Hon. Pete Hodgson

Government Boost For Gas Exploration

Exploration for new gas reserves will be encouraged through a suite of proposed measures announced today.

Energy Minister Pete Hodgson said with the depletion of Maui gas reserves, new fields were critical to meet future energy needs.

The proposals include:

· reducing the ad valorem royalty [AVR] rate from 5 per cent to 1 per cent for gas (oil will remain at 5 per cent) for discoveries made within the period;

· allowing a deduction in relation to the accounting profit royalty [APR] on production from discoveries, within the period, of exploration and prospecting costs incurred in New Zealand and allowing such costs to be carried forward with interest;

· reducing the accounting profit royalty (APR) from 20 per cent to 15 per cent on the first $750 million [cumulative] gross sales of petroleum offshore and the first $250 million [cumulative] onshore on discoveries within the period.

Associate Energy Minister Harry Duynhoven will lead consultations with industry on these proposals prior to their introduction through the Minerals Programme for Petroleum to have effect from next year. Any changes arising from the consultation will apply to production from fields discovered within the 30 June 2004 and 31 December 2009.

Revenue Minister Michael Cullen said the government was keen to ensure the tax treatment of oil and gas exploration did not create unnecessary barriers and would review the tax rules applying to non-resident drilling rig operators; aspects of the capital treatment of development expenditure; and the application of certain GST rules to the oil and gas industry.

In addition, the package proposes $15 million over three years for seismic mapping and increased resources to Crown Minerals to promote New Zealand overseas as a petroleum prospecting destination.

Background information

Royalty charges

Ad valorem royalty (AVR)

Currently applied at five per cent, a royalty paid to the Crown against gross revenue from the sale of petroleum.

Accounting profit royalty (APR)

Currently applied at 20 per cent, a royalty paid to the crown on net revenues from the sale of petroleum after deducting related expenses.

Permit holders are required to pay the higher of the two royalties in any year. Typically, AVR is paid in the early years of production as prior costs are netted against revenue and at the end of the field's life as production falls. Also the predominant paying of AVR can apply across the life of marginal fields. APR is typically paid during the peak years of production of non-marginal fields.

Carrying forward of deduction of exploration costs against APR The proposal is for deductible costs incurred between 30 June 2004 and 31 December 2009 to be carried forward with annual interest at a rate equal to the 10-year government bond rate plus one percentage point.

Tax Measures

The Government is concerned that the tax treatment does not raise undue barriers to exploration, in particular during the proposed period of the royalty reductions. Thus a number of tax measures have been identified for consideration in the tax policy work programme, in the following priority: · Reviewing the tax treatment of non-resident drilling rig operators;

· Clarifying the GST treatment of the sale of an interest in a permit by a person who is part of a joint venture, and also the GST treatment of site restoration costs; and

· Reviewing the amortisation treatment of development expenditure, ensuring the duration and profile of deductions reflects the economic life of the assets, and reviewing the differential treatment of offshore and onshore developments.

Marketing initiatives

The proposals include a range of initiatives to proactively encourage exploration and production companies to New Zealand, and to facilitate more efficient and effective drilling programmes. These include:

· funding pre-competitive data acquisition:

· facilitation/coodination of multi-party work programmes;

· information provision to facilitate exploration.

The provision of pre-competitive bidding data (including seismic data) The government proposes funding a programme, to be managed by Crown Minerals, to increase understanding of the prospectivity of New Zealand's petroleum basins, spending up to $15 million over two to three years. This will be developed in consultation with the industry and other interested parties and will be used to increase the knowledge base available to explorers, thereby increasing the attractiveness of New Zealand as an exploration destination.

More active programme facilitation by Crown Minerals

All permit holders provide Crown Minerals with a detailed work programme that provides dates when specific activities such as seismic surveying and drilling are planned. The proposal is for Crown Minerals to increase the level at which it facilitates the use of this information to assist with the coordination of these activities to ensure progress is not delayed due to shortages of technicians and equipment.

Facilitation of exploration activities

Crown Minerals is currently developing a strategy to promote new investment, targeting a range of explorers that have a profile that is appropriate for New Zealand. Activities to attract these explorers include providing appropriate information and working with market analysts equity investors and explorers.

This work requires preparing and presenting promotional material to explorers, market analysts and investors, managing appropriately structured block offers, and augmenting geotechnical information systems. Four key areas of work are:

1. Establishment and promotion of a new investment strategy

2. Geo-technical data analysis and customisation

3. Technical analysis of users' needs from information technology systems

4. Review and strengthening of the data compliance regime.

ENDS

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