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

a. Introduction

The modern era of exploration in New Zealand began in 1955 when Shell and BP established New Zealand’s first major consortium with the Todd Brothers of Wellington. Their acquisition and analysis of the first seismic data shot in New Zealand led eventually to the discovery of the Kapuni Field (264bcf of gas reserves) in 1959 and Maui in 1969 (3830bcf of gas reserves); together these produce approximately 83% of New Zealand’s oil and 87% of its gas.

The start of production from Kapuni in 1970 marked the beginning of the natural gas industry in New Zealand, and Taranaki as the hub of New Zealand’s oil and gas industry.

Although Taranaki is the most explored and commercially successful of the New Zealand Basins (with 350 exploration wells drilled to date), it is still relatively under-explored by world standards. Increasing levels of exploration over recent years have led to an enviable success rate for wildcat drilling and a commercial discovery success rate of one in three in the Taranaki Basin based on recent exploration activity.¹¹ Offshore discoveries have also been very successful with Pohokura in 2000, and Tui and Karewa in 2003.

New Zealand is currently rated 14th in the world in terms of attractiveness to oil and gas investment.¹² As the business process for investment is driven entirely by oil company investment and know-how, exploration investment and activity in New Zealand is limited primarily by the risk perceptions established by oil companies in a highly competitive global market, rather than resource potential.¹³

However, New Zealand’s ranking may change as exploration activity in New Zealand is expected to increase dramatically in the near future due to:

• the impending depletion of Maui, that will drive the need for new discoveries as a result of New Zealand’s heavy dependence on gas including for electricity generation (around 50% of total national gas production is used to generate 23% of the national energy supply)

• incentives for new discoveries, due to rising gas prices (200% in the past three years) inline with the run-down of production at Maui and global sector profitability due to high oil prices, peak oil concerns and Middle East instability

• Shell’s withdrawal from 2004 from all prospecting in Australasia, which is expected to make New Zealand more attractive to smaller exploration companies by reducing competition for prospecting permits

• the potential for significant commercial hydrocarbon discoveries in the seven additional Sedimentary Basins besides Taranaki that have been severely under-explored. Many untested structural closures could be potentially larger than Maui

• a lack of alternatives to gas-fuelled electricity generation due to the New Zealand public’s resistance to coal-fired power plants, new hydro-electric dams and nuclear-power stations. This will create unique opportunities for exploration companies to create value when gas demand, with its associated pricing, is at its maximum and energy alternatives are at a minimum.

b. Reported Barriers

The business case process for oil and gas exploration is mature; key sensitivities include field (prospect) size, flow rate, costs, timing and prices. Despite the positive factors supporting the development and expansion of the exploration sector in New Zealand, a number of issues were raised by respondents as potential barriers, or causes of curtailment, to their activities.

1. Technology and equipment

• Global scarcity and heavy bookings for specialist equipment was reported as one of the main barriers to the respondents expanding their future exploration activities in New Zealand. Supply of rigs worldwide is tightening as international exploration increases in response to high oil prices.

• Already only 14th in the world in terms of attractiveness to oil and gas investment,¹⁴ New Zealand is becoming even less attractive as a prospecting destination than some other parts of the world, due to a predominance of gas rather than oil in the New Zealand sedimentary structures.

• The scarcity of specialist equipment is contributing to difficulties experienced by the respondents in aligning the completion of work programme commitments with equipment availability within the permit time frames.

• Cost of equipment was cited as a limiting factor for future exploration, especially in areas of lower prospectivity. Rig costs have increased from $70,000/day in 2003-04, to $128,000/day in 2005-06, to a projected $378,000/day for 2007-08.

• Demands for work programmes of 12 months or longer from rig operators may contribute to the ongoing scarcity of specialist equipment for New Zealand exploration activities. The small New Zealand exploration industry would struggle to support such a commitment in the absence of a ‘primary contractor’ willing to underwrite a 12-month rig programme.

2. Policy: Permit Regime and Work Programmes

• Respondents raised concerns about the ‘aggressiveness’ of the current permit regime, in particular the difficulties they faced in aligning the requirements of their respective work programmes with the availability of rigs and other equipment, within in their permit timeframes.

• Respondents suggested more flexibility in or extensions to permit terms may be required as the worldwide demand for specialist equipment is increasing the time horizon to relocate rigs to New Zealand beyond two years. Exploration permits currently run on a two-year rolling system.

• In conjunction with their inability to meet their work programme requirements due to non-availability of equipment, respondents also cited difficulties in securing deferments to their Work Programmes from Crown Minerals as an additional barrier to an expansion of their exploration activity.

• Lack of access to exploration acreage was raised as an issue, despite the previous bid round being significantly under-subscribed.

3. Policy: Resource Management Act

• Inconsistencies in the treatment and processing of resource consents by different councils was reported as being of concern, especially when it impacted on the respondents’ abilities to either plan for or meet their Work Programme commitments. Most regional councils are generally focused on consent protocols for onshore / land-based projects, and only Taranaki was reported to have high-quality in-house RMA expertise for offshore projects.

• Exploration permits and activities that crossed territorial boundaries increased the scope and scale of the consent application process, which compounded the inconsistent treatment reported above.

4. Fiscal regime and incentives

• Currently, tax incentives are only available for new gas discoveries. However, respondents suggested that the incentives should be applied for both types of hydrocarbons, as oil and gas are generally found together and New Zealand has greater dependence on oil.

• Respondents suggested that the incentive regime be applied to the development of previous discoveries, which may now be more economic to produce with the demise of Maui.

• Respondents questioned the implications of the recent initiative by the Inland Revenue Department to remove the tax obligations on survey ships and rigs operating in New Zealand beyond the 186-day exemption period while maintaining the obligation on rig support vessels. Respondents pointed out that rigs operate symbiotically with support vessels and this initiative could increase both the cost of drilling programmes and lead to potential delays due to non-availability of the rigs.

5. Resource information

• Some respondents cited ‘prospectivity’ as the greater driver for exploration activity than the availability of infrastructure in proximity to new discoveries, and shared their experiences of difficulties in accessing seismic data purchased by the Crown for this purpose. These experiences have not been reported here because it was the consensus of participants at the Workshop that the opinions expressed were not valid.

• Recent government initiatives to increase prospectivity and provide access to the seismic data include:

  • the NZ$15m Ministry of Economic Development programme (from 2005) to acquire data in frontier basins, in conjunction with a database project that will provide free online access to both old and new exploration data¹⁵
  • a NZ$23m multidisciplinary programme funded by the Foundation of Research, Science and Technology (FRST) in conjunction with GNS. It will undertake mapping, geological analysis and modelling of yet-to-be discovered petroleum accumulations to reduce exploration risk and increase exploration success for both established companies and new entrants.¹⁶

6. Investment

• Respondents suggested that New Zealand’s attractiveness to international investment in exploration was limited by low prospectivity, a predominance of gas rather than oil in recent discoveries, its relatively small market size and distance to larger markets, and the historically low gas prices due to the oversupply of gas from Maui.

• The lack of a domestic exploration sector capable of completing frontier-type activities unless in conjunction with international investment. Above the relatively small scale of Austral Pacific, and New Zealand Oil & Gas Ltd, only Todd (as a domestic company) has created a linkage with overseas companies to drive offshore exploration in New Zealand. These multinational companies operate globally and tend to come and go as more competitive opportunities emerge elsewhere.

7. Infrastructure

• Some respondents reported that although their exploration activities outside the Taranaki Basin had yielded discoveries, they were unable to commercialise their discoveries due to lack of infrastructure. However, it is worth noting that the size of the discoveries did not justify government intervention to lead the development of new infrastructure as the discovery of Maui did.

• One respondent cited lack of access to existing pipeline infrastructure as the reason for his company’s inability to commercialise discoveries within Taranaki. The lack of access was reportedly for commercial reasons but the respondent chose not to discuss this further. It may be useful to investigate to what extent this is an issue for other exploration companies operating in the Taranaki Basin as it could conceivably be an uncompetitive practice.

• Respondents all supported government intervention to kick-start the development of infrastructure outside the Taranaki Basin as a means of encouraging and supporting exploration activity in the other Basins. However, we comment that this would first require the existence of a proven petroleum system sufficient to support such an investment, which is yet to be achieved. Internationally, government investments in infrastructure are typically linked to the development stage, not exploration.

c. Suggested Interventions

1. Adjustments to the tax regime – exemptions for support ships, incentives for new oil and gas discoveries, incentives to developed existing discoveries.

2. Strategies to attract small to medium-sized international exploration companies – respondents suggested that exploration in New Zealand Basins is more suited to such companies, who are likely to be hungrier and more responsive to current government initiatives to boost exploration activity.

3. Strategies to assist New Zealand companies to develop into world-class operators – respondents highlighted the opportunity for government to assist local companies to become internationally competitive as a result of anticipated local demand and high world prices.

4. Strategies to increase the availability of specialist exploration equipment in New Zealand – respondents suggested that the government might have a role as a ‘primary contractor’ or underwriter for an extended drilling programme.

5. Adjustments to permit regime – consideration of exit points: respondents suggested that a more flexible approach be implemented for the work programmes, in particular more flexibility in reasons for deferral other than rig non-availability.

The study acknowledges that government has already moved in part in the above areas by adjustments to taxation regimes and the provision of seismic data sets without condition to interested parties at no or limited cost. Our investigation suggests that more could be done to better match initiatives to the business interests of targeted mid-sized exploration companies. In respect of specialist exploration equipment, we suggest that there may well be a role for government in underwriting rig programmes for extended periods and then tendering spare capacity to the industry. Such an initiative or similar scaled interventions will require further investigation.

Summary and Conclusions

The oil and gas industry in New Zealand is currently at a crossroad due to the depletion of Maui. In particular:

• it is an established industry with a tight geographical focus (the Taranaki Basin) facing a contracting gas market, competition from imported oil and gas and a high incidence of dry holes

• despite the drilling of almost 600 exploratory wells, it is still considered a ‘frontier territory’, with a well density of 1:14 km2 in the Taranaki Basin that is considerably lower than other geologically similar regions around the world¹⁷

• successful discoveries (eg, Pohokura) have been counter-cyclical and ‘lumpy’, causing strains to infrastructure and support services.

The depletion of Maui is creating an energy shortfall for New Zealand and new opportunities for the industry: exploration activity needs a significant increase in order to produce sufficient successful discoveries for appraisal and development to secure New Zealand’s energy system. Exploration intensity will need to increase by a minimum of 300% to come up with the discoveries to meet anticipated petroleum demand, as stated in a recent article on the Foundation for Research Science & Technology’s website.¹⁸

The study team suggests that the following issues, which were outside the current scope, require further investigation:

1. How should the sector cope with sub-optimal known discoveries (ie, proven reserves that are either too small, too expensive or of uncertain quality to warrant extraction at current prices) through existing infrastructure and support services?

2. Assuming the stimulation of exploration activity through the current incentive programme, how should the sector cope with any resulting new discoveries that do not conform to the Maui ‘profile’ on which the existing infrastructure is optimised for, ie, discoveries in new basins, discoveries with different mixes of oil and gas, discoveries of different sizes?

3. Which government agency should take the lead in facilitating capacity development in the sector that would address the above?

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