The government’s decision to stop issuing offshore exploration permits has convinced many overseas investors that the country is closed for business, New Zealand Oil & Gas says.
Chief executive Andrew Jefferies said the company is working hard to turn around that perception. The firm has continued to market its two permits off the lower South Island at oil and gas events in Australia, Singapore and London but firms are wary that any discovery made may be harder to consent then previously.
They also don’t see how they can build a long-term business here if further acreage is not going to be available.
“Unfortunately the perception is that New Zealand is closed for business,” Jefferies told BusinessDesk.
“We are working really hard to change that, but that’s the headline they have received overseas.”
The Labour-led coalition shocked the industry in April when it said it would stop offering new offshore exploration permits. It also restricted onshore exploration to Taranaki in what it called a long-term transition away from fossil fuels.
Ironically, Energy and Resources Minister Megan Woods cited NZOG’s Barque prospect off the Oamaru coast as the sort of asset that could still be developed within the existing acreage to ensure on-going gas supplies for the country’s heavy industry and power generation.
Today Jefferies said the policy decision was a poor one, and poorly announced. Its timing was also ironic given the increasing demand for gas out of Asia and the increased capital available for exploration worldwide now that oil prices have recovered.
NZOG has already spent several years seeking partners to drill Barque and has had several drilling extensions for the Clipper permit it lies in – PEP 52717.
The venture, which includes Adelaide-based Beach Energy, has until April to commit to drilling a well or it must surrender the permit. Any well to be drilled must be started by late 2020.
Barque lies about 60 kilometres off the coast. The structure covers 150 square-kilometres and could hold the equivalent of 530 million barrels of gas and condensate.
NZOG has promoted its potential for starting a reticulated gas industry on the South Island where heavy industry – particularly dairy processing – currently relies on coal. Shipping gas to shore to make fertiliser or methanol are also considered viable options.
Jefferies noted that the government has committed in writing that the venture’s exploration permits are protected and that, in the event of a discovery at Barque, development proposals would be assessed under the existing rules.
Jefferies said “hand on heart” that he believes the company would have signed up a partner for the project had the government not changed the rules.
Things are tougher now, “but that’s not to say we won’t.”
Jefferies said demand for gas in Asia, particularly in China, has outstripped expectations. The expected supply glut from recently completed LNG projects in Australia has “evaporated” overnight as countries around the region look for lower-carbon alternatives to coal.
Where the tendency of New Zealand fields to produce gas was once a negative, now it’s a positive, he said.
“There’s a good story here to tell.”
NZOG, 70 percent-owned by Singapore-based Ofer Global Group, today reported net profit of $4.8 million for the year ended June 30, up from a loss of $32.7 million, excluding asset sales, the year before. Revenue fell about 3 percent to $35.8 million, reflecting reduced revenue from its stake in Melbourne-based Cue Energy Resources.
In late 2016 NZOG sold a 15 percent stake in the Kupe gas field to Genesis Energy to profit from its long-term involvement in the project and free up capital for other investment. In early 2017 it sold its interest in the declining Tui oil field to avoid potential decommissioning liabilities.
NZOG subsequently bought back a 4 percent interest in Kupe, New Zealand’s fourth-largest gas producer, from Mitsui & Co. It also increased its holding in Cue, which has producing assets in Indonesia and a 5 percent interest in the Maari oil field off the Taranaki coast.
Kupe accounted for $9.2 million of NZOG’s revenue in the past year; Cue delivered $26.6 million. After excluding minority earnings from Cue and other ventures NZOG shareholders shared in a net profit of $762,000, compared with a $22.6 million loss the year before, excluding gains from asset sales.
Jefferies said that while the Kupe investment is small, its earnings are reliable and cover the firm’s corporate overheads. Cue’s revenues also covered that firm’s much-reduced corporate overheads.
The firm has a $98 million war chest. Ofer is also a very supportive shareholder which provides scope for investment beyond what NZOG’s own balance sheet could manage, he said.
“We’re in a pretty good place to be looking at growth.”
NZOG is in the process of taking over operatorship of the Toroa permit east of Stewart Island from partner Woodside Petroleum and is marketing that project alongside Barque.
Earlier this year it took a stake in a venture with Mitsui, AWE Exploration and Ofer Global in the onshore Kohatukai well south-east of New Plymouth. It is scheduled for drilling next month.
Jefferies said the company is still looking for other potential investments – particularly in piped gas markets where demand is increasing and earnings are less sensitive to movements in oil prices.
He cited Australia as another market where domestic demand is high. Indonesia, where the NZOG recently rationalised its acreage, is also an area of interest. He noted that Cue will drill a well at its Sampang permit in October.
Jefferies noted the increased sovereign risk the government’s announcement has created has reduced the investment it is likely to make locally in future.
“We will be spending money overseas that we would otherwise have looked to spend in New Zealand.”
NZOG shares rose half a cent to 57.5 cents today. They reached 77 cents late last year during Ofer’s bid for control of the business and have fallen about 19 percent this year.
The company, which last year returned $100 million of capital to shareholders, opted not to pay a dividend, citing the new growth phase it is in. Last November it paid a 4 cent final dividend.