Questions and Answers for the Gas Exploration Incentives Paper
[ Last Updated 24 November 2005 ]
July 2004
Contents
1. Why Are Incentives Required to Increase Gas Exploration?
The energy market is responding to changing gas supply conditions. Gas exploration activity is beginning to pick up. However, the speed and extent of the response may be constrained by the limited resources of the companies currently holding the bulk of permits over prospective acreage. There is a risk that the level of exploration activity in the short term may not be sufficient to significantly increase the likelihood of new gas discoveries to meet demand in the medium term. Incentives are proposed to encourage more activity over this period.
2. What Are the Resources that Exploration and Production Companies Are Short Of?
Access to capital and the depth of capacity and capability are the principle resources that constrain exploration and production companies in New Zealand currently. Petroleum exploration activities are considered very high risk and costly. Furthermore once a discovery has been made, considerable costs are incurred to test and develop the discovery. These costs typically run into the hundreds of millions of dollars, require considerable technical expertise and experience and are spread over a long time before any revenue is generated.
3. Why Doesn't the Government Simply Fund Exploration Activity?
There are a range of reasons including:
- it would cost more than other options;
- Government funding would take a longer period of time to initiate;
- the commercial risks associated with petroleum exploration are better managed by companies that have the expertise and experience.
4. How Much is this Proposed Package Worth to the Industry (or How Much Will It Cost the Government)?
The exact cost to fund the proposed initiatives will depend on how successful explorers are at making new discoveries and bringing these into production. The impact of the package could be worth up to $100 million. This is split between:
- funding seismic exploration to increase understanding of New Zealand's petroleum basins (up to around $15 million);
- active marketing of New Zealand as an exploration destination, including facilitation of exploration activities (around $5 million);
- temporary adjustments to the petroleum royalty regime (up to around $80 million).
5. Why Has the Government Proposed Incentivising Exploration Rather than Putting Money into Sustainable Energy Initiatives?
It is not an either-or choice, both need to be part of the solution to meeting New Zealand's increasing demands for energy.
The government is committed to a policy of sustainable development, where economic development is balanced against social and environmental outcomes.
Gas is an important part of the government's policy on sustainable energy, even though it is a non-renewable fossil fuel. It is an important fuel for ensuring security of supply, now and into the medium term. Gas is particularly important for dry-year situations, where there is insufficient generation from renewable sources.
Improvements to the efficiency with which electricity is used can substitute for new supply, but the rate and level of efficiency improvement is uncertain.
The Energy Efficiency and Conservation Authority (EECA) and the Electricity Commission are developing proposals for further improving electricity efficiency and demand management.
6. What Outcomes is the Government Hoping these Proposed Incentives will Bring?
It is hoped that these proposed incentives will lead to an increased level of exploration activity over the next few years and the discovery of gas to replace the existing reserves to meet projected demand.
The review of the tax regime and more active facilitation of exploration activities should also lead to a more favourable long term environment for petroleum exploration.
7. If the Country Is Looking at a Possible Gas Shortage in the Near Future, Why Is It Encouraging Consumers to Use Gas in Their Homes?
There are sufficient gas reserves to meet domestic demand. Any reduction in gas supply is likely to predominantly affect the amount of electricity generated by gas-fired electricity generators. Consumers should be encouraged to use gas in their homes, as gas used domestically means less demand for electricity.
8. Won't These Proposed Incentives Simply Benefit Explorers Who Are Looking for Oil?
The proposed incentives have been tailored to focus on encouraging gas exploration where possible. Because of certain geological factors, discoveries are mostly gas condensate, meaning both gas and liquids are discovered by explorers. In practice, the proposed incentives encourage both gas and oil exploration.
9. How Long Will These Incentives Stay in Place?
It is proposed that the incentives apply to production from new discoveries within the period 30 June 2004 up to 31 December 2009.
10. How Does This Package Compare to the One Recently Introduced by the Australian Government?
The two countries offer comparable incentives although the mechanisms are slightly different.
Australia faces a similar problem to New Zealand except their principal concern is with declining oil reserves not gas. To address this problem the Australian government has announced that it will incentivise exploration activities in 'frontier' areas. The Australian Government has already introduced a data acquisition programme to improve knowledge / prospectivity to increase the attractiveness to explorers.
11. Do the Proposed Royalty Incentives Apply to Coal Seam Gas?
Yes, the incentives apply to coal seam gas. Coal seam gas is defined as a petroleum resource and is managed under the Minerals Programme for Petroleum.
12. What Is a Discovery?
A discovery is defined as any petroleum not previously known to have existed in:
- a new structure or in an environment never before productive
- outside the limits of a proved area of a pool; or
- inside the limits of a proved area of a pool but above or below the deepest proven pool that has been penetrated by an exploration well and that is recoverable at the surface of earth in a flow measurable by conventional petroleum industry testing methods.
Details of this definition are outlined in the draft replacement Minerals Programme for Petroleum, which is due to be released later this month for public consultation.
13. If the Government Is Trying to Encourage Exploration, Why Is It Continuing to Allow Explorers to Secure Acreage through the Acceptable Frontier Offer Process?
The AFO (Acceptable Frontier Offer) process provides the opportunity for explorers to submit bids for acreage outside the competitive bidding rounds. It is a first come - first served permitting system.
To encourage exploration and competitive work programmes, the government has blocked off all land from explorers via the AFO process in the Minerals Programme for Petroleum.
This measure will enable officials to assess areas to put aside for future competitive blocks offers. Without this measure there is a risk that these areas could be taken on speculative grounds. This is only for a short period of time (three months) and will not reduce the impact of incentives.
14. What Happens if an Explorer Makes a Discovery before 30 June 2004?
This hypothetical discovery would not qualify for the proposed incentives package. There is always some form of exploration activity taking place, the aim is to make the incentives available as soon as possible and allowing enough time for industry to adjust to the package. This means not waiting for all exploration activity to stop before getting the incentives underway.
15. What Are the Assumptions Underlying the Gas Supply/Demand Projections?
Projections are based on an estimate of several key factors, each having considerable uncertainty. These factors include:
- the volume and structure of demand given possible gas prices;
- the likely remaining reserves from current gas fields;
- the likely reserves in gas fields that are not yet in production (including Pohokura and Kupe); and
- the size of possible new discoveries over the next several years.
Given this uncertainty, a conservative approach has been adopted in considering possible exploration incentives.
Projections will be updated as new information becomes available, including the industry's response to the announced incentives.
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