Home grown innovation

New Zealand Oil & Gas has come a long way in the last few years and now appears poised to reap the rewards.   By NEIL RITCHIE

Listed company New Zealand Oil & Gas is well on the way to becoming a substantial diversified energy player through its trio of major developments – the offshore Taranaki Tui oil and Kupe gas projects and West Coast Pike River coking coal.

NZOG’s new managing director David Salisbury says the Kupe and the Pike River projects will both be long-life assets, with production expected to last 15-20 years, or even longer, but Tui will provide the quickest return on investment.

“The past 18 months have seen major growth and progress for NZOG as all three developments were approved, substantially financed and moved through to construction,” Salisbury told Energy NZ.

“These projects will see the NZOG group of companies move from being exploration based, with no production, to being companies with cashflows from commercial production that will transform their operations.”

NZOG did have some production and cashflows from its stakes in the small onshore Taranaki Ngatoro oil field but sold these interests several years ago.

Oil from the Tui fields is scheduled to start at the end of June, with the Tui joint venture partners enjoying high front-end revenue streams due to the initial production that will ramp up to 50,000 barrels of oil per day (bopd), says Salisbury.

This initial production will enable NZOG and its partners to recover the estimated $NZ355 million of capital expenditure in as little as four months of full commercial production if the global price of crude oil remains above $US50 per barrel.

In late April 2007, crude oil was fetching above $US60 per barrel on world markets.

He says the Tui fields – the Tui, Amokura and Pateke oil pools containing almost 28 million barrels of recoverable oil – will be New Zealand’s first stand-alone offshore oilfield, though the offshore Taranaki Maui gas field did have an oil leg that produced about 35 million barrels of crude oil over about 10 years to mid-2006.

NZOG and its Tui partners – headed by operator Australian Worldwide Exploration – plan to utilise a floating production storage, and offloading (FPSO) vessel to process and store Tui oil until visiting tankers load the crude for further processing at refineries.

The Tui FPSO Umuroa (Maori for long on energy or place of energy) arrived in Taranaki waters from Singapore in mid-April.

Fellow Tui partner Japanese conglomerate Mitsui & Co will be marketing Tui oil, with the Asia-Pacific region, especially Australian East Coast refineries, the predominant markets for the sweet light crude.

Innovative technologies

NZOG senior geology manager Jonathan Salo says NZOG and its respective joint venture partners have been involved in introducing several innovative and new technologies and techniques to New Zealand.

“While it can often take 10 years or longer to bring oil and gas fields on-stream, from discovery to development, the introduction and utilisation of this technology and techniques enabled NZOG and partners to fast-track the development of the Tui fields in four years,” Salo told Energy NZ.

These “firsts” include the first use of sub-sea wellhead completions, the first use of offshore horizontal production wells, and the first geosteering for the horizontal wells.

Salo says sub-sea wellhead completions are common overseas but have not been used in New Zealand before. Production valves mounted on production ‘trees’ are tied into the top of well bores on the seabed. Production flowlines run from these wellheads to the FPSO. There is no need for an offshore platform and associated pipelines to shore or for onshore production and storage facilities.

 The horizontal wells are drilled by using one of several drilling technologies, such as deviating the borehole by several degrees over a long interval, curving the well bore from a vertical to a horizontal hole.

NZOG and its Tui partners have also successfully introduced the use of the “periscope” geosteerable drilling assembly technique to search for any additional oil column in the reservoir, and additional lateral extent of the oil-bearing structure. 

Salo says there is considerable “upside” potential at Tui, with nearby prospects and some further away in the mining licence having the potential to add substantially to existing reserves.

The Tui partners are operator AWE with a 42.5 percent stake, NZOG (12.5 percent), Mitsui E&P New Zealand (35 percent) and Pan Pacific Petroleum (10 percent).

The bigger $NZ980 million Kupe project also has the potential for much larger reserves.

The central field area (CFA) being developed by operator Australian Origin Energy and its partners holds estimated recoverable reserves of about 253.5 petajoules (PJ) of gas (New Zealand uses 150-170PJ of gas a year), 14.7 million barrels of condensate (the light oil often associated with gas) and 1.06 million tonnes of liquefied petroleum gases (LPG).

However, the northwest of the CFA, plus other nearby prospects, have the potential to contain up to another 200PJ of gas with associated condensate.

The “upside” of the north-west block will be tested during the development drilling phase scheduled to start in September.

“Therefore, the production facilities have been built with substantial excess capacity, to allow for increased volumes of product should this or satellite areas be proved up by successful drilling and developed,” adds Salo.

As well, the mining permit includes several discoveries made in the late 1980s and early 1990s – including Toru-1, Kupe South-4 and Kupe South-5 – some of which may yet be developed with time.

Kupe will produce gas, condensate and LPG via a normally unmanned platform off the south Taranaki coast for at least 15 years from mid-2009. Each year it will supply approximately 15 percent of New Zealand’s gas needs and about half of the country’s LPG needs.

In addition, the condensate and LPG are likely to generate roughly the same revenues as the gas that is to be sold to partner Genesis Energy for use in its gas-fired power stations, says Salo.

NZOG actually discovered Kupe in 1986 as operator of another consortium but low New Zealand gas prices and world oil prices meant the project did not proceed until now.

The Kupe partners are operator Origin Energy, with a 50 percent stake, NZOG (15 percent), integrated energy player Genesis Energy (31 percent) and Mitsui (4 percent).

And then there is coal

NZOG’s non-petroleum project is through its substantial shareholding of associate company Pike River Coal (PRC).

Former NZOG general manager Gordon Ward, who recently took over the reins at PRC as chief executive, says first commercial production from the Pike River mine is scheduled to start by about the end of 2007, with production then building over a two-year period to over one  million tonnes per annum.

Pike River coal is an ultra low ash, low phosphorus and high fluidity coking coal, valuable for use in the steel making process.

Two Indian coal manufacturers, Saurashtra Fuels Private and Gujarat NRE Coke, have joined forces with NZOG, taking stakes in PRC to fund the development of the Pike River project.

Saurashtra will purchase at least 150,000 tonnes per annum of Pike coal, and Gujarat 40 percent, averaging 400,000 tonnes per annum, at market prices over the life of the mine, which is expected to be at least 18 years.

In addition, PRC has also entered preliminary conditional agreements

with a major Japanese steel mill, for the sale of a further 150,000 tonnes per annum of coal, for a minimum three-year term. Negotiations continue for additional coal sales’ contracts.

Record worldwide steel production, driven by China and India in particular, is likely to keep pressure on coking coal prices, especially in the next few years. Global coking coal prices are just under $US100 per tonne, up from US$54/tonne in 2004.

Ward says total development costs and working capital (to get to the full production of over one million tonnes per annum) is approximately $NZ185 million, of which $NZ60 million has been raised already.

 PRC has also raised $NZ60 million in debt under a credit-approved scheme and is planning to raise the final $NZ65 million or so via an initial public offering (IPO) on the New Zealand Stock Exchange (NZX) and Australian Stock Exchange (ASX).

Salisbury adds that Wellington-headquartered NZOG is the largest of the few “home-grown” oil and gas companies listed on the NZX and the only one currently in the NZX MidCap Index (companies in the top 50 index excluding the 10 largest) with a market capitalisation of approximately $NZ206 million.

“With significant production from all three of these projects, NZOG will become a strong earner and well poised for further future growth,” he says.