In what amounts to the first substantial new investment by the government in economic development since last year’s election Minister Gerry Brownlee has announced a spend up of $20 million on the acquisition of geophysical data in New Zealand’s offshore petroleum bearing ocean basins.
With a government services spending drought firmly in place one has to admire whatever MED mandarin it was that managed to make the business case for the project. National are claiming it as an election promise delivered, but the reality is that it needed to happen no matter which government was in power and here’s why. In 2006 Crown Minerals went to Court to force petro-giant Exxon Mobil to hand over data that had been generated by the company and its partners but not exploited. About the same time the government began undertaking its own surveys. In 2007 there was another tender round for fresh exploration blocks but the response from major players was muted.
Notwithstanding that legal action by the Crown raises questions about ownership rights and foreign investment; by owning the survey data, the Crown has far greater influence over how it is used. It also mitigates the risk of any further expensive and wasteful Court actions by multi-nationals keen to defend their patch. Exploration companies build survey estimates into their financial reporting data, but will quite happily sit on this information until it suits them to act on it, possibly for decades. The Great South Basin is by far the most promising of New Zealand’s licence areas, but is also the most treacherous. At $55 per barrel small players could not possibly justify the several hundred million dollar invest required to bring a deep water well into production.
Offshore oil exploration is a dirty business and Exxon-Mobil in particular have an appalling environmental track record for which they make few apologies. So the government needs to be careful about how it spreads the financial and environmental risk associated with this game. On the upside, making the survey data available could potentially lead to a multi billion dollar exploration and production investment once the oil price rises again (which it no doubt will). Unfortunately because of the development timeframes involved, it is unlikely to contribute to the economic recovery in the short term.
It is positive news that the survey information will be made available and while it may well indicate significant potential reserves available in those regions we will still be left with the ongoing paradox which sees such reserves remain untapped. Arguably, if it were economically viable for those fields to be developed they would already be doing so.
Oil and Gas Operating companies are notorious for performing nth degree studies on the economic viability of fields they have rights to developing and the industry in general is probably the best around at demonstrating maximum discretion where potential profits are concerned given the somewhat ‘black-art’ nature of exploration for hydrocarbon reserves.
The real problem in NZ lies (as it does in any country) with providing a business environment which gives the operators warm fuzzies (read certainty) about their profitability. There is an anti-large profit culture in New Zealand which filters all the way up (as negative ideologies sometimes do) to the highest levels. The reality is that successive NZ governments have felt threatened by oil companies and viewed them as the enemy at least partially because of their size and clout.
For NZ to fully benefit from the finite offshore resources it has available, those in charge must provide a much friendlier and supporting business community and economic climate to encourage more large operators to set up camp. It is my assertion that this really has not happenned in the past due only to fear and bloody-mindedness.
There is also the looming spectre of an extrapolation of indigenous seabed rights extending to sub sea mineral claims. Such an extension would send already jittery developers scurrying and surely be the death-knell for NZ hydrocarbon exploration. While article 2 of the Treaty of Waitangi in its broadest interpretation probably allows for it, this would represent a triumph of purist foolishness over realist pragmatism.
All parties need to understand the realities of contemporary business conditions and appreciate that (especially in hydrocarbons markets) we exist in a pretty open world economy for NZ to compete for any chance of parity with the larger producing nations.
Given that some oil companies are themselves the size of a small island economy it behoves any government to tread warily. I’m pleased that Crown Minerals have a strong regime of governance.
Yes we do have to compete in a global market for capital and other resources (like drilling boats and crews) which is partly why there has been little action in the Great Southern Basin. There is still lower hanging fruit.
If the hydrocarbon reserves in the GSB should prove commercially significant, they could significantly shift both NZ’s balance of payments and the composition of GDP (ie. shift us further away from an economy based on agricultural commodities). For this reason alone, the government is wise to maintain tight governance for the moment.
Hopefully we can find a middle ground between national control and commercial interest. We’ll only get one shot at this, so we better get it right.
The fields present in the Great Southern Basin are are only available through truly deep-well technologies. Until relativley recently they were beyond the technical limits of conventional drilling operations.
There has been alot of progress in this area in the last 10 years but when you compound this with the geographic realities of NZ being laterally adjacent to the roaring forties it makes deep-water exploration and development in marginal sea-states a very challenging prospect.
Almost certainly too challenging with the price of the product loitering around USD50 per barrel and clearly operators have much easier options to chase in the shallow calms of the tropics. As you corerctly analogise, lower hanging fruit. I expect to grow old and die waiting for these fields to produce.
In reality, the best option for maximising NZ’s benefits from these reserves if proven substantial would be to set up a government owned operating company. Most oil producing nations do this (even very small ones) and it has considerable merits especially in a down-turning economy, not the least of which is a huge boost to flagging employment rates.
I can hear the cynics grumbling now about another state owned enterprise promoting beauracracy and wastefulness but the spin-offs for the country are substantial and surely whatever profits which might emerge would be better funneled into the national economy than into another huge, faceless international consortium.
Of course such a venture would take time, effort and a slightly enterprising approach from any government, things which modern administrations seem naturally averse to. Perhaps our new leadership can’t be bothered but one thing is certain, even during dismal economic times, oil creates money, jobs and wealth.