As a relative newcomer to the drilling industry, 2024 is shaping up to be an interesting year for the drilling industry.

Since I joined ADIA (Australian Drilling Industry Association) as CEO in July 2023, I have had hundreds of conversations with drillers and suppliers to the industry. Regardless of what part of the drilling industry those conversation relate to - broadly defined as exploration, underground, water well and geotechnical, most agree that 2024 marks a year of change, and uncertainty, for the drilling industry in Australia.

The most obvious cause for concern for those exposed to the resources sector is the decline in the price of many commodities, including copper, nickel, and lithium. Most of the so-called battery minerals are seeing sharp price declines despite the promise of long-term anticipated demand as the world looks to make a transition to greener energy sources.

The cause of these price declines is, of course, not related to any single event. Some of the factors that led to once-in-a-generation price rises throughout 2022 (anticipated long-term demand, the Russia-Ukraine conflict, among many others) have now been counterbalanced by oversupply, muted demand from China and a settling of the concerns about the impacts of current global conflicts.

Nickel issues

On the supply side, Indonesia has flooded the nickel market. The impact on price has been significant, with the price of nickel halving in the past 12 months. In response, the Australian federal government added nickel to its critical minerals list and the Western Australian government followed days later with an increased royalty rebate. However, in the short-term, this may be too little too late, even for a major player like BHP, which has written down the value of its nickel operations by over AUS$5 billion and is carefully considering its options. Shuttering of major assets remains a distinct possibility.

The sharp decline in lithium carbonate pricing, it appears, has been more broadly impacted by demand-side factors. Electric vehicle sales in China have slowed, along with a broader slowdown in the Chinese economy. While Australia is diversifying its customer base to include Europe and North America, other players are also entering the market with new extraction techniques. This creates not only demand-side impacts on price but also the potential for significant supply shocks to emerge.

Drilling contractors overly exposed to these mineral types are carefully assessing their exposure. Many contractors are responding by entering other markets to ensure they hedge against any one commodity's fluctuations. But moving quickly - particularly in a declining market - is far easier said than done.

Squeezed margins

Adding to this uncertain backdrop, most contractors are already reporting significant margin squeeze. Major producers are demanding ever-increasing safety and performance standards and will often demand these outcomes without funding the full cost involved. Recent Australian Bureau of Statistics quarterly data bears out these impacts. Record exploration expenditure is not resulting in record metres drilled.

To be clear, ADIA - and indeed all credible industry players - fervently believe in creating more safe and productive workplaces. No one wants to see anyone get hurt, or for any unnecessary risks to be taken at the expense of human well-being or life. But simply adding more things for a contractor to do and cutting the financial means for the same contractor to achieve those additional requirements, is not a sustainable solution. A contractor's margin should not be used as the sole means to fund these initiatives.

The best outcomes will eventuate when industry-wide standards are agreed, with early contractor involvement and having global equipment manufacturers directly involved in the process. The oil and gas drilling industry agrees many of its safety and operating standards globally. In Australia, exploration drilling standards vary from company to company, and sometimes even between mine sites within the same company.

Diversification

Many contractors exposed to the sharply cyclical nature of the exploration sector are expanding their footprints into the more perennial sectors of water well and geotechnical drilling. Several exploration rig types can be repurposed for other drilling conditions. It makes sense for contractors to broaden their market opportunities and hedge their risks.

Several exploration rig types can be repurposed for other drilling conditions

Regardless of the sector, drilling in Australia is also experiencing the very real challenge of shortages of skilled labour. The Australian government's Skills Priority List records a future shortage of drillers across all Australian states and territories.

In each of the conversations I have had with drillers of all shapes and sizes in Australia, it is evident that no one single factor will drive sustained success for the Australian drilling industry. Mineral prices rebounding will only fix part of the challenges the industry now faces. Skills shortages, margin erosion and other business impacts are all now factoring on sustained success.

So many other factors are now also at play in a globally connected world that is making - or at least attempting to make - the biggest energy transition since mankind began the use of fossil fuels.

We all know more drilling, not less, will be required to unlock these new resources. But quite how it all plays out for the Australian drilling industry in the coming year or so will be very interesting to watch.  

Got a story? Email: duncan.moore@aspermont.com