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Oil And Gas Drilling Changes Include Loss Of Community Consultation

Phil Pennington, Reporter

A government move to boost oil and gas exploration includes a change to permits that might speed up allocation, but at the cost of community consultation.

The proposed law change would introduce a way to obtain a drilling permit without having to tender for it.

This would be part of reversing the drilling ban put in place by the former Labour government.

A briefing to Resources Minister Shane Jones in March - released to RNZ under the OIA - recommended introducing the alternative non-tender approach, as well as a review of petroleum royalties.

The non-tender approach "offers benefits to smaller operators, who can more rapidly evaluate an opportunity and execute investments", it said.

Among the negatives were that "consultation with local communities and iwi could be burdensome and inefficient for them because the timing and number of applications would make engagement unpredictable", officials told Jones.

The tender touch

Exploration permit allocation has been done through annual competitive tenders.

These tended to attract high-quality explorers but were "inefficient when interest is low... [and] might not be the best approach to signal the government's desire for more and quicker investment", the briefing said.

The non-tender approach had another two possible downsides: It "also limits competition... which means the government may not see and therefore cannot necessarily choose the best work programme for a particular block".

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It also tended to focus on accepting offers that met a "minimum standard" and risked giving prime permits to less established companies unable to optimise them, the advice said.

But this depended on how it was designed, officials added.

Amending the act to allow both ways offered more flexibility to adapt to investment conditions and "other objectives".

"In practice, it might mean the regulator reserves certain blocks for future tenders and leaves other areas open to an immediate application."

The government went along with this in its announcement on Sunday.

The briefing also mentioned the option of "an investor-state compensation scheme", but it remained unclear what that might involve.

It also recommended a review of petroleum royalties that explorers pay the government, and that a decision could be made on this issue by this month.

Jones' announcement on Sunday did not mention this. RNZ has asked him if this has occurred.

The briefing noted that "New Zealand's policy instability" on drilling was the number one issue to address and a "risk premium" for companies that must be reduced by the government. It added that "our fiscal regime will also determine how attractive we are relative to other countries. This includes... royalties".

"If you agree to a review, we will provide further advice and seek decisions by June 2024."

A matter of royalties

Most current oil and gas fields pay two royalties - one called an AVR (ad valorem) of five percent of the net sales revenues; and also an 'aAPR' of 20 percent of the accounting profit of petroleum production.

But the royalties for gas production were reduced between 2004 and 2009, over a perceived risk of lack of supply.

The proposed law change would also provide more "flexible" ways for industry to set aside money to pay for decommissioning or clean-up of a field.

The decommissioning regime was to protect taxpayers and third parties from these costs, and changing it required "managing Crown fiscal risk", a separate briefing in March to Jones said.

Decommissioning of the Tui Oil Field has saddled taxpayers with a bill of more than $400m after the collapse of the operator.

"Industry has raised concerns about the... regime, including that it lacks flexibility, imposes a high regulatory burden, and allows for too much ministerial discretion," the March briefing said.

The amount of information they had to give the Crown, so it could work out what decommissioning entailed, was considered "invasive and administratively burdensome".

Jones disagreed with a law change to limit ministerial discretion, which would also have limited the flexibility to change the regime.

The bill proposes - as Jones wanted - to limit "trailing" liability to the last previous holder of a permit, rather than allowing it to "flow up the chain" to other former permit holders, or to remove it entirely. The criminal offence provision would be retained.

Australia brought in tougher decommissioning measures and trailing liability in 2021, after paying hundreds of millions to clean up the ageing Northern Endeavour oil vessel in the Timor Sea, including imposing a levy from 2021-2029 on production licences just to clean up after that liquidation.

Economists have estimated the combined liability of decommissioning Australia's offshore oil and gas infrastructure at more than $50 billion.

The UK had a wider grasp of who could be held responsible than here or in Australia, extending to a parent company of a current licence holder and "any associates and affiliates". This had led to companies doing their own deals to ensure they knew who was liable for what.

Australia has very broad "trailing" liability provisions as a defence against taxpayers left to pick up the bill, though it was moving away from that to mandatory "financial assurance", according to an April briefing to Jones looking at New Zealand's decommissioning regime.

The NZ government's bill proposes that "post-decommissioning liability remains on a permit-holder who decommissioned if something goes wrong after they have plugged and abandoned a well or left infrastructure.

"This is a change from the current requirement to provide a payment or financial security for post-decommissioning liabilities, which sought to quantify the likely risk and cost in the future."

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