Kupe: A long hard road

It’s been a long and somewhat tortuous path for the offshore Taranaki Kupe gas field from its discovery 23 years ago to development taking almost a quarter of a century.   By Neil Ritchie.

Since its celebrated birth in 1986 Kupe has had a tough upbringing, spending years with different ‘caregivers’, which meant cared for by some and discarded by others after years of frustration.

New Zealand Oil & Gas, the only original partner still left in the project, is about to reap the rewards for its patience and perseverance with Kupe providing the company with a long-term earnings base from the scheduled start of commercial production early next year.

NZOG was the operator of the joint venture that discovered the Kupe field. Industry veteran Dave Bennett, who was company operations manager at the time, well remembers the discovery. Bennett is currently the managing director of unlisted Kea Petroleum along with fellow industry veteran and founding partner Bill Treuren.

The other original partners were Trans Canada Pipe Lines (later known as TCPL Resources), Houston-headquartered JFP Energy, and state-owned Petrocorp through the “infamous 11 percent free carry” scheme, as Bennett puts it, when the Government used to take a 11 percent stake in licences but did not contribute financially to exploration costs, only development costs.

Bennett recalls JFP Energy’s jack-up rig JFP Eleven drilled the discovery well, Kupe South-1.

“We came in low to prognosis by doing the very thing we tried to avoid, namely we drilled into pay halfway down the main field controlling fault.

“It was an anxious wait to get to paydirt and, when we got there, we were initially taken aback by the absence of shows and the relatively modest pay column.”

But the rig tested the well, which flowed about 2000 barrels of liquids and about 5.4 million cubic feet of gas per day, which were mildly encouraging results for an offshore discovery.

“It tested okay . . . I think three zones and for about three weeks from start to finish . . . and it was tough times because testing was expensive and NZOG had to hang on in there,” says Bennett, who is based in Wellington.

But he also remembers that those liquid flow rates were for crude oil, not for the condensate often associated with gas finds.

“There was an oil leg underneath the gas-condensate cap and that liquids flow rate was for oil, though there were also separate gas-condensate flows.”

TCPL took over and operated the field for the next few years, drilling Kupe South-2 (KS-2) in 1987 and Kupe South-3 (KS-3) well and several sidetracks the following year. Both KS-2 and KS-3 encountered a stratified hydrocarbon reservoir with a significant oil column underlying a thick gas column.

Bennett says the location of KS-2 was a compromise location and was not expected to be the greatest reservoir.

“It flowed modestly, but enabled the TCPL technical folks to keep their jobs, which was what it was about. My feelings were that we had drilled a poor well in the wrong location.” 

The KS-3 wells were “an unnecessary drilling disaster,” saved only by flow testing extremely well, he adds.

“My feelings were of intense annoyance at the drilling plan and procedure and unnecessary expense, and of relief at the flow results.”

These results kept NZOG going, he says, paving the way for it to sell 20 percent equity in the licence for $43 million to Calgary-based Norcen International.

The three wells formed the basis for the Kupe Central Field Area (CFA) development, proposed by at least two front end engineering and design (FEED) studies during the 1990s.

The JFP Eleven drilled all the Kupe wells up to Kupe South-5, which JFP president Marvin Smith did well out of, says Bennett. However, after Smith died in New Plymouth during September 1995, JFP sold out of the Kupe project, closed its office in the city and left New Zealand’s shores, never to return.

Then, in 1992, TCPL sold its 40 percent stake to Australia’s Western Mining Corporation (WMC Resources) for A$23 million. WMC operated the field for a few years without making much progress, as the development of Kupe remained sub-economic while international oil prices were low and New Zealand gas prices were kept down through the large offshore Taranaki Maui field that dominated domestic gas markets.

This all changed as international oil prices increased and production from the Maui field was replaced by more expensive gas.

The present partners, operator Australian firm Origin Energy (50 percent), Genesis Energy (31 percent), NZOG (15 percent) and Japan’s Mitsui Corporation (four percent) made the final investment decision to proceed with the project in June 2006.

This was on the basis of proven and probable (2P) reserves of 254 petajoules of sales gas, 14.7 million barrels of condensate and 1.1 million tonnes of liquefied petroleum gas (LPG).

Genesis Energy will take all gas from the field, about 20PJ per year, principally for its Huntly power station, while the field will also provide about half of the country’s LPG needs, about 180,000 tonnes per annum.

The early struggle

Industry veteran Dave Bennett (pictured), who worked on the original Kupe project concedes that the years from 1986, when the field was discovered, to 1994, when he resigned as NZOG exploration manager, were frustrating.

“At various times it seemed like we were getting close to a development decision. It certainly was not for want of trying.”

The joint venture meetings were intense, with different people holding different perspectives.

“There were also some fallacious figures and concepts proposed, but those were later abandoned in tatters.”

Bennett says he was deeply involved in a FEED study carried out by American engineering giant Bechtel

Corporation with its preferred development option that was very similar to the Origin approved plan – an offshore platform linked by a single pipeline to shore and an onshore production station.

He says if the joint venture had followed that Bechtel proposal the field would have been in production long ago. “It could have got there years ago but for egos,” he says.

All’s well that ends well and Bennett predicts the field will easily outperform the development reserves on which it is based.

“Kupe certainly has a colourful, even disreputable, history,” he adds, “but I will keep most of those details for my memoirs.”

Executive survivor

While NZOG is the only original partner left in the $1.2 billion Kupe project, founding chairman Tony Radford (pictured) is the sole surviving energy executive still holding the same position in the same company.

“The objective in drilling those initial wells, all of which were discoveries, was to find oil in commercial quantities, though it’s certainly not ideal to have to wait so long to bring a discovery to production,” he says from Sydney.

“It is a lesson in patience and perseverance but blind faith alone will seldom do the trick,” he comments.

“NZOG monetised a substantial part of its interest in Kupe through a cash sale to Norcen for a large cash consideration and, a few years ago, it sold a four percent stake to Mitsui, also for cash, just ahead of the development decision, which assisted us in early development funding.”

On some of the reasons why the North American companies TCPL Resources, JFP Energy and Norcen exited the Kupe project Radford says: “It has often been the case that companies spread their geographical areas of activity only to fall back closer to their home base when the outlook is not so expansive. In the case of Western Mining, that company closed down its petroleum division.

“NZOG’s own home ground is of course New Zealand, making this project much more relevant to our company.” 

While a “huge endeavour” the Kupe project will provide a long-term earnings base for all the partners, he adds.

The $1.2 billion project is expected to meet about 12 percent of the country’s current annual gas demand and 50 percent of its LPG demand for the next 12 years at least.

For NZOG, this long-term income stream from sales gas, condensate and liquefied petroleum gas (LPG) will “underpin” the company’s revenue and profit base for years to come, says Radford.

“We intend building on this base by finding and developing the next Tui or Kupe,” he says, referring to the offshore Taranaki Tui oil field in which NZOG has a 12.5 percent stake.

“We are constantly looking to expand our portfolio, with the drill bit remaining a key element in targeting additional reserves and profits.”