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Speech: Brownlee - Unlocking Our Petroleum

Hon Gerry Brownlee
Minister of Energy and Resources

Unlocking Our Petroleum Potential

Speech to the Biennial New Zealand
Oil & Gas Industry Outlook Conference 2009

Intercontinental Hotel, Wellington

18 November 2009


Thank you for the invitation to speak here today.

Many of you will know that since my appointment as Minister of Energy and Resources late last year, I have emphasised that New Zealand’s natural resources such as oil, gas and minerals could make a bigger contribution to our economy over and above what it does already.

Most New Zealanders simply don’t know that we have an extraordinary abundance of energy resources that have the potential to create a step-change in New Zealand’s economic performance.

The Government is setting out to change that perception and to unlock the potential of those resources to create a wealthier and more prosperous New Zealand.

In August this year I delivered a speech titled “Unlocking New Zealand’s mineral potential” which detailed what the Government was about to do to encourage the development of the our abundant mineral resources.

Today I’d like to set out a similar plan of action for the petroleum sector

I’ll start by talking about the wider economic and fiscal environment which the government operates in.

It’s that environment which is providing the impetus for the Government to look afresh at sectors that have the potential to make a serious economic contribution to the country.

Today I will for the first time publicly announce the results of a recently completed study by GNS into New Zealand’s endowment in ten petroleum basins.

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I’m happy to say that even using conservative assumptions the size of our potential endowment is impressive.

The government has developed an Action Plan to realise that potential and I intend to share the core details of that with you today.

The Plan is based on a series of expert reports written for the Government this year.

Today, I am releasing all of those reports and seeking feedback on them and the Government’s Plan.

The economic and fiscal environment

As you’ll all be well aware, when the Government took office last November we faced difficult circumstances.

We inherited an economy that had gone into recession in early 2008 and was under considerable stress from imbalances built up over the past decade.

Government spending had increased by 50 per cent in the previous five years. Spending had increased at double the rate of economic growth and Government revenue.

The tradeables sector – that is, exporters or industries competing with imports – has actually been in recession for five years, contracting by about 10 per cent over that time.

There have been almost no net jobs created in the tradeables side of the economy for the past 10 years.

By contrast, the non-tradeables sector – domestic industries not competing with exports, including the Government, has grown by 15 per cent in the past five years.

So the part of the economy that provides national income has declined while the part that requires that income has grown.

This is one of the reasons why we now face cash deficits of between $10 billion and $12 billion for each of the next four years.

The recession has had a significant impact on the Government's books. We are currently borrowing at an average rate of $250 million every week.

The 2009 Budget was rightly all about getting New Zealand on the road to recovery.

We’re beginning to see welcome early signs of New Zealand moving out of the recession and back on the path to growth.

The Government is now turning its attention to how we can really lift the performance of the New Zealand economy and start to address the imbalances I’ve just mentioned.

We need to dramatically raise our exports and we need to get the Government out of the red and into the black.

We see the oil and gas sector as playing a big role in doing just that.

Current state of the oil and gas sector

Not many people know that the oil and gas sector has been an excellent performer for NZ in the last few years.

We have seen a number of exciting projects come onstream, such as Tui, New Zealand’s first subsea completion with a FPSO, new gas fields at Kupe and Pohokura, and the Maari oil field, which is living up to pre-drill expectations with reserves increasing following the successful recent drilling campaign.

Maari and its accompanying Manaia field is now a 100 million barrel field, double what it was originally estimated to be.

Additionally, Todd Energy is building a $65 million LPG plant in Taranaki using Mangahewa and Pohokura gas.

Oil is now a large export earner for New Zealand.

Few people will know that in 2008, oil was New Zealand’s third largest export earner at $2.8 billion, a 100% increase on the year before.

New Zealand’s most valuable single consignment of export cargo was probably that which left on the MV Pacific Partner in July 2008 destined for a refinery in Hawaii.

That single cargo carried 572,000 barrels of Tui crude oil, with a value of $114 million.

The petroleum sector is also making a substantial contribution to the Crown accounts.

The Crown received approximately $965 million, including taxes paid, from petroleum production in the 2008/09 financial year. $543 million of this was in royalty payments alone.

It’s also worth noting that in productivity terms, mining is top class.

In the 2000-5 period, including mineral extraction, the mining sector returned an average $360,000 of GDP per FTE, nearly six times the national average.

This summer will see the largest exploration programme ever undertaken in New Zealand.

In fact New Zealand is ranked in the top ten countries worldwide for petroleum exploration activity this year.

It’s very pleasing to see that a busy drilling programme is planned for the Taranaki basin.

This includes activity at Mangahewa, Tui, Albacore, Hoki, Manaia and Northland and will be aided by the Kan Tan 4
semi-submersible drilling rig which arrives in New Zealand towards the end of this year.

Australian Worldwide Exploration’s Taranaki drilling campaign is worth around $250 million this year alone.

Government actions to date

As a Government we’ve taken some modest actions so far to encourage the petroleum sector and send a signal that we value the sector.
In Budget 2009, $20 million was appropriated for seismic data acquisition over the next three years. This was on top of $3.75 million freed-up before Christmas last year.

The MV Bergen Resolution has been contracted for this summer and will acquire seismic data in the Pegasus Basin, the Great South Basin, and depending on which way the vessel leaves New Zealand it will acquire reconnaissance lines across either the Challenger Plateau and Bellona Trough area, or the outer Taranaki Basin and Northland East Slope Basin area.

Another part of Budget 2009 was a provision for a five year continuation of a tax exemption for offshore oil and gas exploration.

We’ve also opened bidding for new petroleum exploration permits across two large offshore areas - the Raukumara (East Cape) and Northland basins, with a combined total area of over 66,000 square kilometres.

Our petroleum potential

While New Zealand’s oil and gas sector is already a significant contributor to the economy, it has the potential to be so much more than that.

The Government believes that petroleum has the potential to drive a step change in New Zealand’s economic performance.

With the assistance of GNS Science, my officials have undertaken a study of ten petroleum basins to establish estimated unproven resources that could reasonably be expected to exist.

Given the limited knowledge of our petroleum basins, this work is necessarily speculative but does provide us with a best estimate of the potential of our petroleum resources.

Petroleum in the ground is one thing. We also need to understand how much of this potential could be commercially viable.

The GNS study has been developed further to include specific field by field characteristics that are likely to be encountered, such as water depth and distance from onshore processing facilities, and production and cost scenarios for all current and potential onshore and offshore sources of petroleum.

The scenarios include forecasts for all exploration and development capital expenditure, fixed and variable operating expenditure, administration, abandonment and royalties.

These factors will be important if we are to understand the economic viability of fields and basins that will drive future investment decisions.

My officials have been working with a Taranaki-based reservoir engineer, Michael Adams, and I believe this is the first time such work has been completed in relation to New Zealand’s petroleum basins.

These pieces of work clearly show that, even when taking a conservative approach in estimating the volume of our potential petroleum resources, New Zealand has considerable petroleum potential that can deliver significant economic growth opportunities to this country.

Should the estimated resources in our unexplored basins be developed, Crown receipts alone could increase to more than $10 billion per annum over the next forty years, adding
$400 billion to Government revenues.

The petroleum sector could also generate over $30 billion per annum in export revenues by 2025.

The Centre for Advanced Engineering (CAENZ) has also undertaken a study to examine the options for the development and commercialisation of New Zealand’s methane hydrate potential.

The US Geological Survey has conservatively estimated that the worldwide amount of carbon held in methane hydrates is twice the amount found in all known fossil fuels on earth.

New Zealand appears to be well endowed with methane hydrates which have been identified in areas of high concentration off the East Coast of the North Island from Gisborne to Marlborough. They are in comparatively shallow water and close to shore.

The potential size of these deposits is in the order of 20 times greater than the Maui gas field.

The CAE report has found that methane hydrates offer a real opportunity to make a significant contribution to New Zealand’s economy by forming the basis for new export industries.

I am today publicly releasing the work by GNS Science and Michael Adams as well as the CAE work on methane hydrates.

The Government’s Action Plan for Maximising our Petroleum Potential

As I’ve said, the Government is determined to unlock our petroleum potential.

The development of our resources needs to be driven by the private sector. Billions of dollars are required.

None of this investment is owed to New Zealand by right. The petroleum business is capital intensive and risky.

Businesses will only invest if they see a reasonable prospect of an economic return. We are in competition for this investment with other countries.

To succeed, we need to ensure New Zealand is a highly attractive global destination for petroleum exploration and production investment.

Earlier in the year, the Government engaged McDouall Stuart to explore options available to the Government in maximising our petroleum and minerals potential through attracting investment.

Their report, titled “Stepping Up”, is a comprehensive document that contains many interesting ideas for how to do that.

It also suggests some decisions and recommended actions that will need to be considered carefully by Government.

Many of the ideas in the report are contained in the Government Action Plan on petroleum that I am announcing today.

The Action Plan aims to build upon the work completed to date and aims to ensure New Zealand becomes an attractive global destination for petroleum exploration and production investment.

Let me run through what the Action Plan includes.

First, we will continue to explicitly position the Government both domestically and internationally as highly supportive of the development of our petroleum resources

We know that the signals the government sends are important for international investors.

We very much want to send the message that New Zealand is prospective for hydrocarbons and open for business.

The government will continue to support the efforts of Crown Minerals in promoting New Zealand as a destination for exploration investment.

Senior Ministers, from the Prime Minister down, will be reinforcing that message when opportunities present themselves overseas.

I have asked the Prime Minister to open and speak at the New Zealand Petroleum Conference in September 2010 which we hope will attract much international attention.

Furthermore, as many of you will know, the government is currently revising the New Zealand Energy Strategy. The new strategy will have our petroleum and mineral resources at the heart of it and send a clear message that the government is keen to see those resources developed.

Second, we will evaluate how the government can get the best “bang for its buck” from its investment in improving knowledge of New Zealand’s petroleum resources.

The Government has already committed significant resources to the provision of geo-scientific data through its seismic acquisition programme.

The return on that investment has been excellent value for money.

As I often mention to my colleagues, when you think about what oil and gas does for the economy, the amount re-invested for the future by the Crown is absolutely minimal – something like 1% of all Crown revenue from oil and gas.

The government’s current and future expenditure needs to be well targeted to ensure that we develop a greater understanding of our petroleum resource – both for the purposes of the strategic management of the resource, and for maximising investor interest in exploration and development.

Third, we will be conducting a short and focused review of the Crown’s capability and resourcing to manage our petroleum estate. This work will be completed by May 2010.

Greater government leadership and focus on the petroleum sector will raise expectations about the profile, capability, and co-ordination of the Ministry of Economic Development.

In short, we need to know if we have the right resources in the right place.

A short focused review will look at the scope and levels of capability required to manage and maximise the returns from our petroleum resources.

Fourth, we will look to improve the quality of information provided by industry participants to the Government of the Crown’s petroleum resources.

The sufficiency and robustness of petroleum reserve data has become a source of concern for Government and many in the sector.

Annual reported reserves have fluctuated substantially from one year to the next.

Decisions regarding investment in developing the Crown’s oil and gas resource should be made with the benefit of the fullest and most accurate information possible.

It is unsurprising that this issue has also been raised in the Ministerial review of the electricity sector.

I have asked my officials to report to me by 30 June on improvements we can make in this area.

Fifth, we will make necessary adjustments to our regulatory, royalty and taxation arrangements for petroleum. These will be completed by December 2010.

From the government’s perspective, taxation and royalties are inevitably a key part of a successful petroleum regime.

The Ministry of Economic Development recently commissioned an independent petroleum economics consultancy to undertake a review of New Zealand’s petroleum regime.

This was undertaken by Aberdeen University Petroleum Economics Consultants (AUPEC), who are leading experts in the economic and financial analysis of the petroleum industry with extensive experience of global petroleum regimes.

Over the past few months, AUPEC have worked closely with my officials and shared their expertise in areas such as international energy policy and taxation, comparative modelling and design of fiscal regimes and production sharing contracts, design and review of petroleum laws and petroleum revenue management.

I am pleased to say that AUPEC concluded that New Zealand’s petroleum regime is generally fit for purpose and already provides an attractive investment climate for potential investors.

However, they do recommend refinements to our current regime that would further promote exploration and production investment and ensure a fair and equitable return to the Crown from its petroleum estate.

This includes assessing taxation arrangements around marginal fields and ensuring that our permitting regime provides the Crown with sufficient opportunity to influence how individual fields are operated.

Today, I am also releasing the AUPEC report and would welcome your comments and feedback on its recommendations.

The sixth thing we are going to do is amend the legislative framework for the petroleum sector. This will be completed by December 2010.

The Crown Minerals Act 1991 is deficient in a number of respects. It is now nearly twenty years old and in need of an update.

Some specific improvements we will look to make include clarifying the place of coal seam gas within the petroleum regime, the relationship between the Crown Minerals Act and the Continental Shelf Act, and decommissioning and abandonment issues for petroleum fields.

MED will be releasing a discussion document soon on these proposed amendments.

And finally, we will be undertaking further work to realise the potential of New Zealand’s gas hydrates endowment.

I welcome your thoughts on the Action Plan which I am releasing today along with the series of reports I’ve already mentioned.

To be truly successful the Government needs input from the industry and wider stakeholders. It is for this reason I am encouraging you all to engage with Government on these matters.

In conclusion, let me repeat that this government is serious about raising New Zealand’s living standards.

We are serious about raising our export levels and increasing economic growth.
That means we are serious about unlocking the potential of our considerable petroleum endowment.

By 2025 we could be earning over $30 billion per annum in export receipts from petroleum.

That would create a major step change for the New Zealand economy for the benefit of all New Zealanders.

The government Action Plan which I’ve announced today will start us on the road to turning that possibility into reality.

Thank you and I look forward to your questions.


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