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Greymouth Chilean oil project frustrated by policy

Greymouth Chilean oil project frustrated by NZ policy flip-flops

By Pattrick Smellie

Jan. 8 (BusinessWire) - Greymouth Petroleum has confirmed first flows of oil and gas from its joint venture exploration project with the Chilean state oil company after more than a year's delay caused by unexpected changes to New Zealand tax law that have raised the cost of the project for the privately held New Zealand explorer.

Greymouth's Chilean subsidiary, PetroMagallanes, is the largest foreign owner of exploration acreage in Chile after winning rights to explore in five areas covering 14,900 square kilometres in the south of the country in late 2007. Four months later, New Zealand tax law changed to stop companies from offsetting exploration costs in other countries against their New Zealand income. Greymouth has significant oil and gas producing interests in Taranaki.

The loophole had operated for decades and benefitted major foreign-controlled New Zealand oil and gas producers such as Shell, which could write off costs incurred on exploration in other parts of the world against income from New Zealand assets such as the giant Maui oil and gas field. Tax officials wanted the hole closed as a slew of new income-producing hydrocarbon developments came to fruition in New Zealand for petroleum mining companies with offshore exploration and development activities.

The changes were announced, effective from March 4 2008 by the previous government and confirmed by the incoming National-led government, finally passing through Parliament last September.

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Revenue Minister Peter Dunne confirmed to BusinessWire today that Greymouth remained in discussions with the Inland Revenue Department on the issue.

"The point at issue is that they entered arrangements before March 4 2008," said Dunne. "What they are arguing is the extent to which the earlier arrangements were binding contracts" with the Chilean government-owned oil company, Empresa Nacional de Petroleo (ENAP).

In select committee hearings, Greymouth submitted that New Zealand-controlled petroleum mining companies should be exempt from the regime, and lobbied the then Finance Minister Michael Cullen on the matter, but to no avail.

"The select committee said the IRD would monitor the issue closely and would amend where there was a commitment made before announcement of the legislation", a Greymouth spokeswoman, Lara Walker, said. "We do feel that the New Zealand government has been entirely responsible for the delay on the project.

This included the cost of having a drilling rig lying idle in Chile for a year while the issue was worked through, and delays in meeting the timelines agreed with ENAP to begin exploration in the Caupolicon joint venture block, on the island of Tierra del Fuego, legendary for its foul weather and capable only of being explored during summer months.

"It's been very frustrating and unacceptable," said Walker, especially as Greymouth had gone into Chile with government encouragement under a scheme announced in mid-2007.

Meanwhile, Greymouth says the first oil and gas frlows from the Rio del Oro 1A well in Caupolicon block will be followed by "a further period of flow testing and evaluation activities … with the objective of facilitating development and a declaration of commercial exploitation".

PetroMagallanes has now also moved a drilling unit to the Clarencia-1A well site to test potential gas zones.

"This flow of Rio del Oro oil has particular significance," said Alberto Harambour of PetroMagallanes in a statement. The company was confident that investment in the well, all the expenses of which were met by PetroMagallanes as operator, "will lead to an early declaration of commercial exploitation under the terms of the contract with the government of Chile".

"Gas discoveries should be easily commercialised as these areas of the Caupolicon Block are close to pipelines with available capacity to access other facilities and markets."

The Chilean government has been incentivising exploration since making indigenous hydrocarbon production a priority in order to lessen dependence on oil, gas and coal imports.


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