Drilling down

DRILLERS, the frontline troops in any exploration program, are experiencing one of the worst slumps in demand in recent history, with long-term implications for miners. Nearly half Australia’s 1500 drilling rigs are thought to be idle, imposing formidable financial stress on contractors, particularly the smaller ones. By John McIlwraith
Drilling down Drilling down Drilling down Drilling down Drilling down


Staff Reporter

The slump in exploration for most minerals shows little sign of ending, with commodity prices still depressed and uncertainties about major economies.

In an industry with a high level of fixed costs, notably the money tied up in expensive rigs and the need to retain a skilled workforce, the longer the weak demand for drilling continues, the more difficult it will be to mount a recovery.

Resistance to CSG drilling, particularly in NSW, is blunting the offsetting benefits for drillers in that industry, although it has offered relief for a few.

Western Australia has been hit hardest because of its predominance in the resource industries – nearly half Australia’s rigs operate (or don’t) in that state. Queensland has about a quarter, with NSW and South Australia having a more modest presence.

Industry leaders have estimated that the drilling industry, in normal years, generates revenue of several billion dollars; the loss of a significant part of this will have a measurable effect in the economy.

It also signals a future problem. Without drilling, exploration slows markedly and as a senior drilling executive pointed out, the effect of low exploration budgets now will be reflected in mineral reserves for some years, and inhibit new projects, which can take five to seven years to reach construction after an ore body is discovered.

Even during the resources boom of recent years, exploration lagged.

Three years ago there were high expectations of the need for rigs to develop the emerging CSG industry.

But in the following 12 months it was estimated that only 3000 holes were drilled (in an industry that requires many holes to retrieve CSG from a typical deposit).

This would require up to 60 rigs, a small proportion of Australia’s fleet.

Much of the work available today is in brownfields development – infill drilling to expand existing reserves, or in planning future mining.

Two industries that have greatly reduced their drilling are coal and gold.

The first has caused a severe contraction in drilling contracts in Queensland and, to a lesser degree, NSW.

A major Queensland driller said it was often not recognised that the industry had an unusually high level of fixed overheads, most notably the cost of servicing the millions of dollars tied up in rigs that were not earning money.

A drilling program costing say, $A7 million, can be one of the first expenditures to discard when a small exploration company faces a credit drought.

However the company hoped that the current slump was cyclical – a familiar part of resources exploration – and not a structural change in, for example, the State’s coal industry

Gold exploration has fallen sharply in WA, accelerated by a steady fall in bullion prices in recent months.

A major drilling company pointed out that the industry’s plight was no reflection on its efficiency.

Australia has an innovative and efficient rig building industry, although some companies have moved overseas in recent years.

When this occurred there was often still a strong residue of maintenance workshops, because repairs to rigs could be seriously delayed if components had to be ordered from overseas.

The Australian industry had been innovative, and had introduced a number of new technologies in recent years that place it at the forefront of the global industry.

The decline in exploration and drilling budgets occurred in the second half of last year.

The latest quarterly report on resources and energy, by the Bureau of Resources and Energy Economics, showed growth in exploration budgets to the middle of last year.

But later figures, for the resources leader WA, showed a dramatic drop in the following six months.

Exploration spending for gold in the December quarter fell by 21% to $111 million. All mineral exploration (excluding petroleum) fell by 12% in the calendar year. The decline accelerated, with a fall of 19% in the September quarter.

Figures collected by the Australian Bureau of Statistics tell a similar story.

The trend estimate for total mineral exploration expenditure fell 10.2% (or $89.3 million) to $790.2 million in the December quarter of 2012.

The largest contributor to the fall in the trend estimate this quarter was Western Australia (down 11.2% or $55.3 million).

The current quarter estimate is 21.2% lower than the December quarter 2011 estimate.

The seasonally adjusted estimate for mineral exploration expenditure fell 6.7% (or $56.5 million) to $788.4 million in the December quarter 2012.

The largest contributor to the fall this quarter was Queensland (down 8.9% or $17.5 million).

The downturn for minerals was in contrast to that in petroleum and conventional gas exploration, where budgets increased last year.