New SOE based on Kupe gasfield would boost NZ oil
New SOE based on Kupe gasfield would boost NZ oil sector, says McDouall Stuart
by Pattrick Smellie
Nov 20 (BusinessWire) - A partially privatised, government-backed oil and gas exploration business emerges as a practical option for kick-starting a higher level of activity in the New Zealand oil and gas sector, says a report prepared for Energy Minister Gerry Brownlee by broking firm McDouall Stuart.
The report was released with a speech from Brownlee this week showing the government is intent on making a bigger oil and gas sector part of its efforts to achieve a "step change" in New Zealand's economic performance
It canvasses options rather than making
firm recommendations, but dwells in detail on how a
part-privatised exploration and production business would
have relatively lower risk than other "significant stretch"
options, while building on a range of other actions the
government is already taking to boost oil and gas
activity.
McDouall Stuart proposes taking Genesis
Energy's 31% stake in the Kupe gas field, which will start
commercial production in the next few weeks, and putting its
estimated value of $600 million to work to underpin an
increased exploration and development programme.
"The opportunity involves leveraging Genesis Energy's
existing ownership stake of upstream fuel assets,
particularly its Kupe stake, to catalyse the attraction of
new, private sector investment capital to establish a new
and publicly listed E&P company," says the report, whose
lead author was John Kidd, head of research at McDouall
Stuart.
Such an initiative "could serve to address a
number of the factors identified as weighing on activity and
participation levels in the oil, gas and mining sector"
including:
* Lifting upstream participation, competition and liquidity with the addition of a new player with sufficient scale and focus to make a difference to current levels of activity, which are currently at historically high levels thanks to a spate of commercial finds in the Taranaki Basin;
* Gaining extra value from the Kupe asset "by using underlying asset value and operation cash flows to attract further development capital intended towards finding 'the next Kupe', supporting security of supply";
* Capital market participation, by offering institutional and retail investors an access opportunity to a "large and high quality investment". This would be consistent with a major problem identified by the Capital Markets Development Taskforce, which found the preponderance of government and cooperative ownership of key industries is starving New Zealand investors of local opportunities;
* Maintaining SOE focus on core operations. Under some scenarios, McDouall Stuart envisages that an existing SOE could be tweaked to become an oil E&P sector player, but that this would be at a risk to its core business.
A flow-chart describing the so-called "newCo" oil company envisages three classes of shareholders: Genesis, institutional and retail investors.
"Kupe's gas base will provide a very
stable cash flow base, while allowing more speculative
exposure through oil and LPG production to oil price," says
McDouall Stuart, which knows the Kupe resource well because
of its analyst coverage of New Zealand Oil & Gas, which owns
15% of Kupe.
While there would inevitably be
"privatisation by stealth" issues to deal with, the sale of
individual assets by SOEs has been commonplace in the last
decade, and "the option outlined is at the less
politically-sensitive end of the spectrum and could prove a
useful example of partnership in action."
The report
all but recommends against the creation of a state-owned
National Oil Company, saying these are almost unused among
OECD countries and are typically found in developing
economies.
What makes the McDouall Stuart report
particularly interesting is the fact that it identifies nine
"minimal stretch option" actions that the government could
take to encourage oil and gas discoveries, all of which the
government is either undertaking or will do in coming
months, in the eight point plan of action outlined this week
by Brownlee.
Of the seven "significant stretch
options" listed, establishment of a standalone E&P vehicle
is the least risky option, having moderate risks of
"unintended consequences" and "difficulty of
implementation," but minimal risk of an indirect financial
impact or direct cost to the government.
The other
options, including establishing a national oil company,
using Crown entities more directly, directing government
funds such as the Cullen superannuation fund to invest in
the sector, or underwriting various activities, all have
higher or more risk factors, according to McDouall Stuart's
analysis.
On top of this, Brownlee also released
this week a report from Aberdeen University Petroleum
Economics Consultants suggesting that preferential tax
treatment under the royalties regime for gas-only reservoirs
could be used to make such finds commercially viable. At
present, gas is only mined as a by-product of an oil find.
(BusinessWire) 10:03:54