• Oil and gas at centre of agenda
• “Special fiscal terms” for gas proposed
• NZ royalties already competitive

Improving the economics of NZ gas developments is “crucial” to the Govt’s desire for an upsurge in oil and gas developments, says a Govt-commissioned review by the Aberdeen University Petroleum Economics Consultants (AUPEC). It says the issues needs special treatment because of the prevalence of commercially marginal gas finds in NZ. For the same reason, it urges cancellation of an impending increase in gas royalties. The report is one of four released last week by Energy Minister Gerry Brownlee, along with an eight point action plan to help oil and gas deliver “a step change in NZ’s economic performance.” The speech was Brownlee’s strongest signal yet suggesting exploitation of minerals and hydrocarbons is to be a central part of the Key Govt’s push for stronger economic growth in a way not seen since the Think Big projects of the late 1970s and early 1980s.

The difference this time is there is a need to find big new resources, which are believed to exist, whereas Think Big was sparked by discovery of the global-sized Maui gasfield. AUPEC says “consideration of special fiscal measures for non-associated gas (i.e., where oil is not also present) is recommended, in order to minimise the number of marginal gas developments that are economic before tax but fail to be developed because they would be uneconomic after tax.”

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It says “Special terms would also address issues of perceived risk and capital rationing” which act as deterrents to potential gasfield explorers and developers. Plans to increase the royalty rate on gas extraction are unjustified. The ad valorem royalty regime “penalises marginal developments and is a candidate to have its rate significantly reduced, at least for new gas projects. Consideration should be given to deterring the planned increase in the ad valorem royalty.” A further change might be to modify the accounting profits royalty from a cumulative cashflow basis to a rate of return approach.

However there is no need to treat oil exploration the same way. AUPEC found the NZ fiscal regime “highly competitive against all the comparator countries except Papua New Guinea, when tested under Great South Basin conditions.” The GSB has long been touted as a potentially massive source of untapped mineral wealth, but has so failed to garner significant exploration. Exxon Mobil appears ready to _abandon its GSB exploration rights after announcing in early spring that it had studied seismic data from the area and was now looking for farm-in partners.

AUPEC concludes “under the likely costs and base case hydrocarbon prices used in this study, petroleum explorations investments in NZ, as represented by the GSB, are economically marginal at a cost of capital which is moderate and may not reflect all the risks and effects of capital rationing.”

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