While oilfield development in the Great South Basin (GSB) is identified as "economically attractive" under the Government's present fiscal tax and royalties regime, the possibility of finding gas rather than oil poses more economic issues for exploration companies, the Aberdeen University Petroleum Economics Consultants (Aupec) report says.
"The [Government's] Ad Valorem royalty penalises marginal developments and is a candidate to have its rate significantly reduced, at least for new gas projects," the Aupec report said.
"Consideration should be given to deferring the planned increase in the Ad Valorem royalty [ for gas]".
One industry source, who declined to be named, said it was "pivotal" the Government change its royalty regime on gas, saying with costs of up to $US100 million to drill a single exploration well the final decision could hinge on the gas equation.
"Simply put, they [explorers] want oil; out of the ground, to ship and gone. Gas is just that much more difficult with the costs associated," he said.
Aupec said the economics of GSB oil and gas exploration stood at "break-even", however it posed a problematic combination of oil being economic and gas being uneconomic, which meant "exploration hinges on finding oil rather than gas", the report said.
The GSB has long been mooted as a highly prospective "frontier" exploration area by Government agency Crown Minerals, albeit with acknowledged high risks associated with deep-water costs and long distances to market.
Petroleum Exploration and Production Association chief executive John Pfahlert was contacted and said there was a "link" with the gas royalty regime and production, highlighting there was a "lack of continuity into the world's gas markets" to be considered.
"It's not like Europe where gas can be plugged in [to another country] from your back-door step," he said.
While having attracted multinationals ExxonMobil and Austrian OMV to take up permits and complete ship-borne seismic studies, the former has deferred a decision on test drilling for a year - a stance which appears to signal waning enthusiasm in the high-risk frontier.
While Exxon has recently said it wanted a joint venture partner, OMV have until next year to make a decision on test drilling.
Industry sources are speculating the pair could get together in order to share costs of bringing one rig to New Zealand to test drill the southern basin.
The 157-page final report of Aupec, for the Ministry of Economic Development, was one of five reports, costing several hundred thousand dollars, made public this week by Energy and Resources Minister Gerry Brownlee.
He was not available for an interview yesterday, but earlier in the week announced a wide-ranging review of the petroleum sector with decisions on "adjustments" to tax, regulation and royalties and amendments to legislation to be completed by December next year.
Mr Brownlee estimated petroleum exports could rise from $3 billion to $30 billion annually during the next 16 years to become a powerhouse for the economy, including $10 billion a year for the Crown coffers during the next 40 years.
The Aupec report bases its profiles on the potential GSB developments as it is expected that southern area would have the highest development costs and is also the most gas-prone basin.
"[Its] gas project economics are poorer than oilfield ones as a result of higher operating costs and of [gas] prices below parity with oil".
The Aupec report noted the New Zealand fiscal regime was "highly competitive" when compared to all but Papua New Guinea's regime.
"Under the likely costs and base case hydrocarbon prices used in this study, petroleum exploration investments in New Zealand, as represented by the Great South Basin, are economically marginal at a cost of capital which is moderate and may not reflect all the risks and the effects of capital rationing," the report said in its main conclusions and recommendations.
Ministry of Economic Development director of energy and communications, Peter Crabtree, said the Aupec report was very useful, reiterating GSB was in a global sense recognised as an "under-explored frontier region".
Aupec said while it might advocate for a higher Government take from the most profitable oilfields, "a better case strategy may be" to protect marginal fields first, possibly by having two rate-of-return thresholds and two royalty rates.
"Any special fiscal measures applied to gas developments will feed through to improving the attraction of exploration in general," the Aupec report said.
On the question of a review of the royalty regime, Mr Crabtree said that would be considered in the months ahead, as would the potential of a two-tier royalty system suggested by the Aupec report.
"All of those suggestions will be going into the mix of the review," Mr Crabtree said.
The Aupec report also identified as "unusual", two aspects of Crown Minerals' applications for permits.
Under "priority in time" applications, an explorer can at short notice apply for permit, outside conventional application round time-frames.
"[However] the priority in time concept does not allow full competitive bidding for an area sought by one investor."
Mr Pfahlert, of the petroleum exploration association, said he supported the "priority in time" applications, and while not delivering the overall competitiveness the Government wanted, outside of application times it enabled companies to act more quickly, especially if investment was available at that moment in time.
The other concern was [conditional] "cash bonus bidding" for permits [some money up front with an application], but Aupec felt the emphasis should be on encouraging exploration, rather than the Government seeking "early revenues from bonus".
Mr Pfahlert also questioned the need for bonus bidding, noting it had never been used in New Zealand that he was aware of, preferring instead the use of the priority application.
