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Executive Summary

Development of Oceans Policy to date has established that a substantial number of opportunities exist for possible commercial development. This includes expansion of existing industries and the development of whole new sectors of the New Zealand economy. The Centre for Advanced Engineering (CAE) has contributed to that recognition, in particular through its ‘Our Oceans’ Conference in 19991 and subsequent programmes of work directed at gaining better recognition of the economic importance to New Zealand of its Exclusive Economic Zone (EEZ) and continental shelf extensions.

In advancing the development of an Oceans Policy, the Ministry for the Environment has identified a desire to better understand the factors that lead to or impede commercial development, especially of new sectors. The Ministry commissioned this investigation of the subject, with a view to inform the design of suitable interventions that could catalyse such sustainable development. Our basis is that Oceans Policy is intended to promote the sustainable economic development of marine resources, whilst preserving the integrity of oceans ecosystems and social and cultural values of the oceans.

To gain a practical understanding of the issues, barriers and opportunities facing development of economic activities in the ocean this investigation considered only a selection of cases. All case studies pertain to the energy sector; they represent a temporal spectrum from historic (the discovery and development of the Maui gas and oil field) through contemporary (current oil and gas exploration and development) and near-term (wave and tidal electricity generation) to far-term (gas hydrate mining and conversion). These case studies, in turn, spanned the full range of anticipated activities from fully commercial to future-focussed potential activity.

At various times in our history, the shape of the New Zealand economy has been impacted by bold government interventions at key junctures, for better or worse. One such instance was part of an aggressive response to the energy crises of the 1970s, which happened to coincide broadly with the discovery in 1969, and subsequent appraisal of, the giant Maui gas and oil field (‘Maui’) off the Taranaki coast by the Shell-BP-Todd consortium. The exploration campaign that resulted in Maui was itself a response to two precursor conditions: the progressive international development and deployment of marine exploration and development technologies; and the passage of the Continental Shelf Act 1964 that provided for the application of the Petroleum Act 1937 beyond the narrow territorial sea and out to 200 nautical miles from shore (the Exclusive Economic Zone).

While these ‘settings’ were sufficient to enable development of the resource that has done much to fuel New Zealand’s economic activity over the past quarter century, during the early 1970 the business case for the field’s development was marginal at best without the bold, direct involvement of the New Zealand government. The intervention took the form of a direct (50%) equity interest in the joint venture, in consideration for guaranteed project revenues through a take-or-pay contract. This commitment by government, in turn provided the impetus for development of the vast majority of the infrastructure needed for consumption: power stations, the pipeline grid and associated networks, and a petrochemical industry. Initially much of this was in public hands but eventually these enterprises were all corporatised and mainly privatised. Collectively they have accounted, both directly and indirectly, for a substantial proportion of national economic product over the intervening period; with particular regional importance in Taranaki.

As a consequence, offshore oil and gas exploration since Maui was brought on-stream in 1979 has not required government involvement; the former state oil company (Petrocorp) was privatised in 1987. A number of commercial discoveries have been made offshore Taranaki, and some sub-commercial discoveries in offshore South Island basins. In recent years it has become evident that the rate of discovery and delineation of gas reserves in New Zealand has not kept pace with production. With the pending depletion of the Maui field squeezing the reliability of future thermal fuel requirements for the national power system, government has decided to make some relatively modest interventions to stimulate exploration.

The exploration sector remains at a critical juncture as rapid escalation in global oil and gas prices have impacted on activity levels and put pressure on the availability of core capability such as seismic vessels and drilling rigs. Policy settings are under constant review to ensure as far as possible that New Zealand’s undiscovered conventional petroleum resources yield the desired discoveries to sustain, and if possible extend fuel stocks and their contribution to our energy system.

Global oil and gas prices have reset the economics of energy technologies, and climate change policies have tended to promote renewable electricity generation in particular. Hence, marine renewable energy sources have begun to move closer to commercial viability. New Zealand has substantial potential opportunities for both wave and tidal power generation; currently up to 12 projects are under investigation. These all draw on the implementation of technology that has been developed overseas and adapted for specific New Zealand sites. In some respects this is analogous to most of the considerable wind power development New Zealand has seen in the past few years.

Setting aside the considerable technical risk factors that dominate investment in this industry, our investigation has found that proponents of wave and tidal projects enjoy a high level of ‘moral support’ from government policy including access to research and development (R&D) funding. Yet they see themselves as being quite seriously impeded by issues generally lumped together as related to the Resource Management Act. Perhaps, more accurately, this reflects insufficient clarity as to property rights and market dynamics. However, under current settings it is near impossible for a project sponsor to constrain the expense and delays that may be attendant on an initiative, to secure the right to install a marine power station and offer its production into the electricity market.

The wave and tidal energy case illustrates the very best and the very worst of entrepreneurial or pioneer development. Technical risks are generally high and the often nebulous policy support for renewable energy (for example) is not sufficient to facilitate consequent development. Support to these types of activities must be supplemented by detailed attention to uncertainties in the business cases, which are related to completion and to revenue risk during early-stage development.

Another potential energy source is gas hydrate. Yet to be proven viable, research has shown it to be an important aspect of New Zealand’s marine realm. The most optimistic timeline for commercial exploitation of gas hydrate is: at least one decade away. Current research, at a modest but material level, is improving the inventory and characterisation of the resources offshore New Zealand. But there appears to be a complete gap in research addressing the technology for sustainable exploitation of the resource, for which New Zealand is generally considered likely to be dependent on overseas innovation. There is no sign of commercial interest in gas hydrate commercialisation, and while such development would appear to be governed by the Crown Minerals Act 1991, it is not certain that this statute will indeed provide the optimal development regime. Also, investment will be discouraged by the very high risk levels in the absence of any fiscal incentives.

In summary, these three cases demonstrate that to be effective, interventions will have to be carefully tailored to meet the particular impediments or circumstance that face the various opportunities for commercial development in the ocean. Extending this finding to ocean development as a whole suggests two key points:

Technological innovation is essential, but a small economy can only expect to maintain a cutting-edge position in very few fields. Otherwise, the contribution of resources such as gas hydrate will have to await the availability of technology from overseas sources, just like the discovery of the Maui Field followed international technological advances in the 1960s.

An effective statutory and regulatory framework is essential for new sectors to develop in a desirable and orderly fashion. While resources such as petroleum and fish are governed by specific regimes, it is not apparent that these regimes can be extended universally into other marine-based industries. In the absence of such a framework, history tells us that the Resource Management Act proved an insufficient and unsatisfactory de facto regulatory framework for aquaculture, resulting in a moratorium that curtailed the realisation of the industry’s growth potential. With the emergent marine energy sector, reliance on current planning and consenting frameworks appears to be similarly compromising renewable energy initiatives.

Finally, where opportunities and technology exist, investment may still not be forthcoming when major risk factors cannot be offset. In such cases government may consider specific interventions even though these may distort market functionality. The interventions in the energy sector during the 1970s, while imperfect, have nevertheless delivered a key point of competitiveness to the New Zealand economy that would be desirable to sustain. Recent modest initiatives to facilitate gas exploration go some way, and other instruments should be considered: both to extend existing marine industries, and to catalyse the development of others such as wave and tidal power and eventually gas hydrate, if proven technologically viable.

Definitions

Commercial Development
Establishment of a new economic activity as a consequence of a viable business case.
Economic Development
Aggregate of commercial developments in a sector, region or the nation.
Frontier Territories
Oceans are Frontier Territories, where sovereignty has been established but only limited commercial and economic development has occurred and substantial untapped opportunities are perceived.

1 Centre for Advanced Engineering (2001). Our oceans: A journey of understanding. CAE Comments Series 1.

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