Monday, March 06, 2006

Adam Feeley: Energy crunch demands action

Oil affects everyone. Most people are harshly reminded of this on every visit to their local petrol station.

Its influence is ubiquitous and ingrained. Our car culture means the modern appetite for oil is insatiable. But it is not simply fuel for our daily transport needs. Its use in plastics, cosmetics and other petrochemicals means we require oil in one of its derivative forms at every turn of our daily life.

The worldwide scale of oil production is staggering. Saudi Arabia alone produces 9 to 10 million barrels of oil a day. Super-giant fields individually produce more than 500,000 barrels a day and BP has estimated the world's proven reserves at 1.19 trillion barrels.

But, while integral to modern life, the idea of endless oil is fantasy. At the present rate of consumption, this could be exhausted within 40 years - with non-OPEC nations running out far sooner. Super-giant fields are rare. Finding new fields of any scale is increasingly difficult and expensive. An offshore drilling rig can cost up to $500,000 a day. From initial exploration to production, oil development can cost many hundreds of millions of dollars. Add on an exploration success rate which can be as low as 1 in 12, and the risks and costs are not for the faint-hearted.

Closer to home, the issues are no less daunting. Our scale means New Zealand is a "price-taker" not a "price-maker". Our geographical isolation means we are at the end of the supply chain. The implications for an economy dependent on transporting imports and exports are obvious.

In addition, almost all of our liquid fuels are imported (a far cry from the days when Maui provided 60 per cent of our oil needs). We also face growing uncertainty about the long-term supply of domestic gas. While there is debate about when energy demand will outstrip supply, there is no doubt that without new energy sources, the day will arrive sooner rather than later.

New, sustainable sources of energy (for example, wind power, bio-fuels and geothermal) will ultimately play a greater part in the energy supply equation. However, in the short term, if new sources of domestic gas are not found, we face the prospect of a significant investment in imported gas (in the form of liquefied natural gas), which will ultimately lead to rising energy costs.

The outlook for domestic oil and gas is not all bad news. With a landmass (including the offshore basins) of over 2.75 million square kilometres to explore, and only 800 wells drilled, the scope for future exploration in New Zealand is immense. But, while the potential is vast, it cannot be realised without a large and well-conceived exploration programme.

With record oil and gas prices, one might ask why that is not already occurring. The reality, however, is that much of the frontier acreage likely to yield significant new finds requires substantial technical and financial capabilities. Attracting new companies to New Zealand is an essential element of New Zealand's exploration future.

A number of recent Government initiatives have been directed towards hastening the arrival of new companies and expanding the interests of incumbents. Changes to the fiscal regime have made New Zealand one of the most attractive countries in the world to establish new exploration operations. More significantly, in a world first, a fund has been established to acquire new seismic data from frontier basins. Such data is the critical first stage to assessing the areas most likely to contain hydrocarbons. Without it, an exploration company would have to expend potentially millions of dollars and months of effort to assessing New Zealand against other, better known petroleum systems.

With new data having been acquired and new regions being opened up for competitive licensing rounds, the question is where to next? Today, an international group from the exploration and production industry, the finance sector and Government meet at the 2006 biennial New Zealand Petroleum Conference. With over 50 speakers and 500 delegates with backgrounds as diverse as geology, law, physics and commerce, there is little doubt that the priorities for action will be many and varied.

However, two issues are beyond dispute. The time for finding new sources of energy is fast running out. And, if the vast potential of New Zealand's offshore petroleum basins is to be part of the solution, the time is right for concerted action from all parts of the exploration world.

* Adam Feeley, group head of Crown Minerals, hosts the Petroleum Conference at SkyCity this week. The event brings together oil analysts and companies to debate New Zealand's future potential as a petroleum producer.

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