NEW ZEALAND MAY SEE BIGGER HUNT FOR OIL AND GAS

UNCLAS SECTION 01 OF 03 WELLINGTON 000551 SIPDIS SENSITIVE SIPDIS STATE FOR EB/TPP, EAP/ANP AND EB/ESC/IEC STATE PASS USTR-BWEISEL COMMERCE FOR ABENAISSA/4530/ITA/MAC/AP/OSAO E.O. 12958: N/A TAGS: ENRG ECON ETRD PREL NZ SUBJECT: NEW ZEALAND MAY SEE BIGGER HUNT FOR OIL AND GAS REF: (A) 05 WELLINGTON 859; (B) WELLINGTON 248; (C) 2004 WELLINGTON 291 (U) Sensitive but unclassified -- please protect accordingly. ¶1. (SBU) Summary: Higher oil and gas prices are spurring plans for new exploratory drilling in several hard-to-reach sites in New Zealand. The government - despite a preference for expanding renewable energy sources - has sweetened the pot for prospective drillers through reductions in royalties and offering them free access to previously gathered seismic data. But its encouragement has stepped on toes. ExxonMobil has legally challenged the government's desire to give other companies access to seismic data that Mobil purchased on one potentially vast oil and gas field. Meanwhile, expanded development of New Zealand's existing oil and gas fields is raising hopes that the nation may be able to reverse a slow decline in its modest domestic production. Just how much commercially available gas and oil lies under New Zealand is speculation. Oil experts say the country has been only lightly explored, owing in part to its remoteness from the world's major energy-producing regions. End summary. Under-explored -------------- ¶2. (U) New Zealand ranks in the top 25 percent of all countries in "prospectivity," the term used to describe the likelihood of finding significant oil and gas reserves. Two potential hydrocarbon structures that are large enough to draw the attention of major companies have been identified in the country. One, the Outer Taranaki Basin, sits near New Zealand's largest producing field, Maui, off the North Island's southwest coast. Although no exploration wells have been drilled, seismic data shows promise. The other structure, the Great South Basin, lies off the bottom of the South Island and was explored during the 1970s and 1980s, when four of eight wells drilled found evidence of oil and gas. However, its development was shelved a quarter century ago after world oil prices dropped and abundant reserves of cheap gas became available from the Maui field. ¶3. (U) According to a very rough and optimistic estimate, the total recoverable oil from the two basins could be about one-fifth of total oil from the North Sea. If the estimates are right, the two �0A;fields also potentially could defer proposals to fill the gap in New Zealand gas needs by importing liquefied natural gas. Drilling in the basins presents an expensive gamble since they lie offshore in deep water. The Great South Basin is known for huge wave swells and has no nearby oil industry infrastructure. ¶4. (U) New Zealand -- roughly the size of Great Britain -- has been under-explored, with only 700 wells drilled to date. That compares with the approximately 65,000 wells that have been drilled in Canada. Shell abandoned exploration in New Zealand in 2004 to focus on developing existing fields elsewhere, becoming the last major oil explorer to exit the country. Major oil and gas companies have shied away because of New Zealand's remoteness and the high costs of exploration, an industry representative said. One company estimated the costs of drilling in New Zealand to be double those in the lower 48 United States. Because of the potential discoveries' geology, companies face higher upfront costs and prospects of a longer pay-back on their investments, according to a company executive. The prospective fields are expected to be subtle, stratigraphic traps, which are harder to find and require modern seismic techniques, more data and analysis. Future wells will need to go deep; about 7 percent of the country's wells are drilled deeper than 12,500 feet (4,100 meters). Interest fueled -------------- ¶5. (SBU) However, higher world oil prices are helping override the industry's reluctance. In addition, the slowing output of natural gas from the Maui field -- which has provided up to 50 percent of the country's oil and almost all its gas needs for more than 20 years -- has helped double the price of natural gas in New Zealand over the last three years, encouraging public support of the search for new gas discoveries. Explorers have shown increased interest in New Zealand in recent months. Whereas the government's request for bids to explore two offshore blocks drew no industry interest two years ago, two permits were granted on one of the blocks in February. Permits have been issued for all designated, immediate offshore basins. Major oil companies, including Mobil Oil and Shell, are again sizing up the Great South Basin's potential. Reflecting the increased interest, an ExxonMobil senior executive for exploration has been scheduled for an unusual meeting with Energy Minister David Parker and Associate Energy Minister Harry Duynhoven the week of July 17. WELLINGTON 00000551 002 OF 003 ¶6. (U) While the government's energy policy aims to increase the nation's reliance on renewables (ref A),New Zealand officials are working to lure mid-size explorers by offering free seismic data. The government has reduced from 20 percent to 15 percent the royalties it charges for gas -- but not oil -- discoveries made between 2004 and 2009. The government also has promised to consider tax changes later this year, including more favorable treatment of oil and gas research and development costs. ¶7. (SBU) Predictably, the industry does not think the government is doing enough to promote exploration and production. Its wish list is long. The industry representative complained that the government's requirement that companies drill within three years of being granted a license is especially onerous. Whereas the royalty regime appears favorable by international standards, the industry believes that lower royalties are needed to ensure expanded investment in New Zealand. It also wants further incentives for oil companies and changes in tax policy, such as an exemption from the excise tax for a certain amount of a project's first oil and gas production and accelerated depreciation of development expenditures. The industry also has asked for a simplified and standardized permit process. ¶8. (SBU) In recent months, the government has turned its attention to large explorers, recognizing that deep pockets are better able to swing the high costs of exploring the Great South Basin. The government expects to open 40 blocks in the basin for tender this month. ExxonMobil has expressed interest, and an industry member said the government is using a dispute with the company to draw the attention of other large companies to the area. ExxonMobil has sued the government to keep for its exclusive use seismic data on the Great South Basin that ExxonMobil purchased from a survey company in February 2005 for US $3.2 million. The government contends the data should be publicly available. As a condition of an exploration permit, companies are required to share seismic data with the government, which can share it with other exploration companies if the permit expires or is revoked. Mobil, however, said it has never been a permit holder. No date has been set yet for a court hearing. ¶9. (U) The data was gathered by a Norwegian survey company for a consortium headed by Bounty Oil of Australia, which held a permit to explore the track. The government revoked the permit largely because Bounty had not begun drilling within the specified three years. The High Court on June 27 rejected Bounty Oil's appeal against the permit's revocation, clearing the way for the tender. Bounty had estimated that there is a 10 percent chance of finding 4.5 billion barrels of oil and 315 trillion cubic feet of gas, which is 80 times the gas extracted from the Maui field. New production flows -------------- ¶10. (U) In the meantime, new supplies of oil from five known fields are expected to come on-stream by the end of 2007, which would more than quadruple New Zealand's current production of 20,000 barrels per day. Such an increase would supply up to 70 percent of the country's oil demand by 2008, up from the current level of 18 percent, according to the Ministry of Economic Development. Companies involved in developing the five fields include Shell, OMV of Austria, New Zealand Oil and Gas, Origin Energy of Australia, Todd Energy of New Zealand, and Swift Energy, based in Houston. Ministry officials predict that the increased production will shave more than NZ $2 billion (US $1.45 billion) off New Zealand's current account deficit, which stood at NZ $3.38 billion in 2005. (New Zealand's premium-priced light sweet crude is sold overseas, while imports of cheaper heavy crude oil is refined at the country's sole refinery. The country uses no oil for electricity generation, relying instead on hydro, gas, coal, geothermal and wind. Ref C.) ¶11. (U) Swift Energy and Pogo Producing Company are the largest U.S. companies exploring for oil and gas in New Zealand. ExxonMobil and Chevron are the two U.S. companies involved in the retail gasoline market. ¶12. (U) Separately, the New Zealand government is working to meet the International Energy Agency's requirement to hold 90 days' supply of oil reserves (ref B). Current stocks would last about 60 days. Energy Minister Parker has told the media that he expects the target to be achieved by the end of 2006. Tenders to hold oil stockpiles are expected to go out this month, with the cost of the oil reserves expected to cost the government about NZ $50 million (US $30.4 million) in each of the next three to five years. Oil companies fear that, if the tender fails, the government will foist the cost of maintaining the additional reserves onto the industry. WELLINGTON 00000551 003 OF 003 New Zealand also is discussing government-to-government arrangements with a number of countries, including the United States, to hold oil stock on New Zealand's behalf. Comment -------------- ¶13. (SBU) The oil industry maintains that the New Zealand government needs to do more to boost oil exploration in the country. However, recent announcements of new drilling projects indicate that the prospect of continued high oil and gas prices is doing more than government incentives to lure investment to domestic exploration. MCCORMICK