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MAC BEGGS, the managing director of GeoSphere, puts oil and gas exploration in New Zealand into perspective.
Prior to its passage, the bill was very much debated. The fact that over 100 unsuccessful (and no commercially successful) exploration wells had been drilled over the previous 60 plus years, must have caused some doubt as to prospectivity. However, the rationale was validated in 1959 with the discovery of the Kapuni gas field. Subsequent discoveries, including the giant offshore Maui Field in 1969 and important new fields since 2000 (Pohokura gas field, Tui oil field), suggest that the statement is still valid. Petroleum is the collective term for oil and natural gas – the life-blood of all global and national economies and the heart of the energy systems which modern societies depend on. As noted by Peter Tertzakian, 2007: A Thousand Barrels a Second: The coming oil break point and the challenges facing an energy dependent world: “Oil is the most robust and flexible of all fuels. It’s a liquid that is easy to transport and easy to store. Oil products are highly scalable, usable in tiny engines as well as huge engines. Oil products are also very robust in application: they can be used in leaf blowers, automobile engines, jet turbines, diesel power plants, blast furnaces, and home heating furnaces. No other fuel … boasts all these compelling attributes.” The depletion of known reserves of oil is of concern, given the dependence of modern human society on its consumption. Recent escalation in the price of oil signals a readily perceived threat to the sustainability of global oil. The same threat exists in relation to New Zealand’s reserves of natural gas, and that was brought sharply into focus when reserves associated with the original Maui field contracts were written down by an independent expert in 2003, although there are encouraging signs that more can be found and brought to market. In this country we have witnessed some very encouraging reserve additions and successful developments since the dawn of this millennium – realisations of previously perceived potential at the Pohokura gas field and Tui oil field, discovered in offshore Taranaki in 2000 and 2003 respectively, and already making material contributions to the national economy. There are also optimistic pronouncements about several other regions, such as deep-water basins beyond the Taranaki shelf margin and in the Great South Basin – regions where serious money is being invested in seismic surveys from which to map and evaluate the next tranche of prospects. What weight should be given to such potential against the rationale of peak oil exponents, or the case for importing LNG that we may not actually need, if further large gas discoveries are waiting to be made in New Zealand? Accessing the reservesIf a deposit of petroleum resides within the earth and has not yet been discovered, does it exist? Not in the class of “reserves” according to the strict definitions developed by professional and regulatory agencies in the developed world. Hence, the undiscovered (and therefore unquantified) component of the world’s (and New Zealand’s) natural endowment of petroleum must first be ‘realised’ by discovery and appraisal, before we can know its capacity to sustain the global and national economies and modern ways of life. Although we tend to think of New Zealand as a relatively small nation, our sovereign territory includes the fifth-largest submerged marine territory, in addition to emergent islands. We know the country has a natural endowment of petroleum from the fields that have been already discovered and developed both onshore and offshore Taranaki; but these fields are being depleted and the sustainability of production into the future relies on further exploration, discovery, appraisal and development. Exploration continues to be undertaken in Taranaki and several other regions (mainly offshore) but what results can we expect? What is the best we can hope for? What is a reasonable minimum expectation? Certain lines of research and development may also lead to significant opportunities. Gas hydrate is known to be abundant along some of New Zealand’s continental margins, and its commercial development is a matter of intense investigation in Japan and elsewhere. Global warming concerns are inhibiting efforts to ensure sustainability of hydrocarbon supplies, but research into carbon capture and storage, or revised sentiment on the magnitude of the perceived threat from greenhouse gases (as we are seeing with respect to nuclear power) may relieve those concerns. In any case, environmental factors need to be balanced against the ongoing need for a secure energy system for any country to survive in the modern world. Energy security is high in the list of issues in most countries. Meeting our demandsLike most countries, New Zealand’s energy requirements are met by a mix of indigenous and imported elements. The downward revision in Maui field gas contract reserves in 2003 triggered legitimate concern as to the medium-term adequacy of our gas reserves, with the simple metric of year-end reserves divided by annual production (R:P) dropping well under 10. A tenuous balance was restored through severe curtailment of methanol manufacturing, recourse to coal as the fuel for the Huntly power station, and some other adjustments to consumption. The booking of new reserves in onshore Taranaki (Greymouth’s Turangi discovery) and significant additions to Maui reserves have also ameliorated the perceived shortfall and indeed, with the successful commissioning of Pohokura field in 2006 there has been a degree of surplus extending into the medium term. Nevertheless, inadequate proven reserves constrained the financing case for the e3p gas-fuelled combined cycle power unit at Huntly, which eventuated only because of government’s willingness to shoulder that specific risk (as shareholder of Genesis). Prior to the latest energy strategy (which in its proposed form includes a 10-year ban on additions to thermal power generation, notwithstanding their superior efficiency and flexibility, subject to the availability of fuel at reasonable prices), a steady expansion in demand for gas combined cycle power stations each requiring to contract something like 300PJ of gas over 15 years presented an appealing call to potential investors in exploration. In the absence of this long-term call, New Zealand’s small cadre of exploration companies are more influenced by the medium-term excess and the risk of downward pressure on future volumes, if not also prices, effectively negating much of the business case for exploration. This has created a genuine threat to sustainability of New Zealand’s energy system and the attendant economic advantages that have been enjoyed since Taranaki gas fields were first developed. It is disturbing to consider that substantial resources of oil and natural gas may await discovery within New Zealand’s extensive territory, and fail to be discovered, appraised and developed for lack of commercial incentive due to misguided policies. There are already substantial impediments, such as limited availability of risk capital and key skill and technological resources, to overcome without having to face the expensive reconstruction of the downstream infrastructure that should instead be expanding to meet demand. Realising our endowmentNew Zealand’s endowment of petroleum will not be easy to realise, and an effective system combining know-how, technology and a large amount of capital will be required. Government needs to be concerned about facilitating such a system and it will require a strong, well-resourced regulatory agency. Currently, this strategic resource, which the country depends upon for sustainability of energy services, is in the hands of officials buried deep within a branch of the Ministry of Economic Development who are responsible to an associate minister outside of Cabinet. This is while the Minister of Energy is served by a host of higher-profile agencies including the Electricity Commission, Gas Industry Company, and the Energy Efficiency and Conservation Authority, to help him administer the energy sector. The business case for exploration would be utterly compelling were it not for the incidence of dry holes and associated write-offs of 10s of millions of dollars. A large capital investment is the first ingredient required, if our reserves stock is to be replenished and extended. New Zealand is not well endowed with risk capital, so locally based exploration companies generally need to share the risks and rewards with overseas partners, who also contribute important know-how. Besides financing, a complex and sophisticated supply chain needs to be available for each stage from geological research through exploration, drilling and well evaluation, seismic surveying and processing, and a vast range of specialist engineering services involved in development and production. The effective deployment of these capital and technological resources will only happen to the extent that the regulatory environment gives a reasonable expectation for acceptable return on investment. As owner of all petroleum resources in New Zealand, with the incentive of royalty and tax income as well as the comfort of unparalleled contribution to energy security, the Government’s administration of the exploration and production sector will be a key factor in determining the extent to which our petroleum endowment is realised.
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The view that New Zealand was likely to host a good deal of undiscovered oil and gas was the rationale for the Petroleum Act 1937.