VZCZCXRO8605
RR RUEHNZ
DE RUEHWL #0551/01 1950331
ZNR UUUUU ZZH
R 140331Z JUL 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 3040
INFO RUEHBY/AMEMBASSY CANBERRA 4485
RUEHNZ/AMCONSUL AUCKLAND 0841
RUCPDOC/USDOC WASHDC 0068
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

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 
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