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'Ifs' and 'buts' around the oil and gas industry's ability to bring mega bucks to NZ

'Ifs' and 'buts' around the oil and gas industry's ability to bring mega bucks to NZ

New Zealand can’t put all its eggs in the oil and gas basket.

This seems to be an underlying message resonating through this year’s Advantage New Zealand Petroleum Summit.

Against a backdrop of plunging oil prices, delegates from around the world have gathered at Sky City for two days of presentations, and to hear what acreage the government is making available for new oil and gas exploration in this year’s Block Offer.

Yes, oil is New Zealand’s fourth highest export earner, directly contributing $1 billion towards the country’s gross domestic product in 2013, and royalties adding $1.5 billion to the Government’s coffers over the last four years.

And yes, we’ve only just scratched the surface exploring the country’s potential, with all our production coming from the Taranaki Basin – one of the country’s 18 basins.

But the Minister of Energy and Resources, Simon Bridges, opened the conference highlighting the need for New Zealand to diversify its energy sources. He said:

“While the world must progressively transition towards a low carbon future, it can’t and won’t happen overnight.

“This is why New Zealand takes a long-term view, with a mixed and balanced approach to our energy future, which sees us pursuing opportunities in both renewable and non-renewable energy.

“We are a world-leader in geothermal energy, we have world-class wind generation, our hydroelectricity is extensive, and our abundant forestry resources have incredible potential as a resource for bioenergy.

“But the role of non-renewables, including oil and gas, should not be understated.”

Less “disappointing” exploration outcomes needed

The energy research and consultancy group, Wood Mackenzie, said oil and gas isn’t a sure high-earner for our economy.

Speaking at the summit, the group’s upstream specialist from Australia, Matt Howell, said New Zealand really needs a couple of big discoveries to get developed, for the industry to look up and take notice of us.

“What New Zealand really needs is that PR”, he said.

Howell said recent exploration in New Zealand has been “disappointing” and isn’t going to help attract significant explorers to the country.

While the summer of 2013/14 saw the likes of Anadarko, AWE and OMV bring rigs here from overseas, commercial quantities of oil and gas were not found.

Going back another few years, Howell pointed out the number of discovered resources, compared to the number of wells drilled has been miniscule.

He said most discoveries in New Zealand produce less than 25 million barrels of oil equivalent per year, with the average being around 13 million barrels.

“This is good enough for small caps operating onshore, but from an IOC [international oil company] perspective, this isn’t going to draw you into a country.”

Nonetheless the thing that separates New Zealand out from the likes of the UK, Denmark and Brunei, which like New Zealand have had jumps in production before reaching plateaus, is our number of unexplored areas.

While 457 wells have been drilled in the Taranaki Basin, only 81 have been drilled in the East Coast Basin, 36 in the Great South and Canterbury Basins, and 13 in the Northland and New Caledonia Basins.

Bridges today put a total of 429,298 square kilometres up for tender in this year’s Block Offer.

This includes an onshore block in Taranaki, two onshore blocks on the west coast of the South Island near Murchison, and offshore blocks in the Northland-Reinga, Taranaki, Pegasus and East Coast, and Great South and Canterbury Basins.

Major international players, Chevron, Stat Oil and ONGC Videsh Limited were among the new comers, awarded permits in last year’s Block Offer.

NZ somewhat insulated from oil price drops

Bridges told those gathered at the summit, “It would be artificial today if I didn’t mention the sharp fall in the oil price globally."

Howell explained the extent of this, saying global demand for oil almost halved from 2013 to 2015, while supply doubled. The sector’s cash flows in Asia-Pacific have decreased by more than US$60 billion this year.

Bridges said, “Of course the fall caused –perhaps primarily – by international energy companies’ success in technological innovation and new exploration leading to strong oil and gas supply – has also meant a variety of responses from the upstream sector including reduced budgets for exploration activities in the short to medium term.

“Be clear however: the fundamentals haven’t changed. Energy companies can - and must - look past the immediate and take a long term view if they are to fulfil world energy aspirations into the future.

Howell said New Zealand is relatively insulted from plunging oil prices, as a number of the companies operating here at the moment won’t enter the exploration phase for another four or five years.

While he said this is the case for the likes of Chevron and Stat Oil, he admits Shell may be in a bit of a tight spot trying to push back potentially ground-breaking exploration work it had committed to doing in the Great South Basin.

He said the Australian Government had expressed some understanding towards companies wanting to hold off work until the oil price picks up.

While New Zealand Petroleum and Minerals has said it wouldn’t allow companies to extend work permits due to commercial reasons, Howell thinks established companies may be able to leverage their long-term presence in-country.

New Zealand relatively risk-free and fiscally attractive

Some of the doom and gloom aside, Howell said New Zealand is one of the world’s most attractive countries, when it comes to ensuring good returns for oil and gas producers.

Around 43% of what oil and gas companies earn in New Zealand goes back to the Government through taxes and royalties. This is well below the global average of 62%. Portugal has the lowest government take of 20%, while Iran the highest, of 100%.

Howell said the Government take in New Zealand is the fourth lowest in Asia.

New Zealand also poses a very low risk when it comes to social and geo-political issues. According to Wood Mackenzie’s scale, Syria is the riskiest country to operate in, while the Netherlands is the least risky.

Environmental issues, including the risk of natural disasters and the reputational impact a spill will have on a company operating in a place where people care so much about the environment, are issues that might make New Zealand less attractive.

In terms of finances, Howell said labour costs in the sector are up to 40% lower than in Australia, however exploration costs are much higher, as getting rigs and equipment to New Zealand is relatively more costly.

Harnessing commercial opportunities

Howell said, “It’s important that when a discovery is made, there’s consideration to what market it’s going to feed and what’s important”.

With production from the country’s main gas supplier at Pohukura in Taranaki expected to drop off around 2020, he said large gas reserves need to be found within the next three or four years.

However he pointed out that as companies look to produce beyond Taranaki, they’ll have to factor in the logistics of getting their products to the right market.

Without any infrastructure in place, he questioned the viability of building a pipeline from the Great South Basin for example, if major gas discoveries were to be made there.

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The tag line "Government Promotes Renewable Energy" drew me in to the article, only to find out it was all about the government promoting non renewable energy.
In a world of $50 oil, it does actually seem a good time to use everyone else's oil, and develop more renewables, but the plans for that are not obvious.
I was recently advised by Meridian that they would soon more or less halve the payments they make to me for electricity I provide to them from a solar power system on my roof. Until now they have paid 25c per kwh for the first 5 kwh per day, and 10 cents per kwh after that. The 25c level is disappearing altogether, and the 10c goes down to 7 cents for the 8 months when solar power is strongest. In the winter, when it doesn't produce a lot, they will leave it at 10 cents. They also are increasing the lines charges to be connected. In total I expect the amount they will reimburse me will be close to half what they do now. What you produce and use yourself is still your benefit.
Meridian were more generous than other providers, and are now probably in line. Nevertheless the move seems a little unfair on those who have invested in good faith, and regardless, it will make the maths harder to stack up for new installations, at least until plug in cars or home batteries become more widespread.
In summary, have government controlled power companies initiated a single new renewable facility in the last 7 years? Meanwhile they are trying to cut solar off at the ankles, if not the knees. Bridges' spin is frankly infuriating.

When the feed in tarif is high, it means that the poor who can't pay to put in a solar power system. It ends up that the poor are subsidizing the rich.This because you are getting a high price for the power and the power companys are making a loss on the power you provide.

Your point sort of sounds reasonable if power companies were socially optimal entities, and not now looking after their "rich" shareholders. You can guarantee that Meridian's "poor" customers will not receive a discount as a result of me getting a lower return for my solar system than I otherwise might reasonably have planned for.
In fact, I strongly suspect that solar systems have helped keep the wholesale price of electricity down, and so have helped poor people. You can easily make the arguments one way or the other. 
Given I am relatively comfortable I am not expecting a sympathy vote at all, but as a minimum do not believe any suggestion that the current government is pro renewables.

line charges seem like rear guard action in that context.  Wouldn't it be nice if the NZ government provided a subsidy for solar installation, and then legislated that power companies had to buy home generated electricity at a premium.  

Anybody care to name three technologies that are less efficient, in terms of carbon dioxide saved per dollar spent, than small-scale solar? 

I don't really know, but my system has produced ~15MWH of electricity in its last 12 months. Given NZ's dirtiest marginal production is coal based, which produces 1kg of CO2 per KWH, then my system has saved 15 tonnes of CO2 production in a year. Given this article suggests that the current government has no renewable plans at all, then I'm feeling okay about the 15 tonnes.

Yes, the poor are subsidising the rich.
I've wondered for some time, do people who are unemployed, or disabled, or on welfare, and living in a State House, pay full freight on their power bills, or do they receive concessions on their electricity bills?
Those power bills could be one of the biggest drains on their limited finances
It seems to be a wasted opportunity, with the sale of the power companies. Mighty River, Meridian, Genesis, for $ billions, the government could have and should have used some of those proceeds to install roof-top Solar-PV on every State House, school, and government building
It would have given the solar-PV industry a great shot in the arm and got it off the ground in a more substantive way
But hey, they were trying to sell the companies, and there are probably side deals done that prevent the government from introducing schemes that undermine the business models of those power companies

You can lease the whole kaboodle from solarcity, which suposedly gives you cheaper power without the upfront costs. 

Stephen there's something I've been wondering regarding solar in NZ, perhaps you could clarify.  Imagine you're generating 1kw of solar, and you turn your 2kW kettle for 5 min.  In that short 5 min you drew from the grid power at 1 kW.  If that happens multiple times during the day then even though you're a net producer of electricity you could in theory forfeit much of your generating revenue through those little grid draw downs.  Particularly if the c/kWh buy/sell differential is large.
I just wonder does anyone take this effect into account when they're doing their calculations?  Is there a way of actually calculating how much you've donated and pulled from the grid on any given day?

The point to consider is that, in such circumstances, you use the grid as a remote battery

yes but you charge the battery at 7c/kWh and discharge the battery at -25c/kWh.

Generating and using the power yourself gives the best return, so your kettle example is okay. We pay the same as everyone else for electricity taken from the grid- roughly 25c a kwh give or take with GST and paying on time "discounts". And as noted above, the powercos will be paying roughly 7c per kwh they buy from us. So if I had the kettle on for an hour I would have foregone the 7c in your example but saved 25c. We have a reader that shows how much we have produced in total for a period; and separately import and export metres. Subtract the exports from the total produced, and you get an amount produced and consumed directly. 
Unfortunately much domestic consumption is at night- lights, cooking, heating, so we pay 25c for that; while all production is during the day, so will soon receive 7c for that. 
Hence either batteries, or a plug in car plugged in during the day being useful.
My system is so far borderline paying for itself so I don't wish to put you off at all. If though you are around during the day and using some yourself (as I am) then that is better.
If power prices were to go up over time, then the payback gets better. If they don't all well and good anyway.
Hope that helps.

Thanks, that makes sense.  I was considering getting a system for my mum.  It seems that to really extract all the value you'd need a lead acid battery bank with charge controller etc.  But then it becomes an order of magnitude more complicated if you want to store your energy.

.. I hope you are claiming dperecition on your solar panel to offset the profits from selling the electricity?  Which will no doubt produce a tax loss to offset your personal incme.  At the same time you could also register for gst, taxable activity being electricity producer - thus claimng the 15% back on solar purchase.
Suddenly the economics of solar start to stack up.

batteries would be nice, to avoid the generate and 7c and consume at 25c penalty.  Except that the cost of a battery system will far exceed the 18c differential.  You are better off financially staying grid tied, and that is why none of the solar installers are pushing battery systems unless you don't have a grid at your doorstep.

If you are generating 1kw, and turn on a 2kw jug for 2 min the jug has consumed 0.0666 kwh of electricity, while you generated 0.0333 kwh.  Wouldn't the cost just be 0.0333kwh?

Yes that's correct.  My point was that you generated (enough) electricity to cover the cost of running the jug in the 2 minutes (using your example) before turning it on, and yet you still got charged for 0.0333 kWh of grid electricity.  That's a tough pill to swallow.

Hunt around for batteries they are getting cheaper and more reliable
Friends of ours got 14 years out of their last bank
They made sure that they cycled them properly and only had a nominal draw of 10% made them last a long time.

As renewable energy from solar and wind have to be backed up by gass or something else. They can only be about 15% of the generation before the system starts to have problems. The way of the future I think is Thorium Reactors. Go to Waleoil and look at the video The Furture is Fine that was posted tonight.

It's still fission, and it's still pretty horrific.  It still products copious amounts of Cs137 and other fiendishly carcinogenic isotopes.  In the event of a serious accident it could still make half the country uninhabitable.  The plants will require fluoride chemistry to be done on an industrial scale on material which is highly radioactive.  Chemistry is dirty, and there will be contamination.   I don't know how anyone could defend fission energy, not after the Chernobyl and Fukushima catastrophes.  But I guess if Cameron Slater says it's safe... I feel safer already.

Thorium reactors have a lot of issues to be sorted yet. The liquid salts are highly corrosive and tend to eat through the reactor walls. I think the Indian government are in the process of building thorium reactors (?). Have you heard of the Bloom Box?

Supply of oil doubled from 2013-2015?  WTF care to quatify that statement?

UK oil production has fallen 60-65% from peak, and that is called a plateau.  Denmark and Brunei around 50% down from peak.  I'm so glad we have a bunch of liars running the oil industry, makes me feel all warm and fuzzy.  Welcome to the fact free future.

Welcome to the misinformation around oil! I see you noticed how large declines are reframed as 'plateaus' and world production 'has doubled between 2013-2015' - what BS!

Also be aware US production figures started including Natural Gas Liquids - which are hydrocarbons too light to be used directly for any purpose traditionally requiring an oil source, and when that wasn't enough, they added biofuels and refinery gains, neither of which has ever been near an oil or gas well, and coal to liquids production, which is from... coal!

Hi Skudiv,
This statistic was included in Matt Howell's presentation at the petroleum summit. I have also done a fact check with him. The group he works for, Wood Mackenzie, does commercial intelligence for the energy, metals and mining industries, and provides analysis and advice on assets, companies and markets.  

Do you think he honestly believes those comments?

He said most discoveries in New Zealand produce less than 25 million barrels of oil equivalent per year, with the average being around 13 million barrels.
“This is good enough for small caps operating onshore, but from an IOC [international oil company] perspective, this isn’t going to draw you into a country.”
...Good! Keep the big multi's away.
I know this is based on sentiment, but IF we go for oil then corporate is not the way. I have little faith in their safe sytems for NZ.

To reply to Ms de Meanour's request, "to name three technologies that are less efficient, in terms of carbon dioxide saved per dollar spent, than small-scale solar?": most activities cost money AND create emissions. To be fair these should be included too - to the individuals, all costs are outgoings, but emissions can be positive or negative.
1 round trip to the UK: Cost $2500, emissions 7.7 tons, 3.8kg per dollar
Eat 80kg beef in a year: cost $800, emissions 1.6 tons, 2kg per dollar
2nd hand electric car, costs $10K more than equivalent petrol car, $2K/year depreciation, emissions savings 2.5 tons, 1.25 kg per dollar
Home solar: cost $8K, say $600/year in interest, emissions savings 4 tons, 6.7kg per dollar

The first 3 I thought of all turned out to be less efficient than home solar.
So I would ask Ms de Meanour to find some technologies that are more efficient than home solar. I can think of some, eg shutting down coal-fired power stations, but these are not available to everyone at home.

did you do a search on this Matt Howell guy to find his bias?
This guy is a paper pusher with a vested interest. If you want to talk to a real oil engineer to understand the risks posed by New Zealands oil fields then I can arrange for you to meed a close associate of mine, oil drilling engnieer Pete Bethune.
I have met Simon Bridges btw, he is a lightweight and a limp wristed academic that doesn't know much of the real world.

Days to the General Election: 26
See Party Policies here. Party Lists here.