Encouraging Investment For Gas Exploration

22 December 2003

Media Release

For Immediate Use
Petroleum Exploration Association urges encouragement of investment for gas exploration & production

The Petroleum Exploration Association of New Zealand (PEANZ) is extremely concerned at what appears to be an official Government stance that there is no future for significant indigenous natural gas production in this country.

PEANZ is also extremely concerned and disappointed that not enough has been done by Government up until now to encourage more active investment in the oil and gas exploration industry, such that necessary new reserves can be discovered and brought into production as soon as possible. The Maui gas field, which currently supplies over 80% of the country's gas, is expected to be depleted sooner than previously anticipated, and other known reserves that can be developed will not be enough to meet the country's future energy needs. Energy is the fuel that drives the economy. Without a sustainable level of reliable energy supply New Zealand will not be able to maintain its current economic performance nor achieve its goal of returning to the status of being in the top echelon of OECD countries.

The Ministry of Economic Development's recently-released NZ Energy Outlook to 2025, an essential market information document for companies interested in investing in energy supply in New Zealand, makes very sombre reading for the petroleum industry, to the extent that it does not paint a very heartening picture for the future of indigenous gas supply in New Zealand. When coupled with:

- the small size of the New Zealand economy and gas market;

- the lack of gas infrastructure in most of New Zealand;

- various statements from the Government and officials such as "Methanex being part of the problem", an increased long-term role for renewable energy supplies and increasing quantities of coal being burnt;

- LNG being seen as a readily-available long-term solution without any in-depth analysis of its economic implications such as exposure to the vagaries of international commodity prices, fluctuations in exchange rates and the business dynamics of international suppliers. The country needs reminding of the oil shock of the 70's and the consequence of relying on overseas energy supplies to meet our needs;

- the lack of a coherent Government-led energy plan and strategy...

...then the attractiveness of this country for explorers is markedly diminished.

However PEANZ believes that increased exploration for gas can be achieved but only as long as Government and its officials send the "right signals to the market"

"An explorer/producer requires not just a reasonable gas price, but also a sustainable long-term market capacity into which they can sell large volumes of gas in the event of future gas discoveries - a "failure" in either area would stymie production of any newly-discovered natural gas." according to the Association's Executive Officer Dr Mike Patrick.

"The apparent official position belittles any significant future role for indigenous natural gas, and this will effectively drive away investment in the critical frontier areas of New Zealand for fear of not being able to do anything with any gas discovered. It would matter little even if New Zealand had the best fiscal and royalty regime in the world, investment in gas exploration just would not happen."

Whilst New Zealand has proven to be prospective for petroleum discoveries, as it stands it does not feature in the radar screen of the large exploration and production companies who bring the requisite capital, specialist skills and the technology to explore in frontier areas, including in New Zealand's vast offshore area. For example Shell recently announced that it is to suspend its exploration activity in this country.

"The question has to be asked, surely, "what if the renewable electricity supplies modeled in the Energy Outlook do not eventuate, or are delayed?" It appears that this scenario has not be modeled at all, but PEANZ believes that should such a scenario eventuate, the resulting impact on energy supply and therefore the economy would be catastrophic."

PEANZ is also very concerned that rather than developing coherent national energy policy and strategy, the Government is more preoccupied with the workings of the downstream retail gas and electricity markets as a surrogate. This is largely being done in the absence of meaningful engagement with the upstream exploration and production sector. Policies and regulations are being promoted and introduced on a "one-sided" basis without any appreciation of the role this sector has in the overall equation, nor what is needed to urgently promote increased exploration activity. This is reinforced by the fact that Government officials are proposing rules for increased petroleum reserves information disclosure without any understanding of the uncertainties surrounding reserves estimation, commercial sensitivity of information, and how the petroleum industry works in terms of its general business model.

"These concerns have been communicated to Government for some time but more urgently over the past few months, including a suite of proposals and initiatives. Some of the proposals have been acknowledged, and PEANZ understands that these are currently being worked on by officials. However more needs to be done to work through the issues and barriers facing the industry, with the aim of developing a package of preferred measures which would, if put in place, act as an encouragement for increased exploration and gas production. But the industry believes that much of this work will come to nought if there is an official position, real or apparent, that there is no significant future for indigenous natural gas production in New Zealand." said Dr Patrick.

"The industry believes that Government and officials needs to change their culture, focus on issues that affect the very basis of New Zealand's economic growth and work with the industry to promote and market exploration activity in New Zealand. PEANZ has been saying for some time that not enough is being done and that time is running out. The current environment for gas exploration and production is the best it has been since Maui was discovered over thirty yeas ago and if we do not capture that opportunity now we will leave behind a legacy of dismal failure," said Dr Patrick.

ENDS

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