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A Report on Possible Government Interventions to Promote the Sustainable Development of New Zealand’s Ocean Resources

Executive Summary

1 Introduction

2 Approach

3 Key Findings

Case study 1: The discovery, development and production of the Maui gas and oil field

Case study 2: Issues and barriers facing the oil and gas exploration sector

Case study 3: Issues and barriers in the development of a wave and tidal energy industry

Case study 4: Issues and barriers in the development of a gas hydrate sector

Bibliography

Appendix

Acknowledgements

Case study 1: The discovery, development and production of the Maui gas and oil field

a. Introduction

The Maui gas and oil field (‘Maui’ for short) is located 35 km offshore of the Taranaki Peninsula (see Fig 1) in water depth of 110 m⁷. In 1969, it was the eighth largest gas field discovered in the world to date, with reserves of gas estimated at approximately 3830 billion cubic feet.

Production commenced in 1979, 10 years after discovery. Reasons for the delay included the technical complexities of developing the field, infrastructure design parameters that were beyond anything previously attempted. Also development of offshore gas fields was, at that stage, still novel on a world-wide basis and completely unknown in New Zealand.

In addition, the economic production of Maui required the producers to secure a committed sale of a large quantity of gas over an extended period of time. The New Zealand government was the only possible buyer for such a large quantity of gas and entered into the Take-or-Pay Agreement that committed it to purchase gas from the field for a 30-year period. In consideration of this, the New Zealand government gained 50% ownership of the field.

Production on Maui is from three reservoirs within separate formations of the Kapuni Group. The Maui-A platform wells commenced production in 1979, while Maui-B came on stream in 1993. Thirty-four wells have since been drilled in the field as of 2003, consisting of 14 production wells within Maui-A and 12 development wells within Maui-B, along with a further eight exploration / appraisal wells.

Maui accounts for between 75%⁸ and 80%⁹ of New Zealand’s hydrocarbon production. Annual production from the year to June 2002 was:

• 168 billion cubic feet of gas

• 6 million barrels of oil and condensate

• 168,000 metric tonnes of LPG².

Since commencing production in 1979, Maui has made a massive contribution to the New Zealand economy. In addition to providing approximately 50% of the (relatively cheap) fuel used for electricity generation, it has also contributed an estimated $472 m directly2, excluding revenue to the government from other downstream activities, such as Methanex.

Production from field reduced in 2003, following a downwards revision of the size of the reserve; it is expected that the specified economic reserves will be depleted sometime after 2008. Projections are that additional reserves will be delineated to enable further production that could well extend this timeframe¹⁰.

The decline of the Maui field may prove to be a double-edged sword for the New Zealand economy. While the low price of gas from Maui has contributed significantly to New Zealand’s international competitiveness by allowing the government to attract large multinational companies like Methanex and Comalco, providing them with low-cost electricity contracts over a long term. On the downside, it has also suppressed the commercialisation of new gas field discoveries (particularly Kupe, discovered in 1986 and with first production now scheduled for 2008) and disincentivised exploration, because the Maui gas prices made concurrent production from other fields uneconomic.

b. Factors Supporting the Development of the Maui Gas and Oil Field

Know-How

• Shell-BP-Todd (SBPT) as well as Mobil, Gulf Oil, Hunt and Exxon undertook marine seismic surveys during the 1960s and early 1970s as the technology became widely available.

• The first offshore drilling campaign based on seismic data led to the Maui discovery.

Capital

• Cooperation between Shell, BP and the New Zealand company Todd enabled them to leverage off each individual company’s strengths to discover and develop the field – the previous onshore discovery at Kapuni was the culmination of a joint venture to systematically explore the most prospective parts of New Zealand, with Shell operating the western side of the country and BP the eastern.

• Government stepped in to promote and facilitate the development of Maui during a period when energy security and affordability was (as again today) very high on the political agenda globally. However, even with governments of both parties persuaded of the desirability of facilitation and commercial involvement on an unprecedented scale, the path from discovery to development took 10 years.

Clear Title

• The Continental Shelf Act 1964 vested ownership of resources of the Continental Shelf with the New Zealand Government; and extended the reach of the Petroleum Act 1937 over the newly gazetted territory.

c. Barriers

• The main barrier to the development of the field was the lack of a ready market for the production of gas on the scale required for commercial development

• There were also a number of technical and technological hurdles that had to be addressed, as offshore gas production was unknown in New Zealand and relatively novel elsewhere in the world at the time.

d. Interventions

• The Take-Or-Pay Agreement entered into by the government enabled the commercial development of the field by securing the sale of a fixed volume of gas to the government irrespective of whether it was, or could be, utilised.

• The development of a market for Maui gas in New Zealand was facilitated by massive predominantly government investment into the development of infrastructure for processing, transportation and consumption (power generation, synthetic petrol etc).

• Government also took an active lead, through the Liquid Fuels Trust Board, Power Planning Committee and the Department of Trade and Industry among others, to develop utilisation options for the gas.

Summary and Conclusions

Think Big gave government intervention a bad name.

However its failures largely arose from the collapse of oil price negating the underpinning case for self-sufficiency. While much attention has been given to the negative outcomes associated with this fundamental impact on specific business cases, nevertheless the development of Maui has had a large and widely distributed positive effect on the competitiveness of the New Zealand economy due to its sustaining of competitive energy prices, enjoyed by manufacturing and other industries. For example, Taranaki was until 2003 one of the most efficient sites for methanol production in the world.

More importantly however, the establishment of a viable gas industry in New Zealand was only made possible by the infrastructure that was established and the gas market that subsequently ensued. The Gas industry remains an important contributor to national gross domestic product.

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