content Development – experiences from oil and gas activities in Norway’. The domestic participation rate of Norway’s O&G supply chain is estimated to be 80% during production.

9

Specialised inputs account for 60% of demand during the production phase.

10

ABS, AlphaBeta analysis

| 13 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

The Gastech experience is helping XDR to get closer to their goal.

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

New opportunities for the domestic O&G supply chain will arise as the Australian O&G extraction industry continues to mature. In the near term, operators will seek more efficient operations and maintenance services as major facilities ramp up production to reach full capacity. In the next five years and beyond, many operators will likely look to construct new brownfield and greenfield projects to maintain production levels, which could drive another wave of demand for capital goods. There will also be regional opportunities to provide specialist goods and services to O&G operators in the Asia-Pacific.

The domestic supply chain will need to overcome three key challenges to capture these opportunities:

| 14 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

• Australian capabilities are currently focussed on areas of limited opportunity: Domestic suppliers typically perform work of relatively low complexity, or that must be performed locally. Most of these opportunities have already been captured. These capabilities are also less exportable.

• Labour and operational costs are higher in Australian than overseas: While Australian operators have significantly improved operational efficiencies in recent years, Australian facilities are still relatively expensive to establish and operate due to high labour, operational and transport costs.

These high costs, coupled with the persistent low oil price environment, have dampened suppliers’ export competitiveness and operators’ risk appetite.

• SMEs find it difficult to compete and capture growth opportunities: Small- to medium-sized suppliers find it difficult to compete with larger, more mature global competitors that have had more time and opportunities to earn operators’ trust. Many SMEs also struggle with the complex procurement processes of operators and their large contractors.

2.1. Domestic suppliers tend to perform relatively low-complexity, highly localised work for which growth opportunities are limited Australian suppliers tend to perform work that either must be conducted locally, or involves low levels of complexity. This report defines low-complexity work as generic, non-specialised goods and services requiring low levels of technical expertise such as transport and logistics. Exhibit 5 assesses Australian supply chain capabilities in terms of their complexity and degree of local advantage.11

Exhibit 5 - Australian capabilities in the supply chain Illustrative diagram of capabilities in Australia’s supply chain for oil and gas (non-exhaustive) High

Moderate

Low

High

Concentration of Australian capabilities:

Large-scale manufacturing (e.g turbines, compressors)

Automation & monitoring software Gas compression services

Drilling equip.

Engineering services Geophysical services

Complexity

Operations & maintenance Pipeline installation Drilling services Well service Exploration services

Small scale, specialised manufacturing

Pipeline equip.

Production & processing equip.

Training & risk mgmt.

Health & safety

Transport & logistics Basic manufacturing (e.g. valves, fitting)

Low

Equipment rental

High

Local advantage

Low

Source: Austrade, expert interviews, AlphaBeta analysis 11

Complexity refers to the level of O&G specialisation, technical expertise and value-add of the capability. Local advantage is the extent to which proximity to the O&G extraction would be advantageous for supply chain activities. For example, electricity provision and logistics are low complexity and high local advantage while O&G rig design and manufacturing is highly complex with low local advantage as the rigs can be transported after manufacturing.

| 15 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Pipeline design

| 16 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

Most of Australia’s capabilities are concentrated in the bottom-left, with a low to medium level of complexity and high level of local advantage. For example: basic manufacturing, which is of low complexity, and health and safety enhanced equipment, which is highly localised due to Australia’s high safety standards. Goods and services with higher complexity and low local advantage are less commonly supplied by Australian firms.

An example of how this works is the establishment of new LNG plants. Operators typically import modular components of these plants and assemble them domestically. This means that overseas suppliers perform the specialised, sophisticated design and manufacturing work, while domestic suppliers are left with less specialised work that must be performed locally.

For Australian suppliers to capture a greater share of the supply chain, they will need to move up the value chain and develop more specialised inputs, particularly in goods that can also be exported. This would require building on existing capabilities in key areas such as technical equipment manufacturing, design, engineering services and optimisation services as well as developing new capabilities in disruptive and emerging technologies such as remote operations and robotics.

Australian suppliers have already captured the low-hanging fruit and need to grow by deepening and widening their capabilities Specialised goods and services supplied to O&G extraction can be grouped into eight key segments based on the type of good or service. These are found on the next page. For measurement purposes, these segments also encompass industry definitions that align with ABS standards.12

12

See the appendix for more detail on industry definitions.

The eight key specialised segments in the O&G supply chain are: • Heavy construction and maintenance. This includes construction activities such as pipelines, LNG plants and heavy machinery installations, and construction services such as electrical, site preparation and carpentry. Maintenance includes the repair or replacement of O&G equipment, oil rigs and LNG trains.

• Technical equipment manufacturing. The manufacture of highly specialised tools and equipment for O&G such as pumps, compressors, and drills.

• Engineering, technical and professional services. O&G services and advisory activities such as geophysical surveying, engineering and asset design, and O&G research.

• Basic equipment manufacturing. The manufacture of chemicals and consumables, valves and tubing.

• Exploration and support services. This includes many of the activities that oil field services firms provide such as drilling, exploration, and well construction services.

• Wholesale trade. This includes many of the activities that oil field services firms provide such as drilling, exploration, and well construction services.

• Logistics. Freight, boats or trucks to take goods and people to offshore and onshore facilities.

• Other services. This includes the renting and hiring of O&G equipment such as drills and subsea crawlers, as well as vocational and tertiary education.

| 17 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Specialised segments in the O&G supply chain

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

Australian suppliers have already captured most opportunities in the niche areas of specialised work or activities that have a local advantage. In 2016–17, 88 percent of goods and services in segments such as wholesale trade, logistics and exploration and support services were supplied domestically (see Exhibit 6).

Meanwhile, the more complex capabilities in segments such as heavy construction and maintenance and technical equipment manufacturing were largely imported.

Exhibit 6 - Imports and domestic share of supply chain for Australian O&G operators Total GVA of inputs for Australian oil and gas production by segment and supplier type Gross value added, 2016-17, A$b, current prices

Domestic suppliers

15.7

International suppliers (imports)

43%

7.5

57%

79%

| 18 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

2.7

Heavy construction & maintenance

14%

21%

86%

Technical equipment manufacturing

Engineering, technical and professional services

2.1

12%

10%

2.1 39% 61%

88%

90%

88%

Basic equipment manufacturing

Exploration & support services

Wholesale Trade

Logistics

1.8

1.1

12%

0.8 91%

9%

Other services

Source: AlphaBeta analysis, ABS

Having already captured a large share of the lower complexity services, Australian suppliers need to develop capabilities in adjacent areas that involve higher complexity and less local advantage. For example, some suppliers are looking to expand within the maintenance and technical equipment manufacturing segments by providing remotely operated vehicles for inspection, maintenance and repair of offshore and onshore facilities.

2.2. Australia’s high costs have dampened suppliers’ export potential and made it harder for operators to invest It is relatively expensive for businesses to operate in Australia due to high labour costs, remoteness of extraction opportunities, and the relative immaturity of the O&G supply chain.13 While the O&G sector of the United States has been in operation since the 1850s, little O&G extraction occurred in Australia until the mid-2000s.14 Exhibit 7 shows how greenfield and brownfield expansion of LNG is almost 50 percent more costly in Australia than the United States. These high costs weaken the business case for additional investment in Australian O&G extraction, especially in a low oil price environment, and increase the price of our supply chain exports.

Exhibit 7 - Relative cost of LNG plant construction Cost of greenfield and brownfield expansion of LNG is the highest in the world Average unit construction costs (USD/ tpa), 2018

Greenfield

Brownfield expansion

+48%

1,350

1,050

1,050 900 700

Australia

World (remote)

US

750

FLNG

Source: Productivity Commission, Oxford Institute of Energy studies 2019, AlphaBeta analysis

Australia’s salary levels are among the highest in the world. O&G sector wages were especially high during the LNG construction boom that peaked in 2013-14, when demand far exceeded supply of skilled workers in the relatively new O&G supply chain. This labour shortage was further exacerbated by the mining boom, which occurred concurrent to the surge in O&G activity: competition for labour drove up wages and overall costs of construction in all sectors of the economy.

13

While Australian CSG operations are large scale and quite densely situated in global comparison, the overall Australian O&G sector is relatively immature.

14

ABS, AlphaBeta analysis

| 19 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

1,550

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

The relative immaturity of the Australian O&G sector also meant that the domestic supply chain was not yet big enough to meet demand for equipment, technology and services during the boom.

Meanwhile, imports were – and continue to be – expensive due to quarantine costs. Strict Australian biosecurity laws require any imported machinery to be cleaned to a high standard, and impose specific requirements for installations, vessels and equipment used in offshore O&G extraction.15 These high costs have been less of a problem in the production phase, as competition for labour has decreased, and fewer imports are needed.

Santos, one of Australia’s largest home-grown operators, experienced a net loss of

$2.7 billion | 20 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

in 2015.

O&G extraction in Australia typically occurs in more remote locations and at a smaller scale than in other major global O&G hubs, such as the Gulf of Mexico and the North Sea, making it more expensive for goods and services to be transported and reducing potential economies of scale. The Gorgon project, for example, had one of the highest unit costs of any LNG project constructed since 2014.16 Gorgon’s high costs were largely due to its location on Barrow Island, which is a remote Western Australian island that is protected by the State Government as a Class A Nature Reserve. Gorgon operator, Chevron, has established the world’s largest non-government quarantine system to protect biodiversity on the island.17 LNG operators have also been unable to leverage economies of scale across projects to reduce costs.

Chevron’s Gorgon and Wheatstone extraction plants are only about 110 kilometres apart in Western Australia, but were constructed independently of each other. Chevron could have commissioned construction as a group to reduce costs. For comparison, the contractor building Queensland’s Curtis, Gladstone and Pacific LNG plants was estimated to have saved 10 to 20 percent through economies of scale.18

Low oil prices have increased the cost sensitivity of operators The mid-2014 oil price collapse led operators around the world to focus on reducing costs and risks.

While some risk-averse operators have been reluctant to invest in innovation, others have used innovative processes, goods or services to reduce costs. Santos, one of Australia’s largest home-grown operators, experienced a net loss of $2.7 billion in 2015.19 Since then, Santos has sought to reduce costs by simplifying operations, improving its capital management and adopting more efficient processes, while also developing low-risk, brownfield growth prospects.20 Supply chain firms have also faced smaller profit margins since the mid-2014 collapse, as operators negotiated aggressively to cut costs. Exhibit 8 shows how the oil price drop was felt more acutely by contractors than by operators. Before 2014, shareholder returns for O&G operators and their engineering, procurement and construction (EPC) contractors were largely in sync. Since the collapse, however, operator returns have been much higher: between 2011 and 2016, shareholder returns for operators fell only 15 percent while returns for EPCs fell 46 percent.

15

Department of Agriculture, available at: https://www.agriculture.gov.au/biosecurity/avm/vessels/offshore_installations/offshore-installations; Worldwide Customs and Forwarding Agents, available at: https://www.wwcf.com.au/importing-machinery-australia/

16

University of Oxford (2018), ‘LNG Plant Cost Reduction’.

17

Chevron. Available at: https://australia.chevron.com/environment/protecting-the-environment#qms

18

Oxford Institute for Energy Studies. Available at: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/10/LNG-Plant-Cost-Reduction2014%E2%80%9318-NG137.pdf?v=6cc98ba2045f

19

Santos. Available at: https://www.santos.com/media-centre/announcements/2015-full-year-results-announcement/

20

Santos. Available at: https://www.santos.com/media/4526/180926-santos-targets-production-of-more-than-100-mmboe-by-2025.pdf

Exhibit8 - Shareholder returns for EPCs and O&G operators Total returns to shareholders (TRS)

TRS over 2011-16

US$ Jan 2011 indexed to 100; as of Aug 18, 2016

%

EPC

Operators (A)

Oil price-Brent

180 160 140 120 100 -15 80 -46

60

-52

40 20 2012

2013

2014

(A)

Operators includes majors, national oil companies, integrated, and independent companies

Source: Capital IQ, EIA, McKinsey

2015

2016

2017

These price pressures subsequently flow through the supply chain. EPCs, oil field services firms and other large contractors look for lower-cost suppliers as they face thinning margins, decreasing the demand for innovative offerings and limiting the capacity for suppliers to innovate.

Lack of cost competitiveness limits the export potential of domestic suppliers The combination of high costs and low complexity of Australian O&G suppliers have made these businesses less competitive than their international peers. Exports accounted for only two percent of GVA generated by domestic O&G suppliers in 2016–17.21 In contrast, United Kingdom O&G suppliers generated approximately 40 percent of their GVA from exports. While United Kingdom O&G suppliers also face high costs, they remain competitive by delivering high-value goods and services such as innovative subsea technologies.22 Overcoming this cost challenge will be essential for the Australian O&G supply chain to grow and compete with international suppliers. Providing more specialised and innovative solutions for operators would improve Australia’s value add and help justify the higher prices commanded by Australian suppliers.

21

ABS, AlphaBeta analysis.

22

UK O&G Authority, 2013 estimate. Available at: https://www.ogauthority.co.uk/supply-chain/overview/

| 21 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

2011

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

| 22 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Location of oil rig platform in Stavanger, Norway

2.3. It is difficult for SME suppliers to start up and grow due to the global, mature and complex nature of O&G Few domestic small to medium sized suppliers to Australian O&G operators have grown to become large domestic firms. Australian-born multinational firms are rarer still. This is due in large part to the relative immaturity of Australia’s LNG and CSG industries when compared to more established markets in the United States, United Kingdom, Netherlands and Norway.

For Australia’s domestic O&G supply chain to be globally competitive, SMEs need to be able to grow.

However, there are several systemic challenges to overcome. These are discussed below.

Risk aversion tends to favour larger, global suppliers Because of the large capital investments involved in constructing and developing O&G assets, operators tend to avoid any decisions that may increase the risk of failure. Industry experts indicate that low oil prices have made operators more risk averse than they have been in the past: compressed margins have left less room for error.

This risk aversion may disadvantage smaller, younger suppliers. Risk averse operators may prefer larger, global companies that know and trust over lesser-known domestic suppliers – even if the latter group has innovative solutions that could potentially change the game.

Industry experts indicate operators typically associate large suppliers with reliable, tried and tested goods and services. Smaller suppliers can appear to be a riskier option in comparison: their goods or services may be unproven in the O&G industry (even if successful elsewhere), and they are more prone to financial challenges such as cashflow issues.

The procurement process is complex and can disadvantage SMEs The O&G procurement process is complex and time-consuming due to operators’ rigid requirements, and lengthy contract durations. These issues are sometimes exacerbated by having key decision makers based overseas. SMEs typically have limited financial and administrative capacity to overcome these challenges, which include: • Lengthy procurement processes: It can take up to 24 months for some projects to progress from proposal to final approval. This can be crippling to smaller suppliers that need interim cashflows to sustain their business.

5-10 years while construction opportunities are one-off.

• Long contract durations: Since the 2014 oil price collapse, some operators have sought to reduce costs and risks by introducing longer contracts with fixed low prices and narrower scopes of work. Operations contracts typically span five to 10 years, while construction opportunities are one-off. If suppliers miss these windows, they may face a long wait before another chance for work.

• Narrowly scoped contracts: Even after winning work, small suppliers with narrowly scoped contracts have limited visibility over potential opportunities in other areas of a project. Operators often also fail to include new, emerging technologies in their requirements, which precludes innovative goods and services that may require different processes to deliver the desired outcome from being considered. These narrow requirements disadvantage new, innovative suppliers as well as the operators themselves, which may miss opportunities to adopt productivity-enhancing innovations.

• Focus on unit costs: Operators typically value suppliers that offer lower costs per unit over lower total costs in their procurement process. This can disadvantage suppliers that offer innovative solutions as the cost per unit is typically higher due to the initial outlay to establish new technologies or ways of working, but the total cost is lower as a result of greater efficiency benefits. However, interviews with suppliers indicate that many bids were rejected on the basis of higher unit costs.

• Difficulty accessing key decision makers: All suppliers interviewed for this report identified client relationships as one of their top three barriers to procurement. O&G procurement is highly relationship driven. This puts smaller suppliers at a disadvantage due to having smaller networks with less brand awareness. Key decision makers may also be located in global headquarters outside of Australia, limiting accessibility for smaller, domestic suppliers. For example, one local supplier interviewed for this report was only able to enter Australia’s O&G supply chain after networking with clients from a multinational operator in the United Kingdom. Several other suppliers reported travelling from Australia to Houston in the United States in order to reach multinational operators.

There are no standard pathways for

| 23 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Operations contracts typically span

• Rigid minimum requirements: Small, newer suppliers may be excluded from some opportunities that require suppliers to have at least five years of experience and previous contracts with large operators to be eligible for consideration.

02

THE DOMESTIC O&G SUPPLY CHAIN FACES THREE KEY CHALLENGES TO FUTURE GROWTH

Lengthy procurement processes a challenge for Biarri

| 24 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Queensland software and consulting group Biarri uses advanced mathematical modelling to improve clients’ decisions and processes. In 2016, it launched its Biarri EMI business arm to focus on expansion into the O&G sector.

Biarri EMI offers three software tools: DIMO for maintenance scheduling; ANT for automatic design and optimisation of gathering networks; and Stream for Value Chain Optimisation. It also offers custom solutions to help its resources sector clients reduce costs.

According to CEO Daniel Sutherland, breaking into the O&G market was challenging. While the team had previously consulted with resources sector firms prior to Biarri EMI’s launch, it needed to better understand operators’ procurement processes and establish deeper relationships in order to play a bigger role in the supply chain as a software firm. Sutherland and his team quickly learned the importance of identifying and targeting decision makers within client organisations, for example by approaching the head of engineering instead of the procurement or IT team.

Incorrectly understanding the procurement process and stakeholders can easily delay projects by over six months, leaving a Daniel Sutherland, CEO substantial gap in expected work and revenue “Incorrectly understanding the procurement process and stakeholders can easily delay projects by over six months, leaving a substantial gap in expected work and revenue,” Sutherland says.

As a new small business, Biarri EMI also had to pursue tenders more aggressively than incumbents. It won its first contract with QGC/Shell by providing a working prototype during the bidding stage, proving its worth and commitment to the project at no cost to the client.

Biarri’s success has been accelerated by its efforts to understand the requirements of its target market, and its use of proactive innovative strategies to ensure potential clients understand its value. Owing to an increased level of offshore work in Perth, it has recently opened a Western Australian office. The company has also started looking at expanding internationally.

There are no standard pathways for SMEs to join the supply chain and mature their capabilities The relative immaturity of Australia’s O&G supply chain has also constrained SME development.

Operators and their tier-one contractors tend to use their well-established global supply chains for goods and services that are either too costly or too difficult for Australian suppliers to provide. This perpetuates a vicious circle: without sufficient demand, small Australian suppliers are unable to break into the supply chain and develop new capabilities leaving operators the only option of sticking with the tried and true.

| 25 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Other countries have avoided this cycle by providing standard procurement pathways for SMEs to join the supply chain. For example, the Energy Corridor in Houston is a hub that connects O&G suppliers with key decision makers, funding and other forms of support (e.g. mentorship). In Norway and Singapore, government provides significant amounts of funding for local O&G supply chain businesses to develop and grow their capabilities. It is hardly surprising that a number of Australian companies have expanded to other countries to accelerate growth.

03 EDG Australia was able to reduce error rates in their design documents down to 0.5 percent, helping Chevron’s plant operate at

104

%

| 26 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

of its production capacity.

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

A larger, more innovative domestic supply chain would enable new opportunities for O&G extraction in Australia, be more resilient throughout the O&G cycle, and boost the Australian economy. But the sector will need to overcome the key challenges described in Chapter 2 if the domestic supply chain is to mature and grow.

Suppliers, operators, government, research organisations and industry bodies each have a role to play in addressing these key challenges by: • Developing more advanced goods and services: Domestic suppliers could capture a greater share of both domestic and export markets by developing more advanced, sophisticated offerings. These advanced goods and services could leverage the supply chain’s existing strengths, new innovative technologies, or capabilities from other sectors. Developing such offerings takes time, is costly and involves significant risk for SMEs, especially given current challenges in accessing the supply chain.

With support however, it is possible.

• Encouraging and supporting innovation: Both suppliers and buyers stand to gain from a more innovative supply chain that would increase supply chain exports, as well as productivity within the O&G sector. Buyers could collaborate with smaller suppliers or provide financial incentives to encourage innovation. Government, industry and research organisations could support innovation by brokering relationships, improving access to capital and helping to showcase Australian wins.

• Improving the alignment between buyers and SME suppliers: SME suppliers and buyers would benefit from better aligning their priorities and addressing some of the pain points in procurement.

Smaller suppliers could better serve the domestic market by improving their understanding of buyers’ priorities. Buyers could help SMEs participate in the supply chain by making their procurement processes more transparent and accessible to smaller, newer firms.

3.1. Australian suppliers should develop more advanced offerings, particularly in growth segments One of the key challenges facing Australia’s domestic O&G supply chain is its focus on low-complexity, highly localised work, as described in Section 2.1. Australian O&G suppliers’ reliance on local work provides a robust platform for growth, but local demand can be volatile, depending on operators’ investment and production cycles. To unlock new sources of growth, Australian suppliers will need to extend their capabilities to more advanced and exportable goods and services.

Norway is an example of a high-cost, highly educated country that has become a major supplier to global O&G markets by developing advanced, high value-adding capabilities. Norwegian O&G projects have been a testbed for novel solutions that have later been exported internationally. For example, Norway’s Aker Solutions delivered an innovative subsea compression system that was initially trialled in Equinor’s Åsgard field in the Norwegian Sea. The technology will be exported to the Gorgon project in Australia.23

23

Aker Solution. Available at: https://www.akersolutions.com/news/news-archive/2019/aker-solutions-wins-feed-contract-for-subsea-compression-system-/

EDG Australia is a domestic example of an advanced engineering firm that has focussed on higher value-adding work to be competitive. The firm has been able to deepen its capabilities through recruiting highly skilled teams of Perth-based engineers who are able to deliver better results than EDG’s lowercost, offshore competitors. In one project, EDG Australia was able to reduce error rates in their design documents down to 0.5 percent, compared to the 20 percent rate that its competitors offered, helping Chevron’s plant operate at 104 percent of its production capacity. EDG Australia believes ongoing investment in local talent and training the new generation of personnel has helped retain its expertise in Australia and kept costs competitive.

Exhibit 9 - Expanding Australia’s supply chain capabilities

Primary Australian capabilities in the O&G supply chain

High

Local advantage

Low

Source: AlphaBeta analysis

Australian suppliers should build on their existing capabilities to find opportunities to export and expand. In maintenance, for example, most service providers currently rely on local advantage to win contracts, but their opportunities are limited by the number of Australian O&G assets to be maintained.

These suppliers could develop more innovative and exportable capabilities such as robotics for remote maintenance and repair.

| 27 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Complexity

Extending to areas of lower local advantage would enable Australian suppliers to develop capabilities that are exportable and have less dependency on Australia’s oil and gas investment cycle

Low

Extending capabilities up the complexity chain can enable Australian suppliers to capture higher value activities that match Australia’s high cost profile

High

Conceptual diagram of capabilities in O&G supply chain

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

03

Suppliers are well-positioned to build on existing strengths in three growth segments Domestic O&G suppliers should focus on three attractive segments: maintenance; engineering and technical services; and technical equipment manufacturing.

As shown in Exhibit 10, these are segments in which Australia has existing strengths and the growth outlook is strong. Other segments such as exploration and support services, logistics and wholesale trade have lower growth potential and are less exportable.

Exhibit 10 - Potential growth opportunities from specialised segments in the local supply chain

More attractive

Australian capability

| 28 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

2

Exploration and support services

2

Logistics

Basic equip. manufacturing

86%

21%

88%

88%

1

Wholesale trade

Other services

57%

2

Technical equip. manufacturing

Local advantage

Domestic intensity (%) 9

Eng., technical and professional services

2

90% 91%

1

1

Less attractive

Growth potential

Domestic size (A$b) Maintenance and heavy construction

Attractive

61%

Source: ABS, stakeholder consultations, industry reports, AlphaBeta analysis

Exportability

Trend

Overall

These three growth segments present a range of opportunities for Australian suppliers: • Maintenance LNG facilities, platforms and other assets constructed over the last decade are now in their operational phase and will require a substantial amount of ongoing maintenance work over the next 20 years. This is an opportunity to deepen Australia’s maintenance capabilities. Australian suppliers are best placed to maintain offshore extraction facilities, although large-scale or heavily specialised work, such as building future floating production storage and offloading (FPSO) units, will be performed overseas. For onshore extraction, well servicing will be a major driver of demand due to the large number of wells and their relatively short operational life. Maintenance suppliers could also develop higher value capabilities such as applying the internet of things (IoT) and robotics to predictive maintenance and remote repair. Many of these technologies have existed for some time, but the most effective ways of applying and managing these tools in an O&G context is still being explored.

• Technical equipment manufacturing While domestic participation remains relatively low, the past five years have seen local suppliers begin to gain traction in technical equipment manufacturing. Domestic technical equipment manufacturers typically operate in one of two ways: they either combine large-scale, overseas manufacturing operations with Australian design and development; or they develop niche, smaller scale products that are designed and manufactured in Australia. Exploration Drill Rigs (XDR) is a Queensland-based SME providing an example of the former, having developed fit-for-purpose workover service rigs for the CSG industry. An example of the latter is SixDe, a Western Australianbased manufacturer of customised, precise and high-quality machine components.

| 29 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

• Engineering and technical services As the Australian O&G sector matures, operators will need more advanced engineering and technical capabilities to extract oil and gas from new, less easily accessible areas. Domestic suppliers have an advantage, as they are already familiar with Australia’s geological conditions, such as its warmer and shallower waters for offshore extraction. Suppliers have the opportunity to develop advanced engineering solutions to increase the efficiency of exploration, drilling and extraction of CSG. Technical and professional service providers will also be needed to help operators implement new tools and processes such as remote surveillance and operations optimisation.

03

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

Australian suppliers, including both SMEs and the Australian divisions of multinationals, have already developed strengths in specific areas of the three growth segments. Some examples are shown in Exhibit 11. Many regional specialisations are strengthened by clusters that have, such as the Subsea Energy Australia. Building on and deepening these strengths would support growth of the Australian supply chain by enhancing global competitiveness and increasing exports.

Exhibit 11 - Key strengths in the Australian supply chain

Segments

Strengths (non-exhaustive) Inspection, maintenance and repair with emerging tech

Operations and maintenance

Remote operations and optimisation

| 30 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Subsea and CSG pipeline design and installation

Advanced safety and training Visualisation software and technical expertise

Technical equipment manufacturing

Examples

• Technical expertise in handling and developing robots for remote operations and maintenance

Geo Oceans has developed specialised software and hardware to remotely operate vehicles and carry out traditionally manned inspection and maintenance services

• Use of IoT, software and data analytics to enable predictive maintenance • Technical expertise, hardware and software for conducting operations remotely, especially for offshore • Use of IoT and data analytics for production optimisation

Asset integrity software and technical expertise

Engineering, technical and professional services

Australian capabilities

Small scale subsea equipment manufacturing

Specialised equipment design

• Technical knowledge about asset performance in AU environment • Software to monitor and track asset integrity • Expertise in Australian marine conditions (e.g. shallow, turbulent and warm waters) • Expertise in pipeline design and organisation for CSG • Adoption of emerging tech to improve safety and training • Software and hardware modifications to improve safety • Effective software and strong technical understanding for visualisation, monitoring • Sophisticated and high quality manufacturing capability • Quick and flexible production times • Equipment design tailored for Australian environment • Highly skilled and experienced workforce

Source: Stakeholder consultations, industry reports, AlphaBeta analysis

Fugro’s remote operations platform in WA has reduced need for staff to be on offshore platforms

Schlumberger acquired Perth-based company, Peak Well Systems, for flow control, well intervention and well integrity solutions and has integrated this offering with their global supply chain Biarri EMI uses algorithms to optimise pipeline networks for CSG and offshore extraction

Broadspectrum has utilised VR to train employees in using new drill rigs Geo Oceans have developed software to generate maps and 3D digital models of marine habitats and offshore facilities Nexxis have acquired WA-based Groves Manufacturing and Tooling to manufacture and prototype new equipment XDR have developed specialised, fit for purpose workover service rigs, tailored for Australian CSG industry and provides significant efficiency gains

There are capabilities from other sectors that can be leveraged to develop the domestic supply chain Many of the capabilities in the O&G supply chain share common fundamentals with those in other industries, such as mining and agriculture. Leveraging cross-sector strengths and skillsets could be an effective way to accelerate the pace of capability development in the domestic O&G supply chain.

Exhibit 12 - Examples of capabilities from other Australian sectors that can be leveraged in O&G Supply chains of...

Capabilities (nonexhaustive)

Example

Adjacency to oil and gas supply chain

Agriculture

• Remote operations of mines

• Monitoring tools e.g. drones and loT

• Autonomous vehicles for mining

• Automated irrigation

• Predictive maintenance

• Operations optimisation

• Digital twin of mines

• Blockchain to track global supply chain

Semi-autonomous mines utilise remote drilling, loading, hauling and navigating technologies to maximise safety and efficiency of operations

Drones are used in the agriculture sector to take images, monitor livestock and deliver heavy payloads

High

Utilities • Geological tools to manage and maintain water networks • Network management and optimisation to provide electricity, water, broadband

Utilities such as water supply and operations have developed highly effective and innovative tools such as inflatable packers, grouts and bores to manage water wells

Space • Remote operations and robotics to explore other planets in harsh environments • Artificial intelligence and data analytics e.g. analysis of satellite imagery Woodside is trialling one of NASA’s “Robonauts” to undertake operations in remote and highrisk environments and improve safety, reliability

Healthcare • Robotics to perform telesurgeries • Al and machine learning for diagnosis and treatment

The healthcare industry is currently using robotics to carry out telesurgeries on patients who may be living remotely (as far as 400km away)

Low

Note: Non-exhaustive list of sectors Source: Stakeholder consultations, AlphaBeta analysis

Exhibit 12 provides examples of capabilities from non-O&G sectors that could be applied to the Australian O&G supply chain. Cross-sector collaboration and expansion between O&G supply chain and adjacent sectors such as mining and utilities is quite common. Biarri EMI (refer to previous page) is a Queensland firm that supplies its optimisation software and consulting services to both mining and O&G sectors.

While collaboration and expansion between the O&G supply chain and less adjacent sectors are not as common, opportunities do exist. These sectors share several similarities at the capability level. For example, the space industry has made significant progress in remote operations and robotics — these technologies may be further developed for use in Australian O&G.

| 31 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Mining

03

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

3.2. Buyers, government and research organisations should support and encourage local innovation As described in Section 2.2, Australian O&G suppliers struggle to compete in global markets as their offerings tend to be costly and involve lower value-add. But Australian suppliers could turn Australia’s high-cost, highly educated workforce into an advantage by developing more complex, innovative goods and services. This has already happened in other high-cost countries such as Norway and the United States.

Emerging technologies such as robotics, artificial intelligence, and virtual reality are attractive opportunities for young, innovative Australian businesses, as the global playing field is likely to be more level and less crowded than for older technologies. Australian operators and other buyers also stand to gain from a more innovative supply chain, whose goods and services could help improve productivity across the sector.

However, it will be difficult for the Australian supply chain to increase the pace of innovation without assistance. Operators and large contractors can encourage the supply chain to provide more innovative solutions, while government and research organisations should play a facilitative and supportive role in creating a nurturing environment for innovation.

| 32 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Operators and large contractors can encourage their suppliers to provide more innovative solutions While major Australian operators do have comprehensive local content programs, there are ways to strengthen the incentives and support for local innovation such as: • Fund select, innovative offerings: Operators can use grants and seed funding to encourage innovative suppliers to focus on solutions to specific business priorities such as costs, efficiency and safety. Australian suppliers often cite a lack of funding in Australia as a key reason for bringing their innovations to the US. Several SMEs interviewed for this report have found it easier to secure funding for innovative products overseas than in Australia. This suggests that many Australian suppliers do have innovative offerings that are globally competitive but struggle to demonstrate value to prospective Australian customers.

• Collaborate on innovative solutions: Operators should collaborate with local suppliers on innovative solutions that are best suited to Australian conditions. Australian O&G projects face unique challenges – for example, local offshore projects need to deal with warmer, shallower waters than projects overseas. Local suppliers come with unique experience, networks, perspectives and capabilities, and are best placed to tackle these problems. By collaborating with these businesses – for example, by assisting with trials and testing – operators may be able to deploy innovations more rapidly, adapt solutions more effectively, perform more frequent quality control inspections and achieve more efficient maintenance. These benefits would likely enhance the effectiveness of the solution and reduce risks.

• Embed innovation into procurement: Operators can support innovation by better integrating it into the procurement process. This would elevate the importance of innovation, such as the integration of emerging technologies, making it easier to adopt new ways of working it into business operations. For example, some United States supermajors have innovation KPIs in their procurement processes. As a result, innovative Australian suppliers have found it easier to gain a foothold in the United States.

• Leverage and share innovations across sectors: Operators should support emerging innovations by sharing the cost and risk with other operators and sectors. At early stages of technology development, the innovation business case is often challenging to establish. Partnering with others for their expertise and sharing the costs of investment is a way to mitigate risks and increase the likelihood of success. For example, Woodside has collaborated with NASA on the Robonaut program to design robots that can improve the safety and efficiency of tasks performed by maintenance workers and engineers.24 Large contractors also play an important role in stimulating and supporting local innovation. Like operators, large contractors could purchase more innovative Australian goods and services and work more closely with innovative businesses, to help encourage other domestic suppliers to enter the market.

Large contractors can also acquire or partner with innovative Australian SMEs to accelerate their growth.

These acquisitions typically provide SMEs with the resources and networks to achieve rapid growth, access global markets, and invest in R&D. For example, tier-one engineering firm Wood has established a global centre of excellence for asset integrity software in Western Australia, after acquiring a local medium-sized supplier. This software is now used as part of Wood’s offering in the North Sea, the United States and the Middle East but continues to be supported from Western Australia.

Government and research organisations can help boost innovation Government, as well as trade, industry and research organisations, can play important roles in supporting innovation in the Australian supply chain. These include:

The University of Western Australia received almost

$3

million

of CRC funding.

• Brokering relationships on buying and supplying sides of the market: One way to perform industry level brokerage is through organisations that deliver quality matches between firms. For example, Austrade has successfully connected local suppliers to international clients, and vice versa.

Another way to facilitate connections is through establishing clusters and precincts, such as the Subsea Innovation Cluster Australia (SICA), where large operators and contractors, academia and SMEs can discuss and undertake innovative projects.

• Supporting access to capital in the supply chain: State and federal governments can support innovation by unlocking access to affordable capital for local SMEs that are starting up or those that are looking to grow. This could mean working with major banks in Australia to offer more affordable capital or a standalone government program. United States O&G suppliers have access to capital from bank loans, venture capital, private equity firms and government.

• Assisting research in nascent, high growth areas such as emerging technologies: Australia has a number of universities with a strong focus on O&G research that are underutilised by industry, particularly SMEs.25 Suppliers should see academia as a lower-cost way to access R&D. Australian governments and other public sector organisations also provide funding and encourage collaboration between academia and industry. This includes the cooperative research centres (CRC) program and the Australian Research Council (ARC) centres. For example, Total Marine Technology and the University of Western Australia received almost $3 million of CRC funding to jointly develop remotely operated vehicles for subsea operations.

• Showcasing innovations: Government can support innovation by showcasing successful work to help suppliers attract clients. For example, the Australian portal to the Technology Catalogue, which is supported by NERA and developed by Deployment Matters, showcases Australian technologies to the world and introduces new international technologies to Australian purchasers.26

24

Woodside. Available at: https://www.woodside.com.au/innovation/intelligent-assets-robotics

25

Interviews with O&G experts from Australian universities and industry liaisons.

26

The Australian portal to the Technology Catalogue can be accessed: www.nera.technologycatalogue.com

| 33 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

• Encouraging collaboration in the supply chain: Government organisations can encourage collaboration across and within levels of the supply chain. For example, the Western Australian Government’s LNG Jobs Taskforce is helping the industry come together and focus on how to establish Western Australia as the LNG hub for the Asia Pacific region. The program is also helping to fund research that identifies global O&G supply chain opportunities and distils lessons from around the world, such as how procurement in the North Sea was simplified.

03

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

3.3. Buyers and SME suppliers would benefit from jointly addressing priorities and pain points SMEs are an important part of the Australian O&G supply chain. They are critical to the growth of the sector and a vital source of innovation and dynamism.

However, as discussed in Section 2.3, risk aversion and supply chain procurement processes tend to favour larger, global suppliers, and it can be difficult for SMEs to start up and grow. Industry consultations suggest that suppliers do not fully understand what buyers look for when making purchasing decisions, and there is an opportunity for SMEs to better align with buyers’ demands.

Operators and large contractors can also help more SMEs join and participate in the supply chain by reducing procurement barriers and providing additional support for these smaller businesses.

SME suppliers should ensure their value proposition meets buyers’ priorities

| 34 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Buyers look at several purchasing factors when assessing goods or services to procure from their supply chain, but suppliers do not always have a good understanding of buyers’ priorities. As shown in Exhibit 13, suppliers tend to underestimate how much buyers value low cost, scalability, and track record. Meanwhile, they overestimate the extent to which buyers want to collaborate on a solution, and the value of a ‘perfect fit’ solution that meets all specified requirements.

Interviews with operators and large contractors show that while effectiveness of a good or service is vital, any value premium needs to be demonstrable. This can sometimes be challenging for SMEs. For example, it is difficult to prove the superior quality of inflatable packers — a device used in drilling or hydraulic fracturing in O&G extraction — other than through a strong track record, which SMEs are less likely to have.

Exhibit 13 - Most relevant purchasing factors when selecting O&G suppliers Top 3 most relevant purchasing factors for buyers choosing a supplier % of respondents, 2019

Buyer’s assessment of relevance Track record and trust

25% 17%

Unique IP / innovation

Costs

Effectiveness of good or service

8%

Maintenance and support

8%

Knowledge of local market

8%

0%

6%

Wide range of products or services Partnerships (e.g. co-development

0% 22% 0%

8%

Scalable Exportable

Collaboration

11%

8%

Cost competitive

Scale and breadth

17% 22%

17%

Low cost

Premium cost

17%

0%

0%

0%

0%

0%

0%

6%

Source: Stakeholder consultations, AlphaBeta analysis

Successful SMEs ensure their value propositions are nimble and responsive to market demands. MyPass Global, for example, started as an online marketplace to match contractors to work opportunities in the resources sector. However, the company soon realised that contractors, operators and suppliers would be better served by an integrated platform with wider capabilities. MyPass now enables contractors to validate their skills and experience, and suppliers and operators to track workforce compliance, schedule and mobilise workers more efficiently. Formed in 2013, the platform now has over 26,000 users across 24 countries.

| 35 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Product or service value differentiation

Supplier’s perception of relevance

03

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

SMEs need strong go-to-market strategies to break into the O&G supply chain SMEs need effective go-to-market strategies that can address the complexity of procurement processes and the risk aversion of operators.

Successful suppliers say building client relationships are a top priority in their go-to-market strategies, as these relationships establish trust and credibility for the business (Exhibit 14). Some travelled to Houston in the United States to access key decision makers at Chevron and ExxonMobil headquarters instead of targeting those in the Australian offices.

Exhibit 14 - Key components of suppliers’ go-to-market strategies Not relevant Components of go-tomarket (GTM) strategy

Sub-components

Client relationships

Champions and network in potential client organisations

Highly relevant Supplier perception of relevance

Buy-in from key decision makers in client organisation

| 36 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Initial anchor client Sales and marketing

Effective product or services marketing Education about product

Market entry

Identification of suitable channel to enter supply chain Provision of product or service in collaboration with other suppliers Understanding of how to navigate procurement process

Financial sustainability

Early stage funding for product or service development Lean business operations to maximise finances Ongoing funding for R&D Funding to commercialise product for anchor client

Source: Stakeholder consultations, AlphaBeta analysis

Marketing and customer education are also key to a successful go-to-market strategy in the domestic O&G supply chain, particularly for innovative products that operate differently from the industry norm.

One local supplier overcame this hurdle by investing in up-front education and providing additional postsale training about how to use the product.

Some smaller local suppliers have entered the market by collaborating on projects with large contractors – either as equal partners or as subcontractors to those larger firms. This report found that SMEs that developed strong relationships with their partners often achieved greater growth. Collaborations can help SMEs attract new buyers, strengthen their credibility, and improve their visibility of other problems that they might be able to solve. In some cases, investing in the relationship can mean sharing successes and failures (e.g. walking away from a contract together if one party is not accepted) and sharing some operational risks.

Technical equipment and custom robotics supplier Nexxis was founded in 2014 with the aim of combining the provision of cutting-edge technology with technical know-how. It specialises in bringing emerging technologies to market, including equipment developed overseas, in-house and jointly with CSIRO. Nexxis now employs more than 40 staff, 16 of whom are technical specialists while others focus on business relationships. The business has four offices and 17 collaboration partnership agreements, including a number of patents. Founding Director Jason De Silveira credits its success to good “business sense”: managing cashflow, establishing strong networks and industry connections, investing in growth at the right time and a clear go-to-market strategy that is now a proven and refined methodology.

On the client side, Nexxis builds trust and relationships by positioning itself not as a supplier but as a partner that provides advice and shares the risk in assuring each project’s outcomes are delivered as a measurable success by all parties. With many O&G operators headquartered overseas, Nexxis invests in building international relationships by attending overseas conferences and in 2019 won first place at the World SPRINT Robotics conference for new innovative technology. In late 2019, it opened its first overseas offices in Houston and Singapore to support the ongoing demand for custom solutions.

On the supplier side, Nexxis’ connections, reputation and capabilities have made it “a commercialisation vehicle for a lot of companies,” De Silveira says. “There are a lot of start-ups, technology companies and organisations that have great ideas and products. However, without a go-to-market strategy and ability to execute this strategy, they struggle to get the product to market. A major point of difference for Nexxis is adopting a strong go-to-market strategy and outlook, enabling us to commercialise new innovations much faster and with greater impact.”

| 37 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Nexxis becomes an emerging technology ‘commercialisation vehicle’ with successful go-to-market strategy

03

A CO-ORDINATED EFFORT IS NEEDED FOR AUSTRALIA’S DOMESTIC O&G SUPPLY CHAIN TO REACH ITS POTENTIAL

Operators and large contractors can support SMEs by reducing procurement barriers Operators and large contractors can support the development of local SMEs by reducing barriers to procurement, for example by: • Providing more information about the procurement process to assist SMEs with strategic planning; • Providing access to key decision makers; and • Simplifying the procurement process to reduce friction.

One effective way for purchasers to address these barriers is to develop an alternative procurement pathway for specialist procurement needs, such as procurement from smaller suppliers. The standard O&G procurement process can take as long as 18 to 24 months, involving large volumes of documentation. This is manageable for large organisations with sufficient resources and cashflow but can be a significant challenge for smaller suppliers that have a narrower scope of services and fewer employees. Potential features of an alternative procurement pathway for SMEs include: • Setting supplier requirements that are more reasonable for SMEs to meet, e.g. relaxing requirements such as minimum track record of five years where risk is more manageable.

• Taking advantage of lower risk activities to support more innovative, smaller domestic suppliers.

| 38 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

• Increasing collaboration and exploring new models to partner with local SMEs for co-development and implementation of innovative products or processes.

As Australia’s largest natural gas producer, Woodside prioritises local suppliers in its procurement process. In 2018, the company spent a total of $5 billion on suppliers, of which 83 percent went to Australian businesses.

Woodside uses Australian Industry Participation Plans to maximise local industry participation in its major projects. Where practical, it lists supplier opportunities on the ICN Gateway, which is a network for Australian SME suppliers. The platform provides unsuccessful tenderers with feedback and directs them to support and advice where appropriate.

Woodside also runs supplier networking events and information sessions to publicise its plans and potential opportunities.

“Woodside supports a number of initiatives that work collaboratively with small businesses to better understand how to effectively engage in our supply chain as well as build the capability of the small business sector, in particular in the communities where Woodside operates,” the company states.

“An important part of our growth projects is continuing to foster sustainable supply chains, delivering value while seeking to enhance positive outcomes for stakeholders and the communities where we are active.”

Recognising that small businesses are particularly sensitive to cashflow issues, Woodside is also a signatory to the Business Council of Australia’s Australian Supplier Payment Code, which commits signatories to paying SME suppliers within 30 days.

27

https://gateway.icn.org.au/

| 39 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Woodside leverages procurement platform, participation plans to boost SME procurement

THE AUSTRALIAN O&G SUPPLY CHAIN COULD REACH $49 BILLION BY 2030 IF GROWTH BARRIERS

04

ARE ADDRESSED

Oil and gas (O&G) operators will initiate new brownfield and greenfield projects in the next three years to maintain production levels. Demand from these projects is anticipated to grow the domestic supply chain to $40–42 billion in 2030 if economic conditions remain unchanged (Exhibit 15).

However, if the growth challenges discussed in the previous chapters can be addressed, Australian suppliers could capture an additional $7 billion of value from local and overseas work, lifting the GVA of the domestic supply chain to $47–49 billion.

Exhibit 15 - Australia’s O&G supply chain could triple its growth if key challenges are addressed

| 40 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Indicative outlook for domestic supply chain of oil and gas production by 2030

International O&G operators (exports) Australian O&G operators

Gross value added, A$b, current prices

+9-11

38

1

2-4

40–42

1

6-7

1

47-49

$6 billion

$3 billion

$45–47 billion

$39–41 billion

$37 billion

2016-17 GVA

0

Business-as-usual growth

2029-30 businessas-usual GVA

Additional growth uplift Size of opportunity

Source: Wood Mackenzie, AlphaBeta analysis

2029-30 growth uplift GVA

2

4.1. The domestic supply chain could generate $40–42 billion of GVA in 2030 under current conditions New investments by Australian O&G operators are likely to grow the domestic supply chain from $38 billion in 2016–17 to $40–42 billion in 2030 under a business-as-usual scenario. This forecast assumes that the Australian supply chain maintains its current level of global competitiveness, and that there are no major changes to factors such as oil prices.

By 2018–19, most ongoing major projects had transitioned into production, with most of the expenditure on the supply chain used to maintain assets and run operations. These expenditures will likely remain at 2018–19 levels throughout the next decade.

However, new construction opportunities will emerge in the medium term, as operators invest in developing new reserves to sustain their existing LNG facilities at full production. Over the next three years, operators are expected to commence $50–65 billion of brownfield and greenfield work — primarily expanding reserves and connecting them to existing LNG processing facilities through activities such as drilling new wells, establishing offshore facilities, and connecting more pipelines.28

28

Wood Mackenzie forecast (May 2019). Available at: https://www.woodmac.com/press-releases/australias-nextwave-of-lng-projects-needs-to-compete-to-progress/

29

Based on the supply chain’s current export ratio. Exports are equivalent to ~3.5 percent of the GVA for specialised domestic production for Australia O&G operators.

| 41 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

This local growth, together with a small increase in exports, will likely result in an overall increase of $6–7 billion of GVA to $40–42 billion in 2030 under business-as-usual conditions.29 This forecast is conservative as it assumes a modest level of new investment, and that some investments currently at final investment decision (FID) stage will not proceed.

04

THE AUSTRALIAN O&G SUPPLY CHAIN COULD REACH $49 BILLION BY 2030 IF GROWTH BARRIERS ARE ADDRESSED

4.2. A more mature, competitive supply chain has the potential to reach $47–49 billion in the next decade The domestic O&G supply chain could be worth

$47-49 billion

As outlined in Chapter 3, the Australian O&G supply chain has the opportunity to enable and capture new growth opportunities by developing deeper and more sophisticated capabilities, supporting SMEs, and becoming more globally competitive. By addressing these key challenges, the domestic O&G supply chain could be worth $47–49 billion of GVA in 2030 – a 20-30 percent increase on its GVA in 2016–17.

A more mature, competitive domestic supply chain would achieve higher levels of growth by: • Enabling more brownfield and greenfield investments from Australian operators. Suppliers that are more productive will help lower costs for Australian operators, making a range of new projects financially viable. Under the growth uplift scenario, operators could commence $75–95 billion brownfield and greenfield investments in the next three years – almost 50 percent more than the investment expected under a business-as-usual scenario.

of GVA in

• Capturing a greater share of domestic projects. Australian O&G supply chain improvements will increase not only the pool of work available but also the share captured by domestic suppliers.

The domestic participation level could improve five percentage points to 74 percent as Australian suppliers develop more advanced capabilities suited to a wider range of operators’ needs. For comparison, Norwegian suppliers perform 80 percent of maintenance and operations work in the local petroleum sector.30 By 2030, Australian suppliers could be generating GVA of $45–47 billion from local work each year.

2030. | 42 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

• Achieving more exports from more globally competitive capabilities. As Australian capabilities improve, the supply chain’s ratio of exports to GVA would likely increase by around two percentage points from the current 3.5 percent. This would increase the supply chain’s GVA from exports to about $1.5 billion.

While these changes will improve conditions for most of the domestic supply chain, some segments will shrink. For example, the development of robotic inspection and maintenance capabilities will potentially mean buyers spend less on site-based maintenance workers, and more on these advanced technologies.

However, the net effect will be positive: deepening O&G capabilities, enhancing innovation and better domestic buyer-supplier relationships could generate up to $7 billion of additional value for the Australian O&G supply chain above business-as-usual forecasts. These changes will enable new extraction and business opportunities, benefitting the Australian O&G extraction sector as well. By diversifying into more innovative, exportable, high value goods and services, domestic suppliers will also become more resilient to shifts in the O&G cycle and better prepared for the automation age.

30

Norad, Institute for Research in Economics and Business Administration (2008), ‘Local Content Development – experiences from oil and gas activities in Norway’.

As outlined in Chapter 3, the Australian O&G supply chain has the opportunity to enable and capture new growth opportunities by developing deeper and more sophisticated capabilities, more globally competitive.

By addressing these key challenges, the domestic O&G supply chain could be worth $47-49 billion of GVA in 2030 – a 20-30% increase on its GVA in 2016-17.

| 43 | 43 | National | National Energy Energy Resources Resources Australia Australia – Growing – Growing Australia’s Australia’s OilOil & Gas & Gas Supply Supply Chain Chain 2020 2020

supporting SMEs, and becoming

05

APPENDIX METHODOLOGY

| 44 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

5.1. Estimating the GVA of the overall supply chain for Australia’s O&G extraction The Australian O&G extraction sector demands goods and services from its supply chain for its operations. In this report, the Australian O&G sector includes upstream O&G extraction activities from exploration to development and construction to production and finally to decommission. The supply chain provides essential inputs for each phase. Demand from the Australian O&G sector consists of purchasing intermediate and capital goods from domestic and international suppliers.

One of the commonly used metrics to measure economic activity is Gross Value Added (GVA). This considers the amount of value added by each supplier along the entirety of the supply chain to create the final good or service that is sold to the O&G sector, not just the value added by the direct supplier.31 The sum of GVA from all the goods and services purchased by O&G operators from domestic and international suppliers is equal to the size of the overall supply chain for Australia’s O&G extraction sector.

31

Direct supplier is defined as the supplier that sells goods and services directly to the O&G operators. Indirect supplier is defined as the supplier that belong to the supply chain of the goods and services sold to O&G operators but does not sell directly to them.

Exhibit 16 - Components of GVA generated by demand from Australian O&G extraction

Gross Value Added (GVA) generated by demand from Australian O&G production • GVA is the best measure of the value created by economic activities – it is the difference between outputs generated and inputs used • It includes both the wages paid to labour and the returns to capital

=

1

Value added from consumption of intermediate goods & services

+

2 Value added from demand for capital goods & services

+

3 Value added from importing goods & services

• Australian oil and gas production consumes a range of intermediate goods & services to produce final output

• Australian oil and gas production receives capital from other industries, e.g. machinery, equipment, R&D

• Australian oil and gas production also imports capital and intermediate goods & services from overseas

• The value created in the production of intermediate goods for oil and gas is part of the GVA of the oil and gas supply chain

• The value added by capital can be measured using ABS industry data and input-output tables

• Using ABS data and input-output tables the value added by these can be calculated

• E.g. Civil engineering construction industry provides oil and gas with capitals good such as heavy machinery

• This includes imports of both intermediate and capital goods & services

• This can be measured using input-output tables • E.g. Transport sector provides services as an input to oil and gasproduction

The GVA of the supply chain was estimated using a number of ABS datasets. The primary dataset was the ABS input-output (IO) table, which provided information about the total purchases between industries in a year. Therefore, the total purchases made by the O&G extraction sector of goods and services from all other industries could be observed. These goods and services also required inputs from other industries which could be estimated using the IO table and so on. This process was iterated for each stage in the supply chain to identify the industry in which the value was generated. The total value by industry was then summed to estimate the industry from which GVA of goods and services was purchased by the O&G sector.

Intermediate goods Intermediate goods for the O&G sector are inputs that do not have a useful life of more than one year.

This includes consumables such as electricity used to power LNG plants or maintenance services to repair gas rigs.

The intermediate goods purchased directly by the O&G sector is reported in IO tables. The economic value of the supply chain for intermediate goods is driven by demand for these goods, which is associated with the total output by the O&G sector.

IO tables also report the purchases of goods and services that include and exclude goods and services that are imported into various sectors in the Australian economy. By taking the difference between the GVA of the supply chain for intermediate goods purchased by the O&G sector, the international and domestic shares could be calculated. The assumption made in this calculation was that the flow of intermediate goods in countries where goods and services were imported follow a similar ratio to that observed within Australian industries.

| 45 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Source: AlphaBeta analysis

05

APPENDIX - METHODOLOGY

Capital goods Capital goods for the O&G sector are inputs that have a useful life of more than one year, i.e. an asset.

This can range from tools and equipment to repair of an oil rig to large-scale LNG plants.

The total capital expenditure (capex) of the O&G sector is reported by the ABS and allocated to relevant industries that provide capital to the O&G sector. IO tables provided the total capital produced by each industry and the total capital demanded (capex) by each industry was available in the ABS National Accounts data. Using these datasets, the flow of capital goods from each industry into O&G could be estimated, in the same way as the intermediate goods flow. Finally, the total value of capital from each industry were reallocated using the value added by various industries to produce the capital. This estimation of value-add followed the same approach as identifying the GVA of intermediate goods.

The approach above was also repeated to estimate the GVA of capital imported by the O&G sector.

IO tables provided information on the amount of capital imported by each industry. This value was then allocated to industries that supplied the capital by assuming the same import ratio as that of intermediate goods.

Where data was not available, historical values were estimated using the trend for capex. These figures were then scaled to match the total capex numbers available from ABS National Accounts and ABS Mining Operations data.

| 46 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

5.2. Estimating the GVA of the Australian supply chain for domestic and international O&G extraction The Australian supply chain for domestic and international O&G extraction consists of suppliers that provide goods and services to local operators and export to international O&G operators. This is comprised of GVA of domestic suppliers to Australian O&G operators as described in section 5.1, as well as exports from domestic suppliers.

Exports IO tables also provide the total exports of each Australian industry; however, it does not provide information on the destination country or industry for those exports. Therefore, to estimate the GVA of exports from domestic suppliers, it is assumed that the share of an industry which provides input to the Australian O&G sector also exports the same share to international O&G operators.

| 47 | National Energy Resources Australia – Growing Australia’s Oil & Gas Supply Chain 2020

Australian Resources Research Centre Level 3, 26 Dick Perry Avenue, Kensington WA 6151 ABN 24 609 540 285 1300 589 310 | contact@nera.org.au

nera.org.au @NERAnetwork NERA – National Energy Resources Australia