Publications

The Wealth Beneath Our Feet

The Value of the Oil and Gas Industry to New Zealand and the Taranaki Region A fresh perspective on the industry and its economic impact

This report is as much about changing attitudes as it is about how an industry is defined, and its economic contribution evaluated.

2

like no other

Forward The oil and gas industry has been an integral part of Taranaki’s business community since the 1860s, yet remains, visually at least, almost below the radar - travelling through the region will give only occasional glimpses of gleaming infrastructure, oil tankers moored off the coast or traveling on the roads, and pipelines across mountain-fed streams.

The last time the Government made a strong foray into infrastructural investment in the oil and gas industry it delivered a range of facilities that have had an intergenerational impact on the Taranaki region, the industry, and the economy.

But the industry’s importance as an economic driver cannot be underestimated. This report exposes the full extent of that impact, going beyond the common exploration focus to independently and apolitically look at all aspects of the supply chain for the first time.

While the Government has recently demonstrated its commitment to partnership with marketing interventions in the tourism and film industries, and encourages research and development into the dairy and food industries, this report ultimately encourages interventions that will enable the oil and gas industry to grow in both scale and profitability.

While exploration and production is a necessary centrepiece for the industry, this is only the tip of the proverbial iceberg – a tiny rig atop a colossal oil field. The O&G supply chain, infrastructure, systems, capability, relationships, knowledge and track record all contribute to an industry which has evolved over many years.

Lifting the performance of the entire industry starts with this report. The report builds a foundation for strong future growth which will enable the industry to realise its full economic and transformational potential and lift its contribution to national growth.

These “Think Big” projects undoubtedly contributed to regional and national economic activity during their construction phase, generating skills and experience that has opened countless doors to many businesses throughout the industry and its entire supply chain.

STUART TRUNDLE Chief Executive, Venture Taranaki December 2010

The challenge for governments – local, regional and national – is to ensure that the oil and gas industry gains the exposure, the networks, the infrastructure and the support it needs to elevate investment levels and apply Kiwi innovation to one of the richest industries in the world.

The Wealth Beneath Our Feet

1

Table of contents 1

O&G Industry Summary

2 Introduction

2.1

Purpose of Paper

08 10 10

2.2 Methodology

10

2.3 Layout

10

2.4 O&G Terminology

10

2.5 Acknowledgements

10

3

Redefining the O&G Industry – the

need for a fresh approach

12

3.1 Upstream

14

3.2 Midstream

16

3.3 Downstream

17

18

3.4 Advancing an integrated approach

4. O&G Industry evolution in

55

6.7.1 Field Facilities (Upstream) 55

6.7.2 Specialised Facilities (Midstream) 55

6.7.3 Downstream Facilites 56

6.7.4 Maui Pipeline and Gas Pipeline Infrastructure 56 6.7.5 Roading 58

6.7.6 Port Taranaki 58

6.7.7 Todd Energy’s LPG Facility 60

6.7.8 New Zealand Refining Company 60

6.8 Wider Economic Impacts

6.8.1

6.8.2

6.8.3

6.8.4

6.8.5

6.8.6

6.8.7

6.8.8

6.8.9

Contributing to a vibrant growing region Reputation and Branding Security of Supply Infrastructure Development Business System Enhancement Knowledge, Skill and Careers Technological Advancement Expansion, Diversification and Leverage Investment in the Community

62 63 64 65 65 66 67 68 69 70

Taranaki & New Zealand

20

4.1

20

4.2 Field Development

21

7. Economic significance of Taranaki

4.3 Emergence of Local Capability

26

34

8. Where to from here?

35

8.1 A fresh approach to defining the industry 75

8.2 Fostering local procurement

75

8.3 Growing the entire supply chain

75

8.4 Think smart

76

8.5 Partnering for growth

76

New Zealand O&G History

5. Local participation

5.1

Influential decision-making factors

5.2 Growth avenues

6. Economic impact of the O&G Industry Method

38 42

6.1

6.2 Oil and Gas – Upstream

44

6.3 Major Construction Projects

46

6.4 Royalties and Tax

47

6.4.1 Royalties 6.4.2 Tax Exports

42

47 48

6.5

6.6 Oil and Gas – Midstream and Downstream 51

6.6.1

6.6.2

Feedstock Economic Impact of Feedstock Companies

2

6.7 Infrastructure

The Wealth Beneath Our Feet

50 52 54

to the nation

72 74

9. Appendix A. Other statistics and economic assessments.

78

Appendix B. O&G Industry Standards

and Safety

79

Executive summary The Oil and Gas (O&G) industry has the potential to make a step-change contribution to the New Zealand economy.

The capacity and capability that has developed over a long period of time in Taranaki will be a major factor in maximising that potential.

In 2009, New Zealand produced 19.6 million barrels of oil and 180PJ (gross) of gas. All of this came from the Taranaki region, and the area has the existing infrastructure that lowers the hurdle for achieving further commercial success. In addition, the capability to exploit discoveries in any region of New Zealand resides predominately in Taranaki. The current climate, where the value of energy is high, and where Exploration and Production (“E&P”) companies are being encouraged to explore and produce in New Zealand, provides the

While the future potential captures the headlines and is the topic of discussion, what is often overlooked is that the O&G industry already makes a significant contribution to the New Zealand economy.

At a minimum, the O&G industry directly employs 3,730 full time equivalents (“FTEs”) and contributes $1.9 billion to the New Zealand economy. Adding indirect and induced effects increases employment to 7,700 FTEs and GDP contribution of the O&G industry to $2.5 billion.

This assessed benefit does not include the contributions from major construction projects, which have been

opportunity for industry growth.

excluded because these are distinct one-off impacts,

While royalties are touted as the major benefit of oil

economic impact of the industry. A separate analysis,

exploration, it is only a part of the significant contribution the O&G industry makes to the New Zealand economy.

Energy supply, employment, capital investment, taxes, and technology and innovation are some of the additional benefits the industry contributes.

Often, because of the low profile that the industry encourages, and the fact that much of the activity occurs out of sight of the public, these benefits are not recognised.

This report goes some way towards identifying the wider contributions to the economy and the potential contribution that the Taranaki based O&G industry could make to New Zealand’s future prosperity.

It also explores some of the issues that face the O&G industry in New Zealand and in Taranaki.

although they can have a major influence on the undertaken in 2007, on the last five major projects – Kupe, Cheal, Pohokura, Maari, and Tui – estimated the economic impact nationally to be 8,700 FTEs and $660 million in GDP. As well as this, the O&G industry contributes to the national economy through exports, taxes and royalties.

At $2.9 billion in value, oil was New Zealand’s third largest export sector in 2008, behind only dairy and meat. A decline in production in 2009 saw oil exports of $1.9 billion passed by resurgent wood exports. E&P companies alone contributed $1.4 billion in company tax over the five years between 2004 and 2009, around three percent of all company tax collected over that period.

Over $430 million in royalties were paid in the year to June 2010, down 23 percent on the $560 million collected in the year to June 2009. Between 1979 and 2008, the O&G industry contributed over $3 billion in royalties, with the recent high receipts reflecting higher royalty structures applying to new discoveries than were levied on early fields such as Maui and Kapuni.

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While the majority of oil is exported, gas is all initially consumed in the domestic market. Gas is converted into electricity, used directly as an energy source by industry and residents, or used as feedstock in the production of methanol and fertiliser. Methanex Corporation is currently producing approximately 900,000 tonnes of methanol annually, all of which is exported, mostly to Asia. This volume adds a further $255 million to New Zealand’s exports.

Activity generated by the companies using gas as a feedstock (namely Methanex and Ballance) directly results in the employment of 355 FTEs and contributes $120 million to GDP. Adding indirect and induced effects increases employment to 1,700 FTEs and GDP contribution to $300 million.

The O&G industry extends far beyond the physical infrastructure of the upstream industry, and includes the collective capability of suppliers, specialist services, engineering and design, fabrication and labour force.

The O&G industry attracts a talented and international workforce, and establishes high standards of internal systems and processes. This capability has been able to then be leveraged geographically and into other high value sectors.

This infrastructure and capability is concentrated in Taranaki and has been developed over a long period of time. This is a positive outcome in that there is sufficient concentration to support existing and future activity, but also that this capability can be applied within other high value sectors and overseas O&G projects.

The benefits to the Taranaki region being the centre of the O&G industry are significant. Including indirect and induced effects, activity generated by the O&G industry contributes a total of $1.8 billion to the Taranaki region’s GDP and employs over 4,200 FTEs. Each project adds further value with the construction of the last five production plants adding a further $450 million and

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The Wealth Beneath Our Feet

employing over 6,300 people. Methanex and Ballance are major companies located in the region directly as a result of local gas production. These two petrochemical companies contribute a further $180 million to the region’s GDP and 870 FTEs. As well, the region has four modern electricity generation plants (655MW or 6.9 percent of national electricity generation capacity), is building a further LPG facility, and has the infrastructure, industry capability and expertise, to service the O&G industry throughout New Zealand.

Thus, the Taranaki region is firmly established as New Zealand’s energy province. It is home to all commercial discoveries and production of oil and gas to date and has spawned an extensive system of infrastructure.

Taranaki will play a key role in any future activity in the O&G industry in New Zealand. The industry expertise and infrastructure that exists in Taranaki will support activity in New Zealand regardless of where it occurs, and enable New Zealand to capture a greater share of the economic activity that O&G exploration and production generates.

The availability of infrastructure and expertise, and the track record (where there has been discovery and production) in Taranaki will be a key factor in continuing to attract major exploration and production to New Zealand.

The wider O&G industry supply chain is progressively expanding internationally to capture project and ongoing supply and service contracts in Australia, PNG and other offshore locations. The skills and capability gained through the industry have allowed a number of Taranaki companies to scale up and diversify into other industries locally and nationally, and in the O&G industry nationally and internationally. Considering the size of the industry in New Zealand, these outcomes would have been extremely difficult to achieve had the O&G industry not been concentrated in the Taranaki region.

•• Being global the O&G industry has contributed to the

••

••

••

••

vibrancy of the region, attracting skilled workers and their families from around the world.

The concentration of the industry in Taranaki has enabled the region to develop a reputation and brand for O&G-related activity, allowing local companies to compete on the global stage.

The specialist and exacting requirements of the O&G industry have seen the capability of individuals, businesses, and industries improve, resulting in innovation and expansion.

The industry has catalysed advancements in technology, as well as fostering greater understanding of our natural resources, careers, science, research and engagement from a multitude of disciplines.

The Exploration and Production (E&P) companies within the industry have contributed to the Taranaki region in terms of supporting social and environmental activities.

The O&G industry has unique traits. It is a high risk / high reward industry, operating around the world, often in challenging locations with variable conditions. Activity is purely driven by oil and gas prices and the ability to make an attractive profit on investments. The industry deals with hazardous materials and so has exacting procedures and standards to ensure safety.

The reputation that Taranaki is continuing to build means that New Zealand has an opportunity to participate in this industry beyond merely capturing royalties and corporate taxes.

Because of the scale of the investment, and the technical capability required, it is extremely difficult for small “unknown” companies to get “into” the O&G supply chain.

There are clear synergies for O&G service providers to locate in close proximity to each other and key clients.

Further, current activity in New Zealand is too variable to support an effective O&G support and service industry – the New Zealand industry needs to be participating internationally.

Currently, New Zealand companies are capturing between 30 and 80 percent of the construction of major O&G projects occurring in New Zealand.

While they can never capture 100 percent of projects, there is potential to capture more.

There are a number of ways that the industry can address the peaks and troughs in activity that constrains the growth of O&G companies. Growth opportunities will come from: •• further O&G activity in Taranaki or New Zealand; •• O&G opportunities overseas; or •• diversification into other industries.

The major factors constraining growth of the wider industry in New Zealand are: •• an ageing workforce; •• reputation and ability to secure major projects –

particularly offshore; and •• higher cost structures relative to other industries.

Further exploration and production activity in New Zealand will go some way to overcoming these constraints. But there are other ways that the industry can be proactive such as through: •• diversifying into other areas, such as geothermal

energy, where the industry can manage the variability of activity; •• collaborative efforts, where New Zealand companies can compete for international projects in niche areas as a formal collective; and •• better specification, where O&G companies can improve competitiveness in other industries.

The report recommendations are: •• changing New Zealand’s philosophical definition of the

oil and gas industry •• building stronger partnerships to foster the industry •• shifting the Government partnership model

The Wealth Beneath Our Feet

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The value of the O&G Industry to New Zealand

Foreign Direct Investment into New Zealand by the O&G Industry

global O&G market

Royalties = $432 million Company tax = $30 million p.a PAYE = undetermined

Exports = $2.15 billion • Oil = $1.9 billion • Methanol = $255 million

Economic, vibrancy, diversity and skills Reputation and brand (Taranaki/NZ) Security of NZ Energy Supply Infrastructure development Enhancement of Business Systems, H&S, Knowledge, careers, scientific discovery Technological stretch, transfer and innovation Expansion e.g export development Diversification and leverage Community investments ($2 million) Potential to transform NZ’s economy

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The Wealth Beneath Our Feet

NZ Economic and social wellbeing

Energy companies and electricity generation Business and households

Total jobs = 7,700*

• 20% NZ’s primary Energy supply • 25% Electricity generated

Tangibles flow into NZ economy enhancing other businesses, industries and social wellbeing

GDP = $2.5 billion

tangibles

Gas O&G exploration and production

Mid/down stream processing (feedstock)

Jobs = 6,000

Jobs = 1,700

GDP = $2.18 billion

GDP = $298 million

Intangibles

Intangibles flow into NZ economy enhancing other businesses, industries and social wellbeing

*Direct jobs = 3,730, total impact = 7,700 The Wealth Beneath Our Feet

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1 O&G Industry summary Current producing fields

Drilling activity (2009)

•• Currently some 20 oil and gas fields are in production,

•• Drilling activity has averaged over 35 wells per year

all in Taranaki. The key ones are (in descending order of remaining reserves) Pohokura, Kupe, Maui, Maari, Turangi, Tui, Kowhai, Kapuni, and Mangahewa.

since 2007, including exploration and production wells, both conventional and coal seam gas wells.

Major projects

Reserves

•• Major projects recently completed include

•• New Zealand’s reserves (MED* P50, as at

Ultimately Recoverable

Remaining

%Gas

Maui (1978)

4994

322

85%

-- Pohokura (June 2006) -- Tui (July 2007) -- Maari (February 2009) -- Kupe (December 2009) •• Current projects include: -- McKee LPG plant – Todd -- Motonui recommissioning – Methanex -- Ahuroa gas storage –Contact/Origin

Pohokura (2006)

1487

1180

78%

Oil and Gas prices

Kapuni (1969)

1395

118

73%

•• The oil price, currently US$80/bbl, has averaged

McKee (1981)

518

60

43%

Kupe (2009)

402

400

66%

Maari (2009)

320

270

0%

311

150

0%

1039

559

67%

1 Jan 2010) are 1.92TCF (2,077PJ) gas and 171mmbbls (983PJ) oil

Oil and Gas Reserves (P50) - PJ

Tui (2007) All Other

US$75/bbl since 2005 (peak >US$150/bbl in June 2008) •• Gas prices average $7/GJ (wholesale pipeline

specification, established through bilateral contracts).

Energy supply •• Gas provides 20 percent of New Zealand’s primary

energy supply •• Gas accounts for 25 percent of electricity generated,

Oil production (2009) •• 18 fields produce oil.

•• 19.6 million barrels were produced, of which:

-- 17.9 million barrels exported -- 1.7 million barrels refined locally

Gas production (2009) •• 20 fields and wells produce gas.

•• 180 Gross PJ (154 net PJ) of natural gas of which:

-- 53.7PJ went to electricity generation -- 18.0PJ went to cogeneration -- 24.5PJ went to feedstock mainly at Methanex and Ballance Agri-Nutrients -- 44.3PJ went to industrial users -- 7.9PJ went to commercial users -- 6.8PJ went to residential users

* Also see acroynms list at back of report

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The Wealth Beneath Our Feet

second only to hydro.

Security of supply •• The majority of New Zealand’s oil is exported due to its

higher quality •• Net oil import dependency is 63 percent.

Economic contribution 2009 (National) •• GDP

-- The industry (E&P and supply chain) directly

contributed $1.9 billion in GDP -- Including indirect and induced effects, the industry contributed $2.5 billion in GDP. •• Employment -- The industry (E&P and supply chain) directly employed 3,730 FTEs -- Including indirect and induced effects, the industry employed approximately 7,700 FTEs.

Economic contribution 2009 (Taranaki)

Royalties

•• GDP

•• In the year to June 2010, the Government collected

-- The industry (E&P and supply chain) directly contributed $1.8 billion in GDP -- Including indirect and induced effects, the industry contributed $2.0 billion in GDP. •• Employment -- The industry (E&P and supply chain) directly employed 3,560 FTEs -- Including indirect and induced effects, the industry employed 5,090 FTEs.

$432 million in royalties from O&G •• Between 1970 and 2008, the Government collected close to $3.1 billion in total royalties.

Capital expenditure •• Background exploration expenditure $200 million

per annum •• Background development expenditure $200 million

per annum •• New projects Pohokura $1.0 billion, Tui $0.3 billion, Maari $1.0 billion, Kupe $1.3 billion.

Exports (2009) •• $2.15 billion in export value

New Zealand O&G capability

•• 17.5 million barrels of oil

•• Large number of O&G industry certified suppliers

•• 4th largest export sector after Dairy, Meat and Wood.

•• Over 3,000 FTEs in Taranaki O&G industry

Tax

•• Awarded approximately 70 percent of O&G

•• Between 2004 and 2009, the E&P industry

development projects (higher for onshore projects, lower for offshore projects) •• Professional, advisory, industry advocacy and corporate functions predominantly hubbed in Wellington •• Strategic positioning and capability evolving in emerging O&G regions.

contributed around $1.4 billion in company tax (This is around three percent of total company tax paid over that period).

E&P Expenditure - $million

2,000

500

Maari Kupe

Exploration

1,000

Tui

Pohokura

Development

1,500

0 2000

2002

2004

2006

2008

Source: MED, Rockpoint

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2 Introduction 2.1 Purpose of paper

Venture Taranaki, as part of its New Zealand Oil and Gas Industry (OGI) development project commissioned this report to comprehensively define and describe the Oil and Gas (O&G) industry and assess its economic contribution to the Taranaki and New Zealand economies.

Chapter 7 focuses more closely on the role Taranaki plays in the O&G industry in New Zealand. Chapter 8 considers future opportunities and issues for the industry.

There are two appendices looking at alternative measures of economic impacts and a discussion of standards and safety in the O&G industry.

This document investigates:

2.4 O&G terminology

•• A description of the O&G industry in Taranaki and

The terms ‘oil and gas’, ‘petroleum’, and ‘hydrocarbons’ are broadly interchangeable, all being compounds comprising (principally) hydrogen and carbon atoms.

Natural gas comprises methane (CH4) and ethane (C2H6), while LPG is a mix of propane (C3H8) and butane (C4H10). Larger hydrocarbon chains (and their more complex variants) include liquids ranging from condensate and light crude, through to heavy crude.

New Zealand that includes value and supply chain considerations •• The economic contribution of the O&G industry to

New Zealand and Taranaki •• The strategic importance of Taranaki’s O&G resource to the New Zealand economy •• The wider and future opportunities for the O&G support and service industry in New Zealand.

2.2 Methodology The approach includes statistical analysis, public information, as well as interviews and a workshop with a wide range of industry participants.

The economic impact analysis uses multipliers to identify indirect and induced activity, and includes all upstream activity, mid stream and downstream activity where appropriate.

2.3 Layout The report is split into eight areas aligned to the purpose of the report. Chapters 3 and 4 provide a description of the O&G industry – its history and current activity, Chapter 5 discusses local company participation in O&G activity.

Chapter 6 looks at the economic impact of the O&G industry on the New Zealand and Taranaki economies.

It determines contribution to employment and GDP from upstream and associated activity. It also quantifies the royalties, company tax and exports generated by the

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industry. The wider benefits of the O&G industry, unable to be quantified, are identified and discussed.

The Wealth Beneath Our Feet

2.5 Acknowledgements Venture Taranaki would like to thank the large number of industry participants for their willingness to contribute time and information to this report at their own expense and the Government, through New Zealand Trade and Enterprise for their support of this initiative. Participation by Venture Southland, the Dunedin City Council (EDU) and Nelson EDA contributed to the national profile. A detailed database has been built up that could form the basis of future tracking and analysis of economic activity in the industry.

The report was also made possible by background research and analysis undertaken by BERL, RockPoint Corporate Finance, Arete Consulting Ltd and Red Eye Ltd. Their assistance is greatly acknowledged.

Photo credits: Rob Tucker, Taranaki Newspapers Ltd, GNS Science, Fitzroy Engineering, Independent Technology, Arabac, Digital Insight, Hooker Pacific, Wells Electrical, Methanex, EXITO, M&O Pacific, Fitzroy Yachts, BBBS Taranaki, Venture Taranaki Trust.

Design credit: C7 Design

The Wealth Beneath Our Feet

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3 Redefining the O&G Industry Global economic growth can only be sustained by energy.

driven by rising demand from emerging economies such

Oil currently accounts for 35 percent of global primary

Despite shifts and aspirations towards greater use of

energy, ahead of coal at 29 percent and natural gas at

renewable energy sources, in 2050 more people and

24 percent, (in aggregate accounting for 88 percent of

increased wealth will raise overall energy demands,

primary energy consumption). Per capita primary energy

with much of this increase stemming from developing

consumption globally, which reached a plateau following

countries, and continuing (if not increasing) overall

the 1970’s oil crisis, has surged during the last decade

global requirements for oil and gas.

as China and India.

World energy consumption - million tonnes oil equivalent (TOE) (pa) World Consumption - million toe

Per Capita Consumption - toe

12000

1.8

10000

1.6

8000

1.4

6000

1.2

4000

1.0

2000

0.8

0

0.6 1970

1965

1975

1980

1985

1990

1995

2000

2005

Source: BP statistical Review, Rockpoint

CHANGING ENERGY MIX

RISING GLOBAL ENERGY DEMAND

Million barrels oil equivalent per day

100 = global primary energy demand 2000

400

300 high

300

low

200

high

200

low 100

100 0

2025*

2000 Coal

Gas

Large Scale Hydro

Oil

Nuclear

Alternative Energy

* Shell estimates Source: Royal Dutch Shell

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The Wealth Beneath Our Feet

0

2000

2025*

2050*

While the public at large is familiar with the downstream O&G industry from direct experience at the petrol pump and in the home, the upstream O&G industry and midstream activity is largely unknown*.

Higher profile O&G activities periodically appear in the media, such as the arrival of an offshore drilling rig or the commissioning of a new field or a negative impact such as the Gulf Coast oil spill. However, the day-to-day activities and economic benefits of exploration, production and processing of oil and gas products are more remote and consequently not broadly acknowledged. Even within Taranaki, the physical presence and cultural significance of the dairy industry gives it a far greater profile than the O&G industry.

When economically significant sectors hold little attention in the wider public conscious, this can lead to shortcomings in policy formulation and official data provision. This is the case with the O&G industry, and is further exacerbated by the global nature of the industry, the complexity of the technologies employed, the project nature of major developments, and the intricate supply chain requirements to support long-term O&G resources.

Upsteam (E&P) •• •• •• •• ••

Exploration Appraisal Development Production Pre-processing

New Zealand benefits directly from the export of domestic crude oil and gas (as methanol), and via the Government’s receipt of petroleum royalties and corporate tax levied on the industry. A gap does exist in the statistical definition of the O&G industry. Official definitions capture only those companies that define themselves as ‘oil and gas extraction’, ‘petroleum exploration’ or ‘petroleum exploration services’. Such narrow measurements exclude by far the larger part of the industry, being all suppliers to the O&G companies such as engineering and equipment suppliers, fabricators, service companies and consultants that exclusively, or at least largely, operate within the sector. Similarly, the role the industry plays in enabling midstream activity, energy supply and security, infrastructure development, and business capability are generally not considered. As this study demonstrates, conventional economic multiplier analysis also presents challenges in capturing this wider economic benefit.

While it is apparent that the Government understands the importance of and is actively fostering the exploration and production (upstream) portion of the O&G industry in New Zealand, this report seeks to better describe the importance of the wider O&G industry to New Zealand but also to Taranaki.

The O&G Value Chain The O&G industry can be viewed as a fully global industry, and comprising three sequential components - Upstream, Midstream and Downstream.

Midstream •• •• •• •• ••

Processing Storage Refining* Petrochemicals* Transportation (pipelines, ships, trucks)

Downstream •• •• •• •• ••

Marketing Distribution Storage Retailing Trading

*Refining and petrochemical can be associated with downstream activities, however for the purposes of this report they are defined as midstream.

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3.1 Upstream Upstream activities involve the exploration for, and production of, commercial reserves of oil and gas.

Traditionally this has involved recoverable oil and gas in deep (>500 metres) permeable reservoirs, but can also include variants such as coal seam gas and oil shales. Exploration is a risky business where, on average only 1 in 10 wells drilled is considered a commercial success. Furthermore, despite technological advances, there is limited ability to predict whether a discovery will be oil or gas.

Nominally, exploration and production (E&P) companies target oil prospects, given oil is the most valuable and readily sold product on global markets. Yet gas has accounted for over 70 percent of New Zealand reserves discovered to date. The perceived difference between oil and gas wells is a misnomer. All proven gas fields have associated condensate and gas liquids, just as all oil fields also co-produce solution gas, some with a separate gas ‘cap’ (such as McKee). While facilities at each field naturally reflect the particular characteristics of that field, the structure and operations of the upstream sector generally does not distinguish between Oil and Gas. Upstream activities in New Zealand include: •• Numerous companies actively exploring

throughout New Zealand, although still largely focussed on Taranaki.

•• Producing fields in Taranaki. All gas fields (such as Maui, Kapuni, Pohokura, Kupe, and Turangi) also produce oil (condensate and LPG), while all oil fields (such as McKee, Waihapa, Tui, Maari, RimuKauri, and Ngatoro-Kaimiro) also produce gas, particularly in the latter stages of field production.

•• Pre-processing facilities at most fields to separate oil and condensate from raw gas and sediments.

•• Gas gathering pipelines, interlinking to a transmission network.

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The Wealth Beneath Our Feet

In order to undertake their work, E&P companies require support and services from a range of specialist companies spanning: •• Engineering (design, construction and maintenance).

•• Technical services (seismic, drilling, testing,

production).

•• Logistics and marketing services.

•• Professional services (legal, accounting, finance).

New Zealand’s domestic gas market is fully vertically integrated, linking upstream production activities with downstream wholesale and retail markets. While a small coal-gas based downstream gas industry did exist prior to discovery of natural gas, the mid and downstream infrastructure that exists today in New Zealand is entirely the consequence of domestic upstream natural gas production. For oil, there is essentially no link between the upstream production and downstream processing and sales.

Tui Oil Field The Tui field, brought into production in July 2007, has been an outstanding success.

While certainly benefiting from its peak production coinciding with peak oil prices, resulting in full payback within 4 1/2 months, technical success has also been apparent.

Exploration is a risk industry. The rewards for success are very high, especially so since global oil and domestic markets have firmed in recent years. This is offset by the high cost of exploration wells, $5-10 million for a typical onshore well, and $40-60 million for an offshore well, with only a 1 in 10 chance of success. In evaluating the O&G industry, therefore, we most take into account the statistical average of 9 dry wells for every discovery.

The project was completed on-time, on-budget. The production system has operated effectively since, and progressive upgrades have seen field reserves double since investment decision. However, taking the full history of the Tui permit into consideration, the success at Tui-1 involved drilling seven dry wells.

The “Tui� permit was awarded in 1996, and while the Tui-1 discovery was the second well drilled, to date 8 of the 11 exploration wells have been dry, despite some of the wells being close to discoveries.

tui project timeline Expenditure $m

20

Seismic

1000 800 Tui-SW1, Kahu-1

Permit Awarded

40

Hector-1, Taranui-1, Tieke-1

$ million

FID

Hochstetter-1

60

Discovery Tui-1 3D seismic

80

Amokura-1 Pateke-1

Pukeko-1 Kiwi-1

100

4 Development Wells Production

Cumulative Expenditure $m (rhs)*

600 $ million 400 200

0

0 1995

1997

1999

2001

2003

2005

2007

2009

*RHS = Right hand scale

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15

3.2 Midstream Midstream comprises the refining of raw crude oil and natural gas into marketable products, and their transmission to those markets. While some users may tolerate petroleum products within a wider range of specifications, most shared delivery systems (pipelines) and logistics require tight product specifications to ensure user safety, that the product meets environmental standards, and the narrowing tolerances of end user equipment such as car engines, turbines and household appliances. Accordingly, refineries produce a widening range of tightly specified products such as motor fuels, petrochemicals (including pharmaceuticals, solvents, fertilisers, pesticides, and plastics) and natural gas.

The midstream (and downstream) activities for gas are quite distinct from oil. Such activities include: •• Gas processing facilities to ensure gas meets pipeline

specifications (for transmission). This may include separation of liquids (condensate, LPG) and removal of various impurities (nitrogen, CO2, sulphur); •• The gas transmission network linking Taranaki fields to

markets, comprising Vector, linking most North Island urban centres, and the high-capacity Maui pipeline, owned by Maui Development Companies, from Oaonui to Rotowaro (Waikato); •• Major wholesale / industrial users such as electricity

generators and petrochemical plants (sometimes considered part of the downstream); and •• Import–export links, which are limited to:

-- Methanol – exports by Methanex, dependent on access to domestic gas; -- LPG – imported and exported to balance supply and demand variations; and -- Urea – local production by Ballance Agri-Nutrients Ltd (40 percent of total New Zealand urea demand), supplemented by imports (60 percent).

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The Wealth Beneath Our Feet

Midstream oil activities separate from gas activities at field production stations. These include: •• Pipeline and road transport infrastructure from the

fields to central storage facilities near Port Taranaki (in a variety of ownership); •• Export from Port Taranaki of almost all of New Zealand’s

crude oil products, principally to Australian and Asian refineries. These are able to pay a higher price than New Zealand’s own refinery at Marsden Point; •• Processing of imported crude oil products (largely

from Mid-East and Asia) at Marsden Point refinery. The Marsden Point refinery was materially upgraded during the 1980’s and is not optimally configured to process New Zealand’s sweet light crude oils; and •• Transportation of processed products to national

storage centres (Whangarei, Auckland, Tauranga, New Plymouth, Napier, Wellington, Nelson, Lyttelton, Timaru, Port Chalmers, Bluff): -- from Marsden Point by ship or via pipeline to Wiri, Auckland; or -- through direct imports of processed petroleum products (increasingly important as national demand rises - now accounts for 30 percent of market demand).

3.3 Downstream The downstream O&G industry covers the marketing, trading and local distribution of petroleum (and petrochemical) products to end users. These range from major wholesale users such as electricity generators and industrial plants, to retail markets. The largest volumes of petroleum products are diesel (fuel oil), petrol (gasoline) and avgas (jet kerosene). Petroleum is also the feedstock for the petrochemical industry which produces pharmaceuticals, solvents, fertilisers, pesticides, and plastics.

New Zealand’s downstream natural gas activities are largely governed by the capacity and location of the North Island’s current gas reticulation network.

PRODUCERS

Mckee 10.64

Mangahewa 5.85

Maui 56.11

DISTRIBUTION LOW PRESSURE RETAILERS CONSUMERS

Kapuni 17.53

Kaimiro/ Ngatoro 1.84

Turangi 7.70

Pohokura 69.02

Todd Taranaki 100%

Shell 83.75%

Shell 50%

Greymouth 100%

Shell 45%

OMV 10%

Todd Energy 50%

OMV 26%

Operator Todd Energy

Todd Energy 6.25%

Operator STOS

Operator Greymouth

Operator STOS

WHOLESALERS TRANSMISSION HIGH PRESSURE

There are numerous companies involved, mostly integrated with mid- and upstream activities (such as Genesis Energy, Contact Energy, Vector, Todd Energy) and others simply as downstream gas companies (traders and retailers). The material downstream players in the New Zealand O&G industry are Shell (now Greenstone), BP, Mobil, and Caltex/ Challenge, with smaller new entrants such as Gull operating in some regions.

The O&G industry is often defined by upstream activity, which is the primary determinant of incremental economic activity in Taranaki and New Zealand. However, this report also considers demand-based midstream and downstream activities.

Natural Gas industry summary 2009 MAJOR GAS FIELDS (PJ)

Downstream gas activities include: •• Gas trading, marketing and retailing; •• Oil product marketing and trading; •• Local distribution by truck; and •• Storage and retailing.

Todd 26% Operator Shell

Wholesale Market (bilateral) MDL

Vector

Powerco

Nova Energy

Vector

Wanganui Gas

Greymouth Petroleum

Genesis Energy Methanex Chemical Methanol Manufacture

Source: MED, Rockpoint

Ballance AgriNutrients (Kapuni) Limited Ammonia/Urea manufacture

Contact Energy Genesis Energy Electricity Generation

Other major users supplied directly from transmission system BHP NZ Steel Carter Holt Harvey Degussa Peroxide Fonterra Todd Energy Kiwi Cogeneration NZ Refining Company Southdown Cogeneration Tasman Pulp and Paper

Users supplied from distribution system Other Industry Commercial Residential

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3.4 the oil and gas industry - advancing an integrated approach A conceptual way the industry could be viewed encompassing E&P, supply chain and a more extended view of the value chain is highlighted below. The chart provides a starting point, advocating a more integrated industry perspective that could be further refined and built upon by others. Its purpose is to break traditional silos, to fuel lateral thinking about the interventions that could occur at different points of the value and supply chain and to enhance industry connectivity. Further discussion of its components and application to New Zealand O&G activity occurs in chapter 5.

Supply Chain

Reservoir Drilling

Upstream (Life Cycle)

Project Management and Engineering

Fabrication and Package Suppliers

Gas Processing

Oil Storage

Gas Trading

Oil Trading

Gas Transmission

Gas Transformation

Gas Distribution

Oil Refining

Downhole & Well Services

Mechanical, I & E, Telecommunications

Operations Environmental Protection, Emission & Carbon Management Decommissioning

Logistics & Transportation

Maintenance & Modifications

Downstream Maintenance and Modification

Oil Transportation

Marine Systems

Downstream EPC

Gas Gathering

Government Ministries, Regional Councils, Economic Development Agencies

Abandonment

Specialised Institutions

Drilling Systems & Equipment

Subsea Development

Production

Downstream (processes and companies)

Specialist Specialist Technology Advisory Service Service Companies Companies

Product Suppliers

Seismic Modelling

Exploration & Appraisal

Oil and Gas Value Chain

System Integrators

Independent Trading and Marketing – Petroleum/ Petroleum products

Crown Research Institutes, R&D, Universities, Training Centres, Industry Associations

Identification

Main Contractors

Consulting, Legal, HS&E, Finance

Crown & Local Government

Upstream Oil and Gas Companies

source: AretĂŠ Consulting Ltd

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The Wealth Beneath Our Feet

Fostering an Attitudinal Shift The oil and gas industry comprises: •• More than just exploration!

•• O&G Includes:

-- Extensive and skilled supply chain -- Infrastructure -- Production and processing plants -- Systems, skills, knowledge, capabilities -- Relationships - formal/informal -- A value chain -- Industry built up over many years

The industry is not insular, but inextricably interwoven with: •• New Zealand’s past, present and future

economic development •• The nation’s energy needs •• The development of other high-growth industries

and New Zealand’s global competitiveness.

Redefining the O&G industry is important to: •• Fully understand the industry and its contribution

to the nation’s economy •• Encompass changing relationships occurring within

the industry •• Maximise its value and transformation potential •• Comprehend the benefits of O&G beyond ‘royalties’, and the leverage potential at many points in the Value and Supply Chain.

The Wealth Beneath Our Feet

19

4

O&G Industry evolution in Taranaki and New Zealand 4.1 New Zealand O&G history

For such a remote country, New Zealand has a remarkably long history of oil and gas exploration. In the 1860s a well was “dug” adjacent to the Motoroa oil seeps near New Plymouth. Its success spurred a nascent oil industry, with the sporadic production and refining of oil, under the Peak Petrol brand, until the 1950s.

Modern exploration was heralded by Shell in the 1950s, utilising new technologies of seismic profiling and deep rotary drilling. This resulted in the discovery of the Kapuni gas-condensate field in onshore Taranaki in 1959. The government considered the Kapuni gas reserves, then assessed at 350PJ, sufficient to invest in the North Island gas transmission network, and to foster natural gas reticulation within all connected urban centres.

The development of seismic imaging for offshore exploration soon resulted in the discovery of the giant 4,000PJ Maui gas-condensate field in 1969. This bounty of gas, combined with the first oil crisis in the 1970s, spawned “Think Big” projects to both create new markets for gas and to reduce the country’s dependence on oil imports.

Gas Reserves - 000 PJ

That these two large discoveries, Kapuni and Maui, were both gas and occurred so very early in the modern exploration era has coloured New Zealand’s reputation as being both gas prone and constrained by a small saturated domestic gas market.

From 1985 to 2005, low global oil prices and abundant cheap Maui gas reduced local and global anxiety over the price and supply of oil, and further served to discourage exploration and development drilling activity in Taranaki and New Zealand. The consequence was a long period of reserve depletion as depicted in the chart.

Over the last decade rising global oil prices and introduced royalty incentives to find and develop gas reserves have reinvigorated exploration activities, resulting in material increases in drilling activity since 2003.

Concurrent with the activity and success in exploration, the capability of New Zealand companies to support and service the O&G industry has grown. There are now New Zealand companies supporting and enabling exploration activity, building the production and processing plants and undertaking maintenance of all types of facilities. Almost all of these companies are based in Taranaki and are accustomed to operating to the global standards of the O&G industry and working collaboratively with the other industry participants.

NZ drilling history

5 Maui

4

50

NZ Wells per year

100

US $/bbl (rhs)

Kupe

40

80

30

60

2

20

40

1

10

20

Pohokura

3

All others Kapuni

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: MED, Rockpoint

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0 0 1980 1985 1990 1995 2000 2005 2010 Source: MED, Rockpoint

4.2 Field development Commercialisation of oil discoveries involves fewer variables than gas. A global market for oil always exists, albeit as a price taker rather than a price setter, and so the rate of production can be optimised by geological and engineering factors, unconstrained by concerns about finding a market. New Zealand’s premium (sweet light) crudes find a ready export market, mainly with “simple and older” Australian refineries. Quite separately, New Zealand imports a range of Mid-East and Asian heavy crudes, which are more optimally suited to the Marsden Point refinery, in quantities to match domestic demand.

At an economic level, exports offset imports.

At an operational level oil exports and oil imports are very different markets / products.

Gas discoveries, however, are quite different. Gas producers are captive to the small domestic market.

During the Maui years (1979 to 2003), there was no unmet market need, with the Maui contract setting a low base price. Accordingly, several gas fields were produced to strip out marketable liquids such as condensate and LPG and either flared the “waste” gas (as occurred at Stratford for some years), or re-injected gas for later recovery (as at Kapuni).

More commonly, gas discoveries remained undeveloped until market opportunities finally emerged and prices rose sufficiently for these fields to become commercial. For example: •• Mangahewa – discovered in 1960 and redrilled 1997, in

production in 1998 •• Kupe – discovered in 1986, in production in 2009 •• Pohokura – discovered in 2000, in production in 2006 Production rates are often dictated by gas market requirements rather than optimising field performance.

Post-Maui (or post the influence of the Maui gas contract), a gas market has emerged, driven by multiple suppliers meeting demand for multiple wholesale buyers (as observed in the following figure). Price and delivery terms are set through bilateral contracts, on both term and spot.

Two recent turning points in the domestic gas market can be observed.

First was the drilling of Mangahewa-2 in 1997. While this was a repeat of the 1962 gas discovery well, Mangahewa-1, it was New Zealand’s first “exploration” well targeting gas. This was followed in 2000 with the drilling of Pohokura-1, a major gas-condensate discovery on the adjacent structure.

300

60

250

50

200

40

150

30

100

20

50

10

0

0 1970

1975

1980

1985

1990

1995

2000

2005

2010

Maui Kupe Pohokura Years

PJ

NZ GAS PRODUCTION - PJ P.A.

All Others Kapuni Demand Years Supply (rhs)

2015

Source: MED, Rockpoint

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Second was the Maui reserves “redetermination”, which materially reduced remaining contracted gas reserves and so crystallised the realisation that gas supply was diminishing. This saw curtailment of gas supplies to Methanex (hence the large fall in gas production on the prior chart) post-2003.

This success has inevitably attracted the most exploration attention, with onshore Taranaki accounting for 48 percent of all wells, and 56 percent of total metres drilled, while combined onshore and offshore Taranaki exploration accounts for 62 percent of wells and 80 percent of all metres respectively.

New Zealand’s O&G discoveries by field and type are presented in the following chart.

Oil and gas reserves

67% of reserves as gas

All Other Tui (2007) Maari (2009) Kupe (2009) McKee (1981)

0% 0% 66% 43% 73% 78%

Kapuni (1969) Pohokura (2006)

82%

Maui (1978)

1

2

3

4

5

000’s PJ Oil - remaining

Oil - produced

Gas - remaining

Gas - produced Source: MED, Rockpoint

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The Wealth Beneath Our Feet

well-head platform on the field. An umbilical pipeline incorporating a shore crossing linked the platform to an onshore gas processing facility.

Kupe Field The offshore Kupe gas-condensate field offers valuable insights into both gas markets and the field commissioning process. Operated by Origin Energy, Kupe was discovered in 1986 by NZOG, which remains part-owner of the project.

Based on public disclosures and the Kupe Gas Project booklet we have constructed the following chart to indicate the elements and staging of the project.

Origin Energy, and its key contractor Technip, sought to maximise the local content. In the final event, $620 million of the $1.3 billion project cost was awarded to 375 local companies (recognising that some of those companies may have sourced parts and materials from offshore). Further, local companies were awarded 73 percent of the expenditure they were capable of, and will undertake most contracts associated with ongoing operations. 6.2 million man-hours were worked from FID to commissioning.

However, through the Maui era, no new market for gas existed and so it was not until June 2006 that the field owners made the Final Investment Decision (FID) to developing Kupe. First gas flowed in December 2009, with the field soon in full production.

Kupe is a complex project including three (initially) deviated production wells tying to an unmanned

kupe project indicative COST timeline $NZm monthly Shore Crossing 100

500 400

60

300

40

Production

80

Discover 1986

20

Tank Farm Pipeline Wells Productions Station FTE 000 hours (rhs)

200 100

FID

$ million

Subsea Pipeline

0

0

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Source: Public data, Rockpoint

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The Think Big Era Taranaki’s methanol plants and the countries only ammonia-urea manufacturing plant, had their beginnings in the late 1970s and early 1980s when the New Zealand National Government initiated Think Big as an interventionist state economic strategy.

In the face of a global oil crisis, the Government saw opportunity in the substantial reserves of natural gas off the Taranaki coast as a means of making New Zealand more self-sufficient in transport fuels. Projects included the development of a methanol plant at Waitara and the synthetic–petrol plant at Motonui.

During the time of construction, over 2000 workers were employed, and at the height of production there were over 400 employees. However making synthetic petrol proved uneconomic when the price of crude went down. Motonui was sold to Fletcher Challenge who later on-sold it to Canadian- headquartered Methanex. The company constructed distillation units at the facility, commenced methanol production, and ended synthetic petrol manufacturing. Reevaluation of the Maui gas reserves in 2003 curtailed gas supplies to Methanex, leading to the closure of the Motonui facility in 2004 with the company’s remaining operations focusing on the Waitara Valley plant. However in 2008, Methanex reopened one of its two production units at Motonui after a $70 million refurbishment project, and closed its Waitara Valley plant. With global methanol prices buoyant, in 2010 Methanex has signalled a desire to refurbish Motonui-1, to avoid the need to stop methanol production in the face of their required code-of-compliance inspections.

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The Wealth Beneath Our Feet

The ammonia-urea plant at Kapuni was also built to make use of the Government’s ‘Take or Pay’ gas arrangements. Early production was initially exported, but internal demand now absorbs all of the product produced. Now owned by Ballance Agri-Nutrients Ltd, the plant has been significantly upgraded. It is a valuable source of jobs, added-value manufacturing and its product is utilised on New Zealand farms to enhance plant growth and productivity.

The concept of State Intervention and the ‘Think Big’ era has been the subject of critical review, with many still unconvinced of its business case.

However the projects which stemmed from it have contributed positively and widely to New Zealand’s economic and social well-being, and have been instrumental in the creation of a viable gas market.

The importance of facilities such as Methanex, within the overall context and attractiveness of New Zealand’s oil and gas industry, should not be underestimated.

Explorers invest significant money, time and expertise to find oil and gas, and then develop the fields. The presence of major gas customers plays an important role by providing oil and gas producers with a local market for their indigenous gas.

Construction of the gas-to-gasoline plant at Motunui, early 1980.

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4.3 Emergence of local capability

The discovery, development and operation of the Kapuni and offshore Maui fields heralded the development of considerable local O&G industry expertise in Taranaki.

Oil major Royal Dutch Shell (Shell) has been the primary driver of this process. Active in New Zealand since 1955 as part of the Shell Todd Oil Services joint venture (STOS, previously Shell BP Todd), Shell brought with it a combination of internal technical capability and compliance with, and development of, international oil industry systems and standards of which Taranaki has been a significant beneficiary.

Shell’s continuous presence as an operating company has provided an invaluable opportunity for local service industries to learn and develop O&G capability, an exposure that has since been supplemented by a succession of other major global companies participating in the New Zealand O&G industry at both the upstream and midstream levels.

Working alongside the international companies, Taranaki companies grew on the back of the oil and gas industry – not only as a result of the growth stemming from the additional work, but the development of skills acquired from participation in the oil and gas industry and exposure to sophisticated international systems.

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The Wealth Beneath Our Feet

The global O&G industry demands high standards in construction and operations, reflecting the need to handle flammable and corrosive materials under high temperatures and pressures. Arguably the most exacting global industry, O&G has presented a significant opportunity for local contractors to up-skill from other industrial sectors. A long standing commitment exists by E&P companies to foster and develop, where possible, this local capability in Taranaki.

The evolution of expertise has included a diversity of support industry roles such as consultancy concerning entry strategies, land access, professional services, collection of seismic information, district planning, environmental advice, health and safety training, engineering, design, electrical and mechanical work, and transportation.

In the early years, processes were evolutionary as oil companies, local authorities and the Taranaki community grappled with the mushrooming onshore development and new territory.

Taranaki’s rural community had for many years, been driven by dairy farming. Few had experienced large scale commercial development. The arrival of the oil and gas companies meant the introduction of a whole new industry and change to the rural landscape, tradition and lifestyle once known. Noise and roading were particularly affected.

Communication, monitoring and the use of development levies fostered conformity in approach with respect to district planning. New systems included the development of model agreements e.g. the voluntary land access code

by Federated Farmers and PEANZ (now PEPANZ).

The economic impacts of the onshore petroleum development in Taranaki were not analysed to the extent of the Think Big projects (which arose in the late 1970s, early 1980s), however many sectors benefitted considerably from this earlier phase such as metal and roading contractors, trucking firms, engineering and specialist servicing industries.

The effects of Think Big were more pronounced. Their developments created benefits and also pressures for the Taranaki community, such as housing and workforce.

Construction progress featured almost daily in the media and on national news. People were in awe of the huge vessels and engineering modules being transported to their sites. Drilling rigs and support vessels dwarfed other vessels on the coastline. Then, from the mid-1980s this large scale activity began to wind down.

The oil and gas industry of Taranaki today reflects a culmination of this experience. Taranaki has evolved an extensive system of infrastructure that supports upstream and midstream industry. Infrastructure includes gas production and storage facilities, Port Taranaki, and the pipelines that transport gas throughout the north island. Feedstock includes Methanex and Ballance Agri-nutrients, which are significant companies within the region that exist in New Zealand because of the availability of local gas. The energy sector is supported through three power stations within the region and gas supply to others (including Huntly) as well as a soon to be completed LPG production facility, and supply to commercial and residential end users.

There is maturity to the region’s O&G systems, knowledge and capability and to relationships, both formal and informal in nature, that have evolved over the years.

As the region is home to all the commercial discoveries and production of oil and gas to date, New Zealand’s expertise has remained concentrated in Taranaki.

Local industry continues to be actively involved in the operations and maintenance of O&G activity and is supporting the new exploration and development work presently occurring in New Zealand.

However the limited size and scale of New Zealand’s O&G industry means that few supply chain businesses are totally focused on the oil and gas industry. O&G tends to comprise one element of a diversified industry portfolio mix. They have evolved expertise to become globally competitive – exporting products and services to international O&G markets. Consortiums have evolved for added leverage, and companies have developed niche specialities and technological advancements.

The Wealth Beneath Our Feet

27

Fitzroy Engineering Group Fitzroy Engineering is a provider of heavy engineering, construction and maintenance services particularly to the O&G industry.

Starting in O&G on the Maui project in the 1970s, Fitzroy Engineering is often cited as a key success story for Taranaki.

Once a small engineering firm, the company developed significantly as a result of their participation in the O&G industry. Today Fitzroy employs 385 FTEs and derives over 80 percent of its revenue from the O&G industry, which has included substantial projects for the four New Plymouth domiciled E&P companies, Shell, Origin, AWE and OMV.

Duplex vessels, kupe gas project Scope of Work: Design and fabricate duplex High Pressure Separator and Condensate Flash Drum. The HP Separator is 49mm thick and is the largest heavy walled duplex vessel built in Australasia to date.

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The Wealth Beneath Our Feet

Fitzroy identifies three types of project based work, being fabrication, construction (installation and assembly) and maintenance (offshore and onshore processing plants), with only maintenance contracts providing a steady work flow. Like most local contractors, Fitzroy has struggled to be cost competitive against Asian fabricators. However, units fabricated in Asia often require substantial remedial work (such as on Kupe) providing partial opportunity for Fitzroy.

Fitzroy is actively leveraging its relationship with Shell, Origin, AWE and OMV into the Australian market and is currently expanding through acquisitions and has won a $25m contract for Origin to build an accommodation unit for the Yolla offshore platform. Fitzroy is targeting growth in coal seam gas and LNG.

STOS Shell Todd Oil Services Limited (STOS) is a pioneering gas and oil operator that has been active in New Zealand for more than 50 years and is owned by Shell Petroleum Mining and Todd Petroleum Mining who each hold a 50 percent stake in the company.

As New Zealand’s largest operator, STOS has set safety, operational and environmental benchmarks in the industry, underpinned by Shell’s global standards. The company employs some 300 personnel in a wide variety of roles including operations, sub-surface analysis, drilling, engineering, and support services.

It indirectly employs many more through a wide range of substantial contracts.

STOS operates a number of gas fields, production stations and a tank farm for joint venture partners including Shell, Todd Energy and OMV New Zealand. These fields include Maui and Kapuni.

STOS has a Goal Zero operating philosophy, no harm to people and protect the environment, and values its strong community relationships built up over its 50 year history in Taranaki.

The Wealth Beneath Our Feet

29

Arabac

Digital Insight

Arabac (Aerial Abseil Access (NZ) Limited) is an industrial abseiling company whose specialist clients include the O&G industry.

Digital Insight is a small company, operating out of a farm shed near Inglewood. It specialises in in-situ inspection of industrial process equipment in O&G (60 percent offshore), and now operates globally, catapulted by a contract for Conoco Phillips in 2003.

In 1995 they were the first company to introduce and provide Industrial Rope Access Services to the Shell Todd Oil Offshore Oil and Gas installations ‑ Maui A, Maui B and Whaakaropai (Offshore Floating Storage Installation). Today the company undertakes contracts nation-wide and internationally, but retains its prime base in Taranaki. Arabac's advanced abseiling techniques are used where other forms of access are impracticable.

While the majority of contracts involve industry blasting and painting, inspections and fitter/welding, Arabac also offers many other trade skills accessed through alliances with other local specialist companies.

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The Wealth Beneath Our Feet

With innovation in surveying, inspection plans and certification the company has since worked for a variety of major and mid-sized E&P companies. Digital Insight develops and adapts technology itself, providing a material advantage over its global competitors.

Whilst Digital Insight has become one of the leading companies globally in their field, it is a very specific niche market. The company intends to remain based in Taranaki for lifestyle reasons and because New Zealand offers the right sort of people for the roles they undertake. The support of the Taranaki O&G Cluster is also important because it provides market intelligence and collaborative marketing opportunities.

ITL ITL was established in 1988 and provides engineering design and build solutions for industrial process plants, principally in O&G. With 4 principals it grew to 10 staff by 2003.

However, a strategic rethink in 2003 has seen growth

pipeline work (midstream) and opportunistically consider non-O&G projects.

ITL differentiate themselves by providing E&P companies with turnkey options on some projects, working in partnership with other providers such as Fitzroy Engineering, but also maintaining strong relationships

since assume a steeper trajectory, with 55 staff now and

with other key providers. This collaborative approach is

an anticipated 100 FTE within 2 years. 80 percent of ITL’s

considered key to the continued success of the Taranaki

work is Taranaki-based, 90 percent in O&G. The upstream

O&G companies. Recently ITL has expanded offshore,

work is with onshore facilities, with offshore work limited

establishing an office in Brisbane principally to pursue

to topsides (above water). ITL are extensively involved in

coal-seam gas opportunities.

The Wealth Beneath Our Feet

31

An evident feature of Taranaki’s O&G industry is the collegiality of the supply chain. This is not to say that companies don’t compete, but rather that an acknowledgement existed where, through co-operation, the collective capability was greater than the individual parts.

working relationships, project structure, collaborative marketing, the sharing of market intelligence and the management of peaks and troughs. There are benefits by working together.

Despite advances in communication technology and the increased flexibility of long distance travel, there are clear synergies available for O&G service providers that are located in close proximity to each other and key clients.

The following table summarises the positive externalities

Timelines in O&G projects are often tight, and the scale

available by locating in close proximity to potential

of projects can prove a test for individual companies.

clients, and to complementary, and competing,

Partnerships reside between companies concerning

service providers.

The importance of geographic proximity Located near

Benefits Include

Potential Clients

•• Reduced transportation and communication costs •• Clients demand local knowledge •• Increased flexibility to be able to meet client needs •• Scale economies from a greater client base

Complementary Services

•• Referrals •• Collaborative marketing •• Collaborative industry training programmes •• Economies of scale from a greater service base

Competing Services

•• Access to a larger pool of skilled labour •• Ability for potential clients (especially international) to more easily visit and

compare competitive service offerings •• Faster recognition of new competitive initiatives and / or new technologies •• Potential supply chain synergies

It is no coincidence that Taranaki, representing the entire upstream O&G market is home to almost all of New Zealand’s O&G service providers (and FTE employees).

Taranaki represents the logical location for companies involved in O&G, which recognises the merits in obtaining the identified synergies. As exploration expands to other regions, strategic hub and spoke relationships between Taranaki and the emerging areas is anticipated to emerge.

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The Wealth Beneath Our Feet

Transfield Worley Ltd Transfield Worley Ltd is a New Zealand based company with two ASX listed shareholders Transfield Services and WorleyParsons.

They offer a complete range of project management, engineering and construction services across a wide spectrum of industries with a proud 25 year history of involvement and success in New Zealand’s Oil and Gas industry. With its New Zealand head office based in

New Plymouth, the O&G industry is a key focus for the company including 200 of its 260 local staff.

The company provides services for many of New Zealand’s E&P companies ranging from concept evaluation and feasibility studies, through detailed engineering and design, to procurement and construction, maintenance and operations support. Key clients include Shell Todd Oil Services, Todd Energy, Origin Energy, Contact Energy, Prosafe, OMV and AWE.

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33

5

Local participation - O&G expenditure in New Zealand: results of a preliminary assessment

Several billion dollars have been invested in upstream oil and gas field development and more on midstream infrastructure such as transmission pipelines, processing facilities, oil storage tanks and port facilities, as well as downstream infrastructure and related industries such as petrochemical and power generation plants.

as opposed to offshore, and particularly in ongoing production and maintenance operations.

Participation of local companies in O&G activities depends on the nature of the task (level of specialisation) and scale of the task (supplier capability and timelines).

It also depends on the degree to which the E&P company, and its prime contractor (EPC), are in a position to facilitate the involvement of local companies. The following diagram seeks to depict the nature of activities / input through the full lifecycle of a field development project.

To assist with aspirations to maximise the value of New Zealand’s O&G industry, an assessment was undertaken to determine the extent to which such work in New Zealand was undertaken by the New Zealand O&G supply chain. This analysis included an indication of the type of work and reasons for capture or loss.

•• Exploration and appraisal: The key tasks are

acquiring seismic and undertaking drilling operations.

While cumulatively these projects are large (>25 deep wells and 15,000km of seismic annually in New Zealand), each project has specific requirements that demand capabilities in seismic equipment and rig operation. Except for onshore drilling rigs, there is insufficient activity in each project type to support the continuous presence of equipment or a

This assessment found that New Zealand based companies have shared a relatively small, but nevertheless meaningful portion of the upstream expenditure. Local involvement remains greatest for onshore developments (upstream and midstream),

Indicative O&G Project Breakdown Supply Chain Govt

E&P

Main System Product Contractors Integrators Suppliers

Specialist Specialist Institutions Technologies Advisory

Project Lifecycle

Development

Production

Decommissioning

34

The Wealth Beneath Our Feet

Reservoir Studies

Seismic Studies Drilling Operations

Project Management

Operations

Drilling Systems and Equipment

Plant Fabrication and System Suppliers

Maintenance Environmental

Down hole Services

Transport

Research Training

Design/FEED/FID

Government Regulation

Exploration

Professional Services

Pre-exploration

permanent offshore drilling rig. Accordingly, except

in onshore infrastructure. However, as noted overleaf

for onshore drilling, most exploration and appraisal

the Project Teams of all international E&P companies,

work is undertaken by offshore contractors, who bring

excepting Shell (STOS) and OMV, are located overseas

in specialist equipment for short programmes. Local

and accordingly, it is difficult for New Zealand companies

companies are called on to supplement with generic

to build and maintain the required relationships and

tasks and provisioning or to undertake those tasks

credibility necessary to gain large contracts.

that require specific local knowledge, such as resource management, regulatory compliance or community consultation.

•• Design and development. Key tasks in this area

Local companies cannot expect to capture all contracts for which they are capable and qualified, recognising that they compete with experienced offshore providers.

Even so, anecdotal evidence suggests they are awarded

encompass the detailed design of production wells and

in excess of 70 percent of the work for which they are

surface infrastructure. While local companies have the

qualified.

capability to undertake smaller onshore developments, the scale, level of specialisation, existing certifications and tight timelines of offshore projects are barriers to local companies gaining core roles.

•• Production (and decommissioning): Field life

Often cited practical constraints on local company participation in O&G projects include: •• Project characteristics: All development projects are

one-offs, with specific design, fabrication, assembly,

ranges from 5 to 50 years (to date Kapuni >40 years,

installation and fit-out requirements. The unique

Maui >30 years, McKee 30 years), and requires

characteristics are most evident in offshore projects,

continuous monitoring, control and maintenance. In

such that local companies are less likely to be

some instances there may be significant expenditure

extensively involved in these projects.

to extend the productive life of these fields. While

•• Timelines: Subsequent production and maintenance

some tasks may require imported specialists, the

operations are ongoing (often multi-decade) which

field operator will generally prefer to leverage the

strongly favours local firms that are well suited for

availability of local companies.

ongoing activities. They are able to meet demands for

5.1 INFLUENTIAL DECISION-MAKING FACTORS

The majority of E&P companies in New Zealand are multi-nationals and, as such, major decisions on construction and production are often made outside New Zealand. Similarly, the Prime Contractor on a project is also generally a large multi-national. This makes it more difficult for local companies to capture a major share of activity.

immediate response and over time build up detailed knowledge and understanding of the maintenance requirements. This has been an essential component in developing the industry expertise that now resides in Taranaki.

•• Cost competitiveness: Proximity and short supply

chains serve to benefit local companies, offsetting the scale, specialisation and cost advantages of many larger international competitors. Specialist skills and high demands serve to make the O&G a high-paying industry, and while local companies cannot compete

The local management of E&P companies contacted

against sometimes cheaper offshore wage rates,

for this study all expressed a preference to maximise

particularly in Asia, local companies can nevertheless

the local content of their development and production

remain cost competitive for many tasks.

operations. This is driven by commercial interests, the

•• Continuity of activity: The range of tasks demanded

convenience of short supply chains and the benefits

by the O&G industry is vast, with the activities in New

of fostering a local economy. This has been evident on

Zealand as diverse as other locations in the world

recent development projects such as Pohokura and

despite the country’s small size. It is impractical for

Kupe where local companies played a significant role

New Zealand companies (and those from most other The Wealth Beneath Our Feet

35

countries) to sustain capability across all technical and specialist sectors, especially given the discontinuous (project based) nature of O&G activities. Accordingly, global centres of excellence develop to support the O&G industry, such as shipbuilding, offshore platform fabrication and specialist technical services. Local companies benefit most from production operations where the focus is on ongoing maintenance and monitoring.

•• Location of E&P project teams: The activities within

each exploration joint venture are managed by the operating company. An operators’ geological team drives the exploration and appraisal activities, while the engineering/project team drives the design and development. Given most E&P companies operate globally, they will tend to develop centralised geological and project capability, often close to a regional centre of activity in O&G, such as Houston, Aberdeen or Perth.

Production, once established, is typically managed by operation teams located close to the field/project, providing greater opportunity for local company participation.

Based on discussions with O&G participants, and our research on the O&G industry, the costs associated with a variety of “type” projects are represented to indicate the degree of participation of local companies throughout a project lifecycle.

These are illustrative only, and are not based on the actual cost of any project. Note that: •• Success rates for exploration drilling are typically

assumed to average 1:10. Accordingly, for every commercial discovery (which leads to a field development) the cost of nine dry exploration and appraisal wells (in which local companies can participate) needs to be considered.

•• Production costs are largely operational (some capital

expenditure relating to maintenance and upgrades), and are incurred over the field lifetime (decades).

•• An estimate of the portion of project lifecycle costs in

each cost category that has been made in the table on page 37 as well as the amount that could conceivably be incurred by engaging local contractors.

36

The Wealth Beneath Our Feet

Location of Engineering Procurement Construction Companies Once the E&P company has finalised its Front End Engineering Design (“FEED”) they will then contract the entire project with an Engineering Procurement Construction (“EPC”) provider.

The companies that provide these services are all based in Australia given the far larger O&G industry that exists there. There are 8 – 9 EPC companies active in Australasia including Bechtel, Technip, Cloughs, Worley Parsons, AMEC and TECQ. These companies will contract to manage the entire construction process against an agreed design, timeline and budget. They have discretion on how this is achieved, on how the project is broken down and who is contracted to provide the required components. As part of the contract they enter into they will typically accept the obligation to pay liquidated damages for failure to deliver on time and to specified standard. The scale of such potential damages will always preclude any New Zealand company from gaining these sorts of roles as they do not have the financial strength.

The EPC will determine how the total project is broken down and will contract with a range of parties for each of these packages. Some packages will be supplied by individual companies all contracting directly with the EPC and others will be supplied by a prime contractor who in turn will form a project specific J/V and enter into a range of contracts with sub-contractors. The prime contractor will accept responsibility for that portion of the contract they are supplying directly as well as responsibility for coordinating the work of all of its sub-contractors.

There are a few New Zealand companies that have the ability to contract directly with the EPCs for the supply of major components. Fitzroy Engineering is an example of such a company and has carved out a niche for itself in the area of high pressure vessels. However, by O&G industry standards Fitzroy, whilst probably the largest heavy engineering company in New Zealand, is still a very small company. The overseas location of all of the EPC companies is a further barrier to New Zealand companies building up strong relationships and credibility.

Indicative Project Cost Breakdown - and NZ Content - NZ $m Project Stage

Onshore Oil (shallow)

Onshore Oil (deep)

Onshore Gas (deep)

NZ Pre-exploration

Offshore Oil (FPSO)

NZ

Offshore Gas (onshore facilitIes)

NZ

NZ

NZ

5

5

5

4

5

5

5

3

5

3

Exploration

30

20

70

45

100

66

300

84

300

86

Appraisal

12

9

42

29

60

43

60

22

60

23

Design/FEED/FID

6

5

11

8

16

11

50

18

50

17

Development

25

17

60

38

55

34

55

13

900

394

Production

20

19

30

28

60

55

120

76

300

210

1

1

3

2

3

2

30

10

100

36

99

75

221

155

299

217

620

225

1715

767

Decommissioning % NZ Content

76%

70%

73%

36%

45%

Research confirms local companies enjoy a high potential share in the exploration/appraisal stage of an onshore project, and dominate in longer-term production stages of both onshore and offshore projects. Offshore projects tend to be larger and more technically complex, requiring technical and engineering expertise unavailable locally.

NZ content in O&G project NZ Content

Non-NZ Content

Offshore Gas (onshore facilities) Offshore Oil (FPSO) Onshore Gas (deep) Onshore Oil (deep) Onshore Oil (shallow) 0

500

1,000 NZ$ million

1,500

2,000 (Source: Rockpoint)

While only one example, Origin Energy’s Kupe project broadly corresponds to these estimates, where New Zealand companies were awarded around $600 million (40 percent) of the total $1.35 billion project cost, representing 73 percent of the capacity they were eligible for. By implication, the potential local content was over $800 million, or 60 percent of the overall project.

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37

5.2 Growth Avenues

O&G Expansion: Domestic and International

Many Taranaki companies presently hold significant ongoing contracts with the major E&P companies for the maintenance of platforms, processing plants and other significant infrastructure. The contracts typically underwrite local companies as their core business with any major projects being in addition to this.

Some Taranaki based companies already participate in O&G activities elsewhere in New Zealand. Several have established offices elsewhere in New Zealand or overseas, building from their Taranaki O&G base, and often forming alliances with companies established in these target markets.

There has been substantial development work over recent years on the Pohokura, Maari, Tui and Kupe projects that have now come to an end. Having invested in their workforces and capabilities, many companies are now looking to pursue O&G or energy contracts in offshore markets and / or expand into other sectors in New Zealand.

The primary growth opportunities for O&G supply chain companies fall into three categories: • O&G in Taranaki, or elsewhere in New Zealand • O&G overseas; and • Diversification into other industries.

38

The Wealth Beneath Our Feet

Most have sought participation in the Australian O&G industry where the sheer scale of activity provides greater opportunity.

Taranaki companies are targeting O&G, Coal Seam Gas (CSG) and / or LNG projects in Australia and Papua New Guinea. To do this, they are leveraging their existing relationships with Australian based companies into the projects being undertaken by these companies.

Over the next few years it is also anticipated that there will be several major LNG projects based on the CSG reserves of Queensland.

A number of New Zealand based companies are collaborating to pursue participation in these projects.

In part such collaboration is due to the recognition that New Zealand companies are typically seen as being too small by the project teams of the major E&P companies and the EPC companies to be taken seriously for overseas projects. Collectively they can demonstrate and train to achieve the capability sought by the industry.

To date New Zealand companies have had limited success winning contracts in the Australian market. Our research suggests this can be attributed to a number of factors: •• It is difficult to build strong relationships with the

E&P company project teams and with the EPC companies as none of these are New Zealand based, and the project-based nature and high mobility of personnel in these organisations limits contact and relationship building.

•• Overseas, the New Zealand companies do not possess

the same natural advantages they enjoy in their domestic market.

•• Stronger competition from the major international

engineering and service providers overseas.

•• Strong competition from their Australian equivalents

who enjoy a domestic advantage. This is heightened by the relationships that the Australian companies will have with the Australian based E&P project teams and EPC contractors.

Industry Diversification A secondary strategy being pursued by a number of the New Zealand O&G companies is to diversify into other sectors in New Zealand. The principal sectors they are focusing on include geothermal generation, electricity generation, the dairy industry, wood processing and other major industrial plants.

Whilst they undoubtedly possess the technical competence to be successful in these sectors, many feel disadvantaged by the cost structures inherent in the companies from their ongoing work in the O&G industry. The factors contributing to this issue are varied but include higher overheads from additional quality assurance staff, higher health and safety standards, and higher wages, salaries and ongoing training costs.

Having established a corporate culture and processes that attain and maintain the standards required by the O&G industry, it is difficult to set different standard levels within the one company.

On the other hand, more stringent health and safety standards can offer a comparative advantage for companies to market when seeking to leverage expertise into non O&G related sectors. While the services and products they can offer may be marginally more expensive, the intangible benefits, including reduced accidents, stronger / more durable equipment, lower pollution, and increased goodwill in the community, can be attractive to prospective customers.

Workforce and Talent Capability is frequently interwoven with workforce requirements. Key issues confronting the O&G industry presently include difficulties attracting good and qualified specialist staff and the replenishment of the aging demographics. The aging demographics is due in large part to the downsizing that occurred in the global O&G industry in the mid 1980s and subsequent lack of recruitment over the next 15 years. Active promotion of the industry within New Zealand schools and universities is being led by industry and training agencies such as the Petroleum Skills Association, Western Institute of Technology at Taranaki (WITT) and the Extractive Industries Training Organisation (EXCITO).

International recruitment of staff is frequently necessary by the O&G companies due to their specialist skill requirements. An immigration and regulatory framework conducive to O&G skills, their contractual environment, work programme timetabling and global recruitment requirements is therefore important to support New Zealand’s O&G capability and growth.

The Wealth Beneath Our Feet

39

Wells Instrument and Electrical Wells was formed in 1984 with a Taranaki focus on the local emerging petrochemical and oil and gas industries.

Initial contracts included the carrying out of instrumentation & electrical work on gas pipeline block valve and compressor stations and on initial commissioning activities on the “Gas to Gasoline” plant at Motunui. This enabled the company to develop capability and a positive client track record in the O&G industry. Wells has maintained ongoing relationships with individual clients which now stretch to close to 20 years Wells has been involved internationally in assisting with installation, commissioning and inspection activities for oil and gas and hazardous chemical operators in Australia, Japan, Singapore and New Caledonia. Recent projects for Wells include the provision of over 100 trade/ technical staff over an 18 month period for the execution of the I&E construction activities for the Kupe Production Station in South Taranaki and the carrying out of the I&E construction activities at the Contact Energy Stratford Peaker Power Station. The Wells Group currently employs over 475 staff and about 35% of its business focuses on the oil, gas and petrochemical industry with another 55% in the wider energy sector.

40

The Wealth Beneath Our Feet

“Not only has the O&G industry been the backbone of Wells’ growth but exposure to this industry has been instrumental in the formation of our high-spec health and safety, and management systems. These systems have, in turn, opened doors to broader energy and industry projects and formed an important part of our company philosophy, competitive advantage and point of difference. So the benefits for us not only include the O&G work itself, but the opportunities and in-roads it has provided for wider leverage”.

Graham Wells Managing Director, Wells Group Limited

Hooker Pacific Hooker Pacific (“Hookers”) is a Taranaki-based transport company that traces its roots back to 1869 and 17-year old entrepreneur, John Hooker. Hooker Pacific is owned by the private TIL Group which also owns TNL Freighting, PLPL and Actus Transport.

Hookers have been heavily involved in the O&G industry since the first major commercial discovery of the Kapuni Field by Shell Todd Oil Services back in the late 1950s.

Since then they have grown with the O&G industry, providing a 24/7 transport, storage and logistics service.

The most significant growth within the group over the last decade has been the Fuel Haulage division. They successfully tendered to take over the nationwide distribution for Rockgas and earlier this year celebrated the 10th anniversary of this contract. Then, six years ago, they successfully tendered for the Chevron petroleum product haulage contract, which transformed Hookers into a major O&G transport provider. Hookers also commenced a very similar contract in 2009 for Greenstone to distribute Shell products nationwide.

Hooker Pacific Fuel Haulage is now one of the major players in this industry utilising 170 trucks, branded Hookers, with operations integrated across these three separate contracts.

These fuel haulage contracts demand high standards for technology, monitoring, training and health & safety, and are subject to regular audit. The industry provides a significant positive for Hookers such as driving efficiencies, staff up-skilling, new technology and beneficial changes in corporate culture.

Other Hookers’ activities in the sector include: •• Drilling rig moves around the North Island •• Crude oil haulage operating 30 trucks 24/7 for

Todd Energy, Origin, Kupe and Tag Oil from field or processing plant to storage facilities •• Storage and logistics services for the off shore well sites •• International and domestic furniture relocations •• International freight forwarding and customs

clearances.

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41

6

Economic impact of the Oil and Gas Industry This section explores the economic impact of the O&G industry on New Zealand and Taranaki in particular.

The Economic Impact Analysis (EIA) focuses primarily on upstream activity as a core driver of O&G industry flow-on activity. However, it is acknowledged that the success of the industry is often inextricably limited to midstream and downstream activity. The difficulty with both midstream and downstream activity is proving and quantifying the additionality of their contribution.

In terms of midstream and downstream activity, it could be suggested that much of this activity would not have occurred in New Zealand, and definitely not in Taranaki were it not for the discovery and production of oil and gas in the region. With the industry and associated infrastructure established and concentrated within Taranaki, it provides the base for further activity, not only within the region, but nationally and internationally.

6.1 METHOD The EIA follows the accepted practice of identifying the direct activity associated with the industry and then applying multipliers1 to determine the indirect and induced effects of that initial activity.

For this analysis we have used employment as the measure of activity. Employment has been identified through a variety of sources, including the BERL Regional Database, public information (such as websites and annual reports) and through direct contact with businesses in the O&G industry.

The approach to identifying industry activity differs from that used in the BERL 2007 report. The 2007 analysis relied on Statistics New Zealand data to identify direct employment in the O&G sector and then used multipliers to determine the indirect and induced effects.

Based on the interviews we have subsequently undertaken we believe that these numbers grossly underestimate the direct employment resulting from investment and activity in the O&G sector.

This under-estimate results from the classification of key O&G support companies to industry segments outside traditional O&G groupings despite the fact that O&G companies form their primary customers.

To avoid double counting, where the company might be included in the indirect multiplier as well, we have excluded the first round effect when calculating the indirect and induced impacts for the industry. However, for downstream and project impacts, where we have not identified the major suppliers, we have included the first round effects in the calculations.

1

At the national level, multipliers have been used that were revised by BERL/Infometrics to 2008. These are multipliers broken down into 59 industries.

At the regional level we use Butcher and Associate multipliers for the Taranaki Region, updated to 2006. These multipliers are broken down into 53 industries. We have used GDP deflators that take into account inflation to provide real prices and have allowed for the difference in industry breakdowns to ensure consistency across the two sets of multipliers.

42

The Wealth Beneath Our Feet

Kingsway Menswear Kingsway Menswear has been selling men’s clothing from a high-profile corner site in central New Plymouth for 75 years, and has seen the oil and gas sector expand from a small niche industry to a major driver of the local economy.

Paul Clarke and his son Matthew own and run the business, which specialises in high quality and high service men’s fashion with a specialty store focusing on Canterbury branded apparel and corporate team wear. While a clothing store may not be an obvious benefactor from Taranaki’s oil and gas industry, the business is quick to acknowledge three positive impacts of having the sector - and its globally connected workforce - based in Taranaki.

“There’s an obvious retail spinoff, as the many overseas contract workers come into the region and seek quality brands and service,” says Paul.

“It has also contributed to our move into team wear featuring iconic Kiwi brands like Canterbury to meet the needs of corporate groups. There’s strong demand for company branded gear and event clothing for training courses and conferences.”

The third main benefit is a little less obvious, and relates to

through sponsorship, but also by sharing their time and expertise.”

“Sitting at business and community events, you can be at the same table as international business leaders. It’s fantastic,” enthuses Paul.

He sees the flipside as the contract nature of the industry.

“While we do get a lot of nationalities through the door, and in many cases become friends with them, we see a lot of customers from the industry come and go,” says Paul.

“In that regard it’s a lot like film” he says, in reference to the Warner Brothers production of Last Samurai, which injected around $50 million, Tom Cruise and Billy Connelly into the region in 2002-2003.

This constant flow of people with international spending power has enabled Kingsway to focus on building a successful business to meet their needs.

“We stock a number of high quality classically styled, more hardwearing brands almost exclusively for the oil and gas industry market, but we’re really known for our quality and service. This seems to be well respected by the international customers we see regularly.”

But when it comes to the broader economic impact of the oil and gas industry, he is unequivocal.

and links, have made a real impact by getting out there

“There’s no question the industry is a huge benefit to the region. It’s certainly played a part in Taranaki’s weathering of the economic storm better than most, and we have traded well throughout the recession, thanks in

and supporting community groups and organisations,

part to them.”

the myriad ways the sector supports the wider community.

“CEOs, managers and staff, with international experience

The Wealth Beneath Our Feet

43

6.2 OIL AND GAS – UPSTREAM As a part of the project we identified companies that were either directly active in the O&G industry or were heavily involved in the industry as first round contractors or suppliers. We do not consider this a definitive list and in some cases an estimate of FTEs has been necessary.

However, these shortcomings are likely to result in an underestimate of the size of the industry and so the final EIA can be considered conservative.

Through a combination of face-to-face and telephone interviews, supplemented with publicly available information and best estimates, we were able to identify employment for the majority of O&G associated companies both nationally and within the Taranaki region.

At this stage we can comfortably suggest that, although higher than the figure achieved through other means , this economic impact is a conservative estimate.

The following table breaks down employment within the companies assessed to nine industry sectors.

Our analysis to date has identified 139 companies where a significant identifiable portion of their activity is directly associated with the oil and gas sector in New Zealand.

The authors believe that this list includes all of the upstream industry participants and the majority of the midstream companies operating in the New Zealand O&G industry. These companies employ approximately 3,400 FTEs in New Zealand, 3,200 of which work in the Taranaki region.

With estimates of employment at a national and Taranaki level, we are able to apply multipliers to determine contributions to GDP and output, not only from direct O&G companies but also incorporating indirect and induced effects.

2

Employment Breakdown Number of Companies

New Zealand

Taranaki

E&P Companies

19

666

605

Drilling

6

173

173

Engineering

23

1,073

1,053

Government Agencies

4

13

2

Logistics

13

467

466

Professional Services

11

22

13

Research and Training

8

53

31

Technical Services

47

479

466

Wholesale Trade

8

428

396

Total

139

3,374

3,205

Employment in O&G (Source: BERL, Rockpoint)

2

44

Such as Business Frame data or PEPANZ membership estimates. Economic impacts applying these sources are included in the appendix.

The Wealth Beneath Our Feet

Directly, the O&G industry accounts for approximately one percent of national GDP and one fifth of one percent of national employment. However, within Taranaki, the O&G industry accounts for almost a third of regional GDP, and seven percent of employment.

NZ O&G Sector

Taranaki O&G Sector Direct

Direct + Indirect

Total Impact

Direct

Direct + Indirect

Total Impact

Output ($mn)

2,703

3,184

3,544

Output ($mn)

2,541

2,737

2,894

GDP ($mn)

1,782

2,003

2,182

GDP ($mn)

1,684

1,771

1,843

Employment (FTEs)

3,375

4,694

6,062

Employment (FTEs)

3,206

3,681

4,221

Source: BERL, Rockpoint

Source: BERL, Rockpoint

Based on 3,375 FTEs employed directly in O&G upstream activity, the industry contributes $1.78 billion to the New Zealand economy. Adding indirect and induced effects to the figures increases employment to 6,026 FTEs and GDP to $2.18 billion.

Within Taranaki, employment is only slightly lower than the national level at 3,206 FTEs and contributes $1.68 billion to the region’s economy. Adding indirect and induced effects, these figures increase employment to 4,221 FTEs and GDP to $1.84 billion. This is because almost all activity related to the O&G industry occurs in Taranaki.

3

4 Employees spend money (induced) 1 O&G companies are attracted to Taranaki/NZ by potential O&G economic prospects Leads to more activity and employment by local businesses

2 O&G industry spend money in Taranaki/NZ undertaking exploration, construction and production, creating employment (direct)

$

3 Local companies buy goods and services (indirect)

3

Note that the numbers do not add up exactly due to rounding. Similarly, reporting of numbers in the text are rounded to avoid spurious accuracy and legibility.

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45

O&G vs dairy

6.3 MAJOR CONSTRUCTION PROJECTS

The O&G industry in Taranaki can be compared to the other major industries in the region. A good gauge of its significance is a comparison to the dairy industry4.

The approach applied in this report differs from that in the 2007 BERL EIA report in that a full life-cycle assessment has been undertaken. The process assessed spans from exploration through to production and decommissioning, and is broken down to a project or well basis.

Indicator

O&G

Dairy Taranaki Total

Employment (FTEs)

3,206

6,436

47,930

GDP ($mn)

1,684

678

5,307

525,296

105,345

103,162

130

2,621

14,517

Labour Productivity (NZ$/ FTE) Business units

Source: BERL regional database, Statistics NZ

While the O&G industry employs less than half as many people as the dairy industry, it contributes almost 2.5 times more to regional GDP. This is largely a result of the capital intensity of the industry, which results in high labour productivity of the sector at over $525,000 per FTE. 4

46

This includes both dairy cattle farming and dairy processing.

The Wealth Beneath Our Feet

As such, industry activity has peaks and troughs depending upon the projects in train and the stage of development. In recent times, there have been a number of field and well development projects (new well projects as well as existing well development projects) that have seen the industry operate at a relatively high level of activity for a number of years. These ‘major’ projects are largely completed and activity is starting to ease (although there are still some large projects underway, for example the Todd Energy LPG facility).

The development of new technology in the global O&G industry has resulted in changes to how developments are likely to be undertaken in the future and also provides the opportunity to extend the productive life of existing fields.

For example, the Maui field was anticipated to be written off as fully depleted several years ago. However, new technology has enabled small pockets of gas to be detected and other areas of low pressure gas to be extracted. In addition much of the remaining gas is trapped between layers of water and is being accessed by horizontal drilling.

Each project has a different economic impact, depending upon where the activity occurs (onshore vs. offshore), how the resource is extracted (piped onshore or direct export via FPSO), and what is being extracted (oil, gas or both).

6.4.1 Royalties

This report considers projects as separate to the general economic activity, as activity can potentially change dramatically depending on the success or failure of projects. The economic impact of individual projects can be significant and would skew the economic impact of the industry if included.

In the year to June 2010, total royalties collected by the Government amounted to $451 million.

6.4 ROYALTIES AND TAX E&P companies are required to pay royalties on the oil and gas produced as well as company tax on profits generated in New Zealand.

Royalties on the oil and gas produced make up the major proportion of total royalties collected by the New Zealand Government.

Oil royalties accounted for $399 million of this (89 percent) and gas levies amounted to $33 million, (or 7 percent).

Over the last six years, O&G has accounted for, on average, 92 percent of total annual royalties collected by the Government. However, over the last two years, O&G royalties have accounted for closer to 97 percent of all royalties collected. This coincides with a significant (fivefold) increase in royalties in the 2008/2009 year, predominantly an outcome of increased oil production5.

Exclusion of projects from the EIA Our EIA does not include the activity generated from significant construction projects. This is due to the value and the variability of these projects, which could skew the EIA results.

For example, the Kupe project cost $1.3 billion and took several years to reach production. While a large portion of this expenditure was spent offshore (on goods and international consultancy) a good portion of it was spent in New Zealand on local production and services.

The earlier report (BERL, 2007), estimated that around $620 million of this project would have been spent within New Zealand (including imported equipment and services), mostly in Taranaki.

That report looked at the construction costs of the five most recent projects undertaken in New Zealand – Kupe, Cheal, Pohokura, Maari, and Tui. Nationally, it was estimated that the last five projects resulted in total employment of 8,715 FTEs for one year and contributed around $660 million to GDP.

5

Last five projects (New Zealand) Direct

Direct + Indirect

Total Impact

Output ($mn)

954.2

1,493.8

2,046.6

GDP ($mn)

276.7

455.3

658.2

4,053.1

6,424.4

8,715.1

Employment (FTEs) Source: BERL

Within Taranaki, the construction of the last five projects contributed $450 million to the regional economy and employed 6,350 FTEs for one year.

Last five projects (Taranaki) Direct

Direct + Indirect

Total Impact

Output ($mn)

756.5

1,210.4

1,354.2

GDP ($mn)

219.4

379.5

454.1

3,506.3

5,680.3

6,346.5

Employment (FTEs) Source: BERL

Mineral royalties have also increased each year, although off a significantly lower base ($11.3 million in 2009/2010).

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47

Royalties 600 500 400 300 200 100 0

2004/2005 2005/2006 2006/2007

Energy Resource Levies Gas

2007/2008 2008/2009 2009/2010

Royalties - Petroleum

Total Royalties and levies

Since the 1970s, the O&G industry has supplied a steady income stream to the Government via royalties.

National Royalty Statistics

400 350 300 250 200 150 100 50 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

0

Source: Crown Minerals

6.4.2 Tax

Total royalties started increasing in 1976 before easing off to between $100 and $150 million per annum through to 2008, when royalties spiked to over $350 million6.

As well as royalty payments, oil and gas companies pay company tax on profits.

Between 1970 and 2008, the Government received close to $3.1 billion in royalties. An important observation is that over ten percent of that came in one year (2008) and that annual royalties only surpassed $100 million in 1998.

6

The upstream oil and gas sector contributed around $1.4 billion in company tax between 2004 and 2009. This is equivalent to around three percent of the entire company tax take in New Zealand over the period6.

Source: Aggregated data was collated and presented for this report by the Inland Revenue Department.

Note that the Crown Minerals figures for royalties and levies are not directly comparable to the IRD figures.

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The Wealth Beneath Our Feet

Royalty Regime New Zealand’s petroleum royalty regime is based on the greater of 5 percent of the value of production (AVR) or 20 percent of field profits (APT), in most cases the latter.

on-stream. The increase reflects both the oil/liquids rich new fields, and that the older fields (Maui and Kapuni) were subject to a different gas-based royalty structure.

While some lag is apparent (particularly in 2008), royalties have averaged $0.80/GJ (or $4.50/boe).

Given lack of existing infrastructure outside Taranaki, it is unlikely unit profitability (and so royalties and corporate taxes) will be as high elsewhere, but nevertheless this provides an initial gauge.

Economic returns are also derived from E&P company tax, and the wider benefits of local employment.

The correlation between royalties and production (chart below) shows the sharp rise in royalties as new fields such as Pohokura (June 2006), Tui (July 2007) Maari (February 2009) and Kupe (August 2009) came

Petroleum Production vs Royalties Gas - PJ

Oil - PJ

O&G Royalties - $million

400

800

300

600

200

400

100

200

0

2000

2001

2002

2003

2004

2005

2006

2007

2008 2009

2010 est June Year

0 Source: MED, IRD, Rockpoint

The Wealth Beneath Our Feet

49

6.5 EXPORTS The O&G industry is a major contributor to New Zealand’s export earnings. Oil was New Zealand’s fourth largest export earner by value in 2009, though in 2008 moved into third place ahead of wood. It currently sits just behind the wood industry in terms of export value as seen in the following chart.

In 2008, oil exports were valued at $2.95 billion or seven percent of total exports. In 2009, the value of oil exports eased to $1.9 billion or five percent of total exports.

The top four sectors presented in the chart account for around 40 percent of all exports out of New Zealand.

That the increase to $3 billion in 2008 was due to two oil fields coming onstream indicates that a major discovery or increased production from existing fields could have a profound effect on New Zealand’s export earning capability. This is in contrast to the productivity and activity efforts required to increase the potential earnings from other industries.

The significance of the O&G industry in terms of export earnings cannot be understated. Export earnings from the O&G industry are well above other, much more heralded industries such as viticulture and aquaculture.

NEW ZEALAND’S LARGEST EXPORT $10 $9

Dairy

$8 $7 $6

Meat

$5 $4 $3

Wood

$2

Oil

$1 $0

2000

2001

2002

SOURCE: STATISTICS NEW ZEALAND

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The Wealth Beneath Our Feet

2003

2004

2005

2006

2007

2008

2009

6.6 OIL AND GAS – MIDSTREAM AND DOWNSTREAM

Commercial users, spanning wholesale and retail trading, health care and other services represented 6.1PJ in 2009.

Midstream and Downstream reflects the gas extraction component of the oil and gas sector. Only a very small proportion of oil produced is refined locally7, whereas all gas is consumed or processed domestically.

Users of gas are generally split between electricity generation, the petrochemical industry (methanol and urea) and direct reticulated users (household and business consumers).

Downstream natural gas activities are largely governed by the capacity and location of the North Island’s current gas reticulation network. Total annual consumption of gas has fallen from 235PJ in 2000 to 165PJ in 2009. In 2009, the electricity generation and co-generation sector was the largest consumer of New Zealand gas representing 79PJ collectively (electricity 35 percent, co-generation 12 percent) down from 92PJ (40 percent) in 2000.

Industrial users, spanning chemical manufacturing, meat processing, dairy and other primary industries, comprise the second largest sector, consuming 44PJ in 2009 (27 percent of total gas production).

Commercial 5%

Finally, residential users represented just 6.8PJ (4 percent) for the same year.

Once piped, gas is either converted into electricity by energy companies, methanol by Methanex, urea fertiliser

by Ballance Agri-nutrients, or consumed directly by commercial or residential users.

As noted earlier, Taranaki production stations or gas treatment plants are located at Oaonui, Kapuni, Waihapa, Rimu, Kaimiro and the McKee oil and gas fields. There are large gas-fired power stations at nearby Stratford and Whareroa.

While it is difficult to argue that downstream activity is completely the result of upstream activity (due to the need to meet the energy requirements of local industry and consumers, and the availability of alternative sources)8, a strong case can be made for a number of incremental activities occurring in Taranaki as a result, particularly around feedstock.

Residential 4% Petro chemicals 16%

GAS USE 2009

Industrial 28%

Electricity generation 35%

Cogeneration 12%

SOURCE: STATISTICS NEW ZEALAND 7

Less than 10 percent of feedstock into the New Zealand Refining Company is from local oil production. 8 In the absence of upstream oil and gas, you would expect that alternative energy sources would have been used for energy generation – most likely coal or imported fuels. However, you could also argue the benefits of gas over alternative non-renewables from an environmental sustainability perspective.

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51

6.6.1 Feedstock The two main feedstock users of gas are Methanex and Ballance, who produce methanol and fertiliser respectively. The majority of Methanex’s production is exported, while Ballance fertiliser is mainly supplied to the domestic market.

Ballance Agri-nutrients Limited is one of New Zealand's leading fertiliser specialists.

Its head office is in Tauranga (Mount Maunganui) and it has four manufacturing plants spread throughout New Zealand.

Both of these industries would not exist without the availability of the gas feedstock. Despite this, technically they are not part of the O&G industry. Hence, the economic impact of feedstock (namely, Methanex and Ballance) is considered separately from the base EIA and the benefits in terms of exports, output, GDP and employment could be considered additive.

Ballance employs around 170 FTEs at its ammonia-urea manufacturing plant (Petrochem) at Kapuni in Taranaki.

Using natural gas from offshore fields around the Taranaki Coast, this plant produces 150,000 tonnes of ammonia and 260,000 tonnes of urea a year.

Dynea is a global leader in providing high performance adhesion and surfacing solutions.

At the company’s New Zealand branch in New Plymouth, the company uses both domestically produced methanol and urea (as well as burning some gas) to produce formaldehyde (used by Ballance) and urea formaldehyde resin in the timber products industry. The company employs approximately 25 staff. Its activities not only contribute to economic activity, but they attract new technologies and add-value to New Zealand’s manufacturing base.

Arguably Dynea would not exist in New Zealand without both urea and methanol production.

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The Wealth Beneath Our Feet

The vast majority of the urea is destined for use on New Zealand farms and a small quantity of ammonia and urea goes to non-farming commercial markets. The urea fertiliser produced by Ballance is an essential input to New Zealand’s primary sector and is a strategically important source of import substitution as it provides the agricultural industries with some protection from the price fluctuations of global commodity markets and currencies.

Methanex produces methanol and owns two New Zealand methanol production facilities in New Plymouth. Gas is the key feedstock in the methanol process and the availability of gas at a competitive price in the methanol market can see major increases in feedstock activity. It could be argued that without a ready and reliable access to gas supply Methanex would cease to operate in the Taranaki region.

Equally importantly the presence of Methanex and the relatively easy scalability of its operations provide strong reassurance of market demand to gas producers in New Zealand. This alleviates industry concerns about the commercial prospects for gas rich discoveries.

Methanex, based on current production facilities, has the ability to significantly increase production. In 2008, Methanex restarted Motonui 1 and is currently producing around 830,000 tonnes of methanol per annum. Through recommissioning Motonui 2, Methanex could potentially increase production to around 1.5 million tonnes per annum and increase employment by around 20 percent9.

The second plant in Waitara Valley could also be recommissioned if desired, providing Methanex with the capability to produce 2.4 million tonnes of methanol annually.

9

Methanex has recently announced that it will be re-commissioning Motonui 2 to coincide with the required maintenance shutdown of Motonui 1.

While production is likely to remain constant, this is a major exercise with significant investment. It also signals that Methanex could potentially gear up production if feedstock were available at the appropriate price.

Methanex New Zealand is New Zealand’s only methanol manufacturer. The company has two Taranaki-based facilities – one at Motonui and the other in the Waitara valley.

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53

6.6.2 Economic Impact of Feedstock Companies Combining the employment at Methanex and Ballance there are 295 FTEs employed in the manufacture of methanol and fertiliser nationally, with 290 of those employed in the Taranaki region. There are a further 60 contractors on site each day. Applying national and regional multipliers for this activity we arrive at the following tables.

DOWNSTREAM USERS (NZ)

DOWNSTREAM USERS (Taranaki)

Direct

Direct + Indirect

Total Impact

Direct

Direct + Indirect

Total Impact

Output ($mn)

401

706

799

Output ($mn)

352

490

522

GDP ($mn)

121

251

298

GDP ($mn)

106

164

179

Employment (FTEs)

355

1,267

1,712

Employment (FTEs)

350

735

868

Source: BERL, Rockpoint

Source: BERL, Rockpoint

Nationally, Methanex and Ballance directly contribute over $120 million to GDP. Applying multipliers, employment increases to over 1,700 and GDP contribution increases to almost $300 million.

Within Taranaki, these two companies provide direct employment for 350 FTEs and contribute $106 million to the regional economy. Applying multipliers increases employment to almost 870 FTEs and GDP to $180 million.

This activity would not be located in Taranaki if it were not for the output of the O&G sector. Furthermore, this activity would not occur at all in New Zealand if gas feedstock was not available.

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The Wealth Beneath Our Feet

6.7 INFRASTRUCTURE

(KGTP), Oaonui Production Station, and the McKee

The concentration of New Zealand’s O&G industry

Production Station (currently being upgraded).

in Taranaki has resulted in the development of key

In addition to extracting high value oil/liquid fractions

infrastructure, both in Taranaki and the North Island of New Zealand.

6.7.1 Field facilities (upstream) All producing oil and gas fields in New Zealand are located within the Taranaki basin. Development of each field has required the construction and installation of physical infrastructure including production wells, control equipment, surface gathering systems and production stations.

6.7.2 Specialised facilities (midstream) Most production facilities in Taranaki enable the preliminary separation of the produced fluids - into fractions of oil, gas, water and sediment - to yield

such as NGL and LPG, they are also able to separate out impurities such as CO2, nitrogen and sulphur (such as KGTP). Unless a market tolerant of non-specification gas can be served by a dedicated pipeline, all field production stations export ‘specification’ gas to industrial, commercial and retail markets.

Storage and dispatch facilities for crude oil operate at or near Port Taranaki, while most other ports provide storage for processed oil products. The Maui pipeline, owned by the Maui Development Companies, provides a strong link between the Maui field and a major hub at Rotowara (Waikato), while Vector owns and operates a gas transmission pipeline network which carries gas to major load centres around the North Island.

product suited to existing wholesale markets and which

The New Zealand Refining Company owns and operates

can be safely transported. When onsite facilities do not

New Zealand’s only oil refinery, at Marsden Point, which

yield marketable products, some specialist facilities

converts imported crude oil into marketable products

are available including the Kapuni Gas Treatment Plant

such as diesel, petrol, bitumen and by-products.

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55

6.7.3 Downstream facilities Downstream infrastructure provides transport and delivery of processed (marketable) product from the gas transmission pipes or oil product storage facilities to the various end markets such as industry, homes and businesses. This is achieved via local gas distribution networks owned by Vector, Powerco, Todd and others.

There are three gas-fired power stations in Taranaki, two located at Stratford (Contact Energy’s 370MW TCC and the new 200MW Stratford peaking plant), and Hawera (Todd Energy’s 70MW cogeneration plant at Fonterra’s Whareroa plant). Over recent years Contact Energy has decommissioned two old plants, the original 240MW Stratford Station and the 525MW New Plymouth station.

While gas-fired plants could potentially be located anywhere in the North Island, each of these is located in Taranaki due to the ready availability of gas.

In terms of electricity supply, gas accounts for 25 percent of generation and three-quarters of non renewable generation.

Oil products are similarly distributed from storage facilities at the ports through to the retail network (petrol stations) by road10. Downstream activities include marketing and trading operations.

The following map presents the current extent of Taranaki Basin oil and gas activity and infrastructure.

10

56

Via specialised trucks modified to transport hazardous substances.

The Wealth Beneath Our Feet

6.7.4 Maui Pipeline and Gas Pipeline Infrastructure The Maui pipeline is a 313 kilometre gas pipeline connecting the Maui production station at Oaonui (Taranaki) to Rotowaro (South of Auckland). It receives gas from Maui, Pohokura, Turangi, and Kowhai and delivers these to the Vector transmission system at Frankley Road, Pokuru and Rotowaro, as well as Methanex and the Genisis generators at Huntly.

In addition, more than 2,300 kilometres of high pressure gas pipelines throughout the North Island are owned and operated by Vector. They transport gas at high pressure from production stations in Taranaki to a range of industrial and domestic consumers.

This gas pipe system has been built solely as a result of the discovery and extraction of gas out of the Taranaki region. It is difficult to value the economic impact of this system.

However, it is safe to assume that it is supported by a business case that provides cheaper energy solutions in terms of transportation and availability.

Selected examples of infrastructure investment stemming from the O&G industry in New Zealand include: TARANAKI OIL AND GAS INFRASTRUCTURE Gas Field

Kapuni / Maui pipeline to: Auckland

Oil Field Power Station Petrochemical Plant Production Station

Motonui (Mx)

Pohokura

Pipelines

Urenui / Ohango Waitara (Mx)

Moturoa Port Taranaki New Plymouth

Roads

McKee

Mangahewa Turangi

Kaimiro

Kahili

Windsor Ngatora

Tariki / Ahuroa Radnor TCC / Stratford

Pateke Amokura

Waihapa / Ngaere

Oaonui

Tui FPSO

Cheal Ammonia Urea

Maui A

Inaha

Kapuni

Kiwi Cogen

Rimu

Maui B

Kauri

Kupe Platform

Kapuni pipeline to: Palmerston North Hawkes Bay Wellington

Maari Platform + FPSO Manaia 0

10

Km 20

30

40

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57

6.7.5 Roading

6.7.6 Port Taranaki

Due to the nature of industry in Taranaki, and in particular O&G, the roading system has been built to support heavy (in terms of weight) and bulky loads. Roads to the port have been built to a higher specification to handle heavier loads and the routes enable clear access to allow for larger/higher loads.

Port Taranaki has developed the necessary infrastructure to store and transport petrochemicals and service onshore/offshore production facilities. Pre-processing facilities, petrochemical storage and gas pipelines have also been developed to support the O&G industry.

Increasing transport congestion and funding limitations for state highway improvements have created real challenges for the urban roading network in New Plymouth.

Additional investment may be required to meet the growth aspirations of the O&G sector.

Around half of all Port Taranaki employees are focused on O&G related activity. The Port is well placed and has the expertise to support O&G activity throughout New Zealand. Moreover, the Port is looking at ways to encourage further activity within the industry in Taranaki through providing facilities and resources to service the industry nationally and internationally.

The port is effectively the “Hub� for servicing and supporting all of the offshore Taranaki O&G fields.

Given the specialist expertise required to undertake this role and the closest offshore facilities being in Australia or Singapore it is possible Port Taranaki would be the main hub to support any offshore exploration activity in New Zealand. It is also the only New Zealand port with significant experience in the operational and safety standards required to handle crude oil, LPG, and methanol.

Accordingly, if there is a substantial discovery elsewhere in New Zealand it is likely that Port Taranaki will be involved in some capacity in establishing the required handling capability.

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The Wealth Beneath Our Feet

Port Taranaki A report on the economic impact of Port Taranaki (BERL, 2007) suggested that the Port and the O&G industry were inextricably linked. The O&G industry could not function without a port, and a significant proportion of Port Taranaki’s activity is related to the industry.

Port Taranaki is geared to deal with the O&G activity and has the infrastructure and expertise necessary to service it. Crude oil is the most significant product item transported through Port Taranaki, followed by methanol and petrol / fuel oil.

The report found that Port Taranaki contributed around $290 million to regional GDP and accounted for the employment of close to 1,500 FTEs. As an enabler of business, most of the Port’s impact was through related industry activity, including services to the oil and gas sector.

Port Operations Direct

Total

Output ($mn)

32

49

Value added (GDP $mn)

14

22

137

228

Direct

Total

Output ($mn)

370

555

Value added (GDP $mn)

174

268

Employment (FTEs)

770

1,257

Direct

Total

Output ($mn)

402

604

Value added (GDP $mn)

188

290

Employment (FTEs)

908

1,485

Employment (FTEs)

Port related activity

Total impact

Source: BERL

The direct economic impact of the Port’s role as an employer suggests a contribution to employment of around 228 FTEs and $22 million to regional GDP.

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59

6.7.7 Todd Energy’s LPG facility

The refinery processes approximately five million tonnes

Todd Energy is in the process of building an LPG

of crude oil per year. It sources its crude mainly offshore,

plant in Taranaki at a cost of $65 million. The LPG plant

from the Far East, Indonesia, and Australia. Less than 10

will enable Todd Energy to produce LPG sourced from

percent of feedstock comes from within New Zealand.

its Mangahewa and Pohokura fields and deliver the product to customers via Todd Energy’s retail company, Nova Energy.

The New Zealand Refining Company directly employs around 330 people, with a further 47 employed at the Independent Petroleum Laboratory, which is a subsidiary

It is expected that the project will create in excess of

company. At any one time, a further 130 contractors are

200,000 man hours of work over an 18 month period. The

on site. The company paid out $43.6 million in wages in

project will have a site workforce of around 45 people at any

the year to June 2009, suggesting an average wage of

one time, with up to 100 workers on site during peak activity.

around $130,000.

The project is expected to be completed by July 2011.

A number of New Zealand companies are involved in the project. Transfield Worley will carry out the engineering, procurement and construction. Plant & Platform is involved in pipeline modifications. Fabrication, mechanical and electrical installation work is tendered to local contractors.

Applying employment activity to national multipliers suggests that the company has an economic impact of over 3,400 FTEs, contributing $1.1 billion to the New Zealand economy.

oil refining

It is unlikely that this activity would have occurred in

Direct

Direct + Indirect

Total

1,646

2,458

2,617

Taranaki if it were not for the O&G industry. This facility will provide a domestic supply capability, which is important for

Output ($mn)

the majority of gas users in the South Island. There are LPG

GDP ($mn)

571

1,008

1,091

Employment (FTEs)

507

2,645

3,434

reticulation facilities in Christchurch and Queenstown and it is a growing source of energy for industrial users that do not have access to reticulated natural gas.

Source: BERL, Rockpoint

6.7.8 New Zealand Refining Company11

the Electricity Commission suggested that the foreign

In contrast to Todd Energy’s LPG facility, a key example

exchange savings to New Zealand by purchasing and

A submission by the New Zealand Refining Company to

of midstream O&G activity that is unrelated to upstream

refining crude oil rather than importing more expensive

O&G activity in Taranaki is the New Zealand Oil Refinery.

finished product is in excess of $300 million per annum

Based in Whangarei, the New Zealand Refining Company

and that in 2006, the direct tax revenue generated for

operates the only oil refining facility in New Zealand.

New Zealand was in excess of $70 million.

The company provides 70 percent of the domestic market’s petrol, 84 percent of its diesel, 83 percent of its aviation fuel, 100 percent of the fuel oil and 75 percent of domestic bitumen. A pipeline delivers fuel to Wiri

According to their 2009 annual report, the New Zealand Refining Company had turnover of $250 million and paid company tax of $9.8 million.

in South Auckland, for supply to the Auckland market,

However, this activity is not attributable to the upstream

and the rest of New Zealand is serviced through coastal

O&G sector in that it would exist even if there were no

shipping and trucking.

exploration and production in New Zealand.

11

Information on the New Zealand Refining Company is taken from their 2009 annual report, their website www.nzrc.co.nz and a submission dated 25 October 2007, which was downloaded from the electricity commission website at http://www.electricitycommission.govt.nz/pdfs/submissions/ pdfstransmission/Naan/NZRefining.pdf

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The Wealth Beneath Our Feet

Summary of Quantified Impacts Economic Impacts

NZ

Taranaki

O&G Industry Baseline EI

GDP ($m)

2,182

1,843

Employment (FTEs)

6,026

4,221

658

454

8,715

6,346

Last 5 Construction Projects EI

GDP ($m)

Employment (FTEs)

Feedstock EI

GDP ($m)

298

179

Employment (FTEs)

1,712

868

Port Taranaki EI GDP

290

Employment (FTEs)

1,485

NZ Refining EI GDP

Employment (FTEs)

1,091 507

Other Benefits

Exports ($m, 2009)

Royalties ($m, 2010)

Company Tax ($m, 2004-2009)

1,900 432 1,400

Energy Supply

Net Oil Import Dependency

63%

Electricity Generation

20%

The Wealth Beneath Our Feet

61

6.8 WIDER ECONOMIC IMPACTS

Aside from employment, GDP, royalties, tax, and exports, the O&G industry provides a wider set of economic benefits to Taranaki and New Zealand. These are the intangible benefits that are associated with a highly technical, capital-intensive industry being established in the region where outcomes are not easily quantifiable into employment or GDP. They remain, however, very important facilitators of economic growth and, in some cases, may have a greater impact than some of the more quantitative outcomes.

The O&G industry has had a noticeable impact on the Taranaki region, largely due to the cosmopolitan nature of its employees and the specialist inputs into the broader industry base. These other economic benefits are specified in the following diagram.

Contributing to a vibrant, growing region Community investment

Diversification and leverage

Reputation (regionally and nationally)

Wider Economic Benefits

Opportunities for industry expansion (offshore and into other sections)

Infrastructure development Technology transfer and innovation

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The Wealth Beneath Our Feet

Security of supply

6.8.1 Contributing to a vibrant growing region

Oil and gas is a major industry in the Taranaki region and plays a key role in its viability and vibrancy. The O&G industry attracts skilled individuals and their families to Taranaki, benefiting the region in terms of employment and the quality and value of that employment.

The O&G industry in Taranaki competes globally for its workforce, with a focus on skills rather than nationalities.

A large proportion of the oil and gas workforce are global experts and bring a high level of experience. Their pay rates reflect this accordingly.

They also contribute an international dimension to the region, including cultural diversity and new ideas.

A number of O&G industry employees apply these skills and experiences in other industry sectors and across the community. They become active participants within the region and often, because of their expertise, take corporate governance roles in social and community organisations.

Smaller, rural regions similar to Taranaki have found it extremely difficult to attract people of this calibre.

At the same time, locals in the industry often work globally, and so are exposed to international ideas and cultures, bringing these experiences back with them to the region. Taranaki benefits from this international exposure, which overcomes challenges of insularity and isolation and encourages diversity.

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63

6.8.2 Reputation and branding The concentration of activity within the Taranaki region enables the region and the country to develop a reputation and brand for oil and gas related activity. On a regional basis, the presence of the O&G industry within Taranaki has provided a point of national difference and competitive advantage and has positively influenced perceptions, identity and awareness about the region.

The infrastructure, experience, and concentration within Taranaki is such that New Zealand can compete globally for investment in exploration and production of oil and gas, as well as for its companies to bid for contracts to explore, build, maintain and decommission projects

overseas. This reputation and branding has grown organically in Taranaki over a long period of time, and continues to grow globally with each successful project completed locally. In many respects, Taranaki offers a location where lifestyle benefits match O&G employment opportunities in a global industry. Taranaki is cited as offering a better quality living environment, particularly for families, than many of the other bases of O&G activity such as the Middle East, Perth, Aberdeen and even Houston.

Anecdotally, the industry has found greater difficulty in attracting people domestically out of the main centres, rather than internationally, where the relative benefits of living in Taranaki are more apparent.

O&G influencing regional awareness, branding and perceptions Over 40 percent of out-of-region respondents participating in Perception Research commissioned by Venture Taranaki, identified the oil and gas industry as a business/industry they associated with the Taranaki region. Its presence also positively influenced

perceptions as Taranaki was considered a commercially progressive region with a talented workforce.

“Taranaki is going ahead because of the energy – offshore oil.�

What businesses or industries do you associate with Taranaki?

Dairy farming/Fonterra/farming (general) Oil and gas Tourism/recreation Port/shipping Agriculture/nurseries/forestry Manufacturing/engineering/stell/industrial Fishing/fisheries Other farming (other than dairy)/freezing works Chemicals Retail (general) Bread/bakery Boat building Cheese Energy Arts and crafts Trucking Horse racing Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

Details: The survey was independently conducted, by telephone. n=900+ with respondents living in Auckland, Manawatu & Waikato. The question was structured in an open format, so potential answers were non-prompted.

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The Wealth Beneath Our Feet

6.8.3 Security of Supply While the vast majority of oil is exported directly, gas plays a key role in meeting the energy needs of New Zealand.

Indigenous crude and condensate accounted for only three percent of feedstock into New Zealand Refining in 2009, with the remainder imported. However, a measure of security of supply, where net imports are determined suggests that Net Oil Import Dependency was 63 percent (in 2009). Therefore if supply was threatened, local content could increase to supply up to 37 percent of local demand for oil.

From a broader energy perspective, gas accounts for around 20 percent of energy supply in New Zealand.

It is also a major input into electricity generation, also accounting for 25 percent of total generation. However,

in terms of non-renewable generation, it accounts for closer to three-quarters of generation. This is important when considering the need for uninterrupted supply and the variability and irregularities that can occur with renewable sources, for example in prologued windless periods or droughts.

6.8.4 Infrastructure development Investment by the O&G industry has fostered the construction and utilisation of infrastructure. Not only have developments fostered industry specific infrastructure, such as pipelines, but catalysed investments in roading, shipping and air transport. The presence of the industry also increases use of general infrastructure such as use of the provincial airport for national and connections to international flights.

The importance of gas to New Zealand •• New Zealand is heavily reliant on weather ••

•• •• ••

dependent renewable generation Government’s 90 percent renewable target is a good long-term goal – but not at the expense of security of supply.

Gas is a key player in managing peak demand in New Zealand generation.

Gas and geothermal – the most cost-effective generation options with a lower CO2 footprint.

Consenting hurdles and unit cost dampen competitiveness of hydro and wind.

Source Origin Energy: The future of Gas in New Zealand

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65

Helicopter underwater escape training – People in the pool getting out of the ‘helicopter’ is taking place at the Marine Training Centre based New Plymouth. M&O Pacific are the only company accredited to carry out the OPITO training in New Zealand.

6.8.5 business system enhancement

M&O Pacific

The specialist requirements of the O&G industry have triggered overall improvements in business systems, especially health and safety.

The head office for M&O Pacific is in New Plymouth, Taranaki, the heart of the oil and gas industry within New Zealand.

The complexity and high specifications required by the sector has resulted in requirements for suppliers to upskill. For example, the O&G industry places great emphasis on environmental issues and health and safety standards, and in doing so have raised both the awareness and proactive management of environmental and safety issues, through their systems and industry leadership.

A number of the engineering and O&G companies have adopted a leadership position with respect to H&S e.g. formation of the industry-led initiative Be Safe Taranaki Centre (BEST) which promotes and offers health and safety for the region.

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The Wealth Beneath Our Feet

M&O Pacific are a registered private training establishment offering OPITO BOSIET (Basic Offshore Safety Induction & Emergency Training) which includes HUET (Helicopter Underwater Escape Training) for the petroleum industry. All offshore workers in the oil and gas industry are required to hold either a current BOSIET or HUET certification. M&O also offer the STCW95 Maritime training for the support vessels to the rigs.

M&O are also NZQA accredited for fire, first aid and HSE training and IADC and IWCF accredited for Well Control training. The company has a specialised “hot fire” facility located in Taranaki. Their specialist courses and facilities are being utilised by a range of industries in New Zealand and around the Pacific Rim, highlighting the transferability and leveraging possibilities that extend from O&G.

6.8.6 Knowledge, skills and careers The presence and potential of the O&G industry for New Zealand has catalysed the advancement of knowledge in a cross-section of disciplines within the nation’s research institutes, universities, schools and businesses.

Education, careers, skill development and research in relation to New Zealand’s natural resources, and energy potential have been encouraged.

Industry scholarships, O&G papers and electives, trades and training have been introduced at tertiary level, including Universities, Polytechnics (such as WITT at Taranaki) and ITOs (e.g. EXITO).

Toolkits about the O&G industry have been distributed to secondary schools throughout the country, and piloted in Taranaki.

The O&G industry attracts and encourages a highly skilled workforce. Pay rates tend to be above average and career opportunities can be global in nature.

Specialist ‘hot fire’ training facilities are available in Taranaki for the O&G industry. This knowledge is being leveraged by other industries.

Pictured: A trainee (EXITO) watches on as a sample analysis is conducted at Shell Todd Oil Services.

Pictured: Health and safety (H&S) is extremely important in the O&G industry, and this consciousness has raised H&S awareness generally in the Taranaki region.

The Extractive Industries Training Organisation (EXITO) provides petrochemical qualifications for people working in New Zealand’s upstream oil and gas industry. Most training takes place on-the-job so trainees can apply the skills they gain to their job immediately.

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GNS Science, the nation’s prime provider of knowledge and research in earth processes is actively engaged in activities to enhance understanding of New Zealand’s petroleum resources with the aim of hastening their discovery. Their research played a major role with respect to New Zealand’s successful bid to the UN concerning the extension of the nation’s offshore territory beyond its EEZ.

6.8.7 technological advancement

The potential of New Zealand’s O&G industry has encouraged the advancement of knowledge about the nation’s natural resources.

•• This project included installation of the world’s tallest

The presence of O&G projects and its international connections and developments has catalysed the introduction of new technologies, required innovative solutions and encouraged technology stretch.

Examples include: Maari self-installing wellhead platform •• Drilling the longest well ever in NZ (7943m) •• Executing the world’s largest size casing-with-drilling application better than schedule Kupe: Achieved a world first in horizontal drilling: At 2.2km, this project set a world record for horizontal directional drilling of a shore line. Furthermore, the project: •• Resulted in no disturbance or damage to the shoreline •• Required installation of two tunnels under the cliff

Pohokura: In a New Zealand first, as a result of state-of-the-art engineering the Pohokura plant is operated remotely.

Other innovative & sustainable developments associated with the Pohokura Plant project include: •• The production station having a storm water

disposal system that includes a natural bio-filter of wetland plants •• Drill cuttings were disposed of at a local worm farm, digested and turned into compost.

Pictured: A field trip of the North Taranaki Coast by GNS and University staff to progress investigations.

Source: GNS science

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The Wealth Beneath Our Feet

6.8.8 Expansion, Diversification and leverage The skills, technology, standards and capabilities developed through the O&G industry are often able to be applied to other industries and these have enabled New Zealand companies to expand and pursue offshore opportunities.

These are technical capabilities that would have arguably been imported into the country had they not been developed locally through the O&G industry.

The presence of the oil and gas industry provides economic diversification helping to reduce peaks and troughs which can emerge from dependency on industries such as dairy and agriculture.

However, O&G also provides the potential for its industry techniques and capabilities to be applied and adopted in other industries and for other purposes.

For example, Fitzroy Engineering Group Ltd (“FEGL”) has adapted and applied the project management skills learnt in the O&G industry to the construction of super yachts, resulting in the establishment of Fitzroy Yachts.

Similarly, the technology requirements have added to New Zealand’s engineering capability and are transferable to other industries that require the containment and transportation of high pressure products. This includes transferability into geothermal projects, where a number of Taranaki businesses have become involved.

Pictured: 20% of New Zealand’s super yacht industy is based in Taranaki, catalysed by skills evolved through the O&G industry.

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6.8.9 Investment in the community Exploration and production companies lie at the heart of the O&G industry through generating projects and providing the funding required to develop and operate oil and gas fields. In doing so, E&P companies generate revenues from marketable products providing returns to their stakeholders and the Government though royalties and taxes. As large multinationals, E&P companies generate significant activity, revenues and employment in their own right.

In addition to their commercial investments, the O&G industry makes substantial contributions to community initiatives, events, social and education programmes.

These investments enhance the vibrancy of the region, and boost not only the economic but social fabric of the region and nation.

For example, both Todd Energy and Shell are major sponsors of the WOMAD festival in Taranaki, which encourages and promotes cultural diversity. Todd energy also sponsors the aquatic centre and raceway in New Plymouth, as well as a number of smaller programmes and initiatives. Shell is also a major sponsor of Puke Ariki, the regional museum.

Similar contributions can be identified for most O&G companies in the region. For example, Port Taranaki is a major sponsor of Taranaki rugby and the Taranaki Arts Festival.

The contribution of the O&G industry to community initiatives is in excess of $1 million per annum, potentially closer to $2 million.

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The Wealth Beneath Our Feet

WOMAD World of Music, Arts and Dance, is an internationally established Festival, which celebrates the world’s many forms of music, arts and dance.

Shell and Todd Energy are event partners of the New Zealand WOMAD festival, which is proudly hosted annually in Taranaki. WOMAD encourages experiences in culture and diversity, attracts national and international visitors to the Taranaki region and advocates positive values such as environmental sustainability and friendship. Todd Energy and Shell have both made a long term commitment to WOMAD, an event which over the years has become a part of the social fabric of the Taranaki community and a national icon. This year, as a result of increased sponsorship from the energy companies, the organisers are able to take WOMAD performance workshops into local schools.

Big Brothers Big Sisters Big Brothers Big Sisters (BBBS) is an international mentoring organisation that has been operating for over 100 years and is active in many countries world-wide.

The BBBS programme is active in New Zealand, and Taranaki in particular, largely due to the significant support the programme receives from AWE and the Tui Joint Venture partners. BBBS seeks to match young people (aged 7 to 17 years) with older mentors in a bid to provide positive, stable and independent role models.

AWE have stated that their fundamental aim is to leave any local community in better shape after they have conducted their O&G operations.

Extensive research in the USA examining the effects of mentoring on the young person have discovered that mentored youth are: •• 46% less likely to use drugs •• 27% less likely to begin using alcohol •• 52% less likely to skip school •• More confident in their school work •• Better able to get on with their families

The Taranaki branch is extremely active and is the largest BBBS agency in New Zealand. The whole community benefits from this partnership.

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7

Economic significance of Taranaki to the nation Statistically Taranaki has a small population and business base (circa 2.5 percent of New Zealand total). However, these measures fail to accommodate the strategic importance of the region to New Zealand’s current and future economic development.

Taranaki is home to the nation’s commercial discoveries and the production of its oil and gas resources. Royalties from this activity are provided to the Government and they pay for services that all New Zealanders can benefit from ($432m in 09/10). Within the region is also an extensive system of infrastructure and capability that supports upstream and midstream industry. The region’s infrastructure includes gas production and storage facilities, Port Taranaki, and the pipelines that transport gas throughout the north island. Feedstock includes Methanex and Ballance Agri-nutrients, and these are significant companies within the region that exist in New Zealand because of the availability of local gas. Fertiliser and urea made in Taranaki adds to the productivity of New Zealand’s farming industry.

Methanol, along with the oil from Taranaki’s fields, is a significant export earner for the nation. Their presence, combined with the proven and developed reserves of Taranaki’s fields, create a more attractive investment proposition for international explorers to come to New Zealand.

The energy sector supports four power stations within the region and supplies gas to others (including Huntly and Otahuhu). There is also the soon to be completed LPG production facility within the region. These facilities supply to commercial and residential end users.

Taranaki’s oil and gas industry is thus a crucial player in ensuring the supply of energy that supports economic growth in New Zealand.

The Taranaki region is the operating base for most of the E&P companies as well as the supply chains that support the industry. Taranaki accounts for around 3,560 of the 3,730 FTEs directly employed in the industry. These are high calibre skilled individuals that add to New Zealand’s professional, engineering and scientific talent and their projects attract new technologies to the nation.

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The concentration of O&G activity in Taranaki is a key strength for the New Zealand O&G industry and pivotal to the nation’s economic agenda. Arguably, no other industry has the same potential to radically transform New Zealand’s economic and social well-being as the oil and gas industry may do, if the anticipated reserves are successfully realised and developed. And the nation needs Taranaki to help make this happen.

To achieve transformation, New Zealand must successfully attract exploration investment from a globally competitive arena.

Whilst the Government may promote the nation’s potential prospectivity and user-friendly policies, Taranaki reaffirms to the potential investor the existence of New Zealand’s proven reserves, developed infrastructure, O&G capability, and systems. This reduces the risk and enhances the attractiveness of New Zealand’s proposition. ‘Brand Taranaki’ becomes inextricably linked with Brand New Zealand (O&G), as Taranaki is recognised globally as a region capable of supporting O&G exploration and activity within New Zealand. Often it is not the country that is the focus within O&G global circles, but its prime O&G zones.

Taranaki will thus play a critical role in any future activity of the O&G industry in New Zealand. The industry expertise and infrastructure that reside in Taranaki will attract and support O&G activity in New Zealand regardless of where it occurs, and will enable New Zealand to capture a greater share of the economic activity that the industry generates.

The experiences of Taranaki can be shared with the country’s emerging O&G regions, and its skills leveraged.

As the industry grows in New Zealand, local businesses will have increasing capability to secure project work offshore, thus continuing to build New Zealand’s export development. New Zealand will achieve its growth aspirations of more jobs, higher skills, wealth creation and export development.

Changing the way we look at Taranaki

Gas Field

Kapuni / Maui pipeline to: Auckland

Oil Field Power Station Petrochemical Plant Production Station

Motonui (Mx)

Pohokura

Pipelines

Urenui / Ohango Waitara (Mx)

Moturoa Port Taranaki New Plymouth

Roads

Taranaki Home of all NZ’s O&G fields, infrastructure, production, processing plants and industry supply chain.

McKee

Mangahewa Turangi

Kaimiro

Kahili

Windsor Ngatora

Tariki / Ahuroa Radnor TCC / Stratford

Pateke

Amokura

Waihapa / Ngaere

Oaonui

Tui FPSO

Cheal Ammonia Urea

Maui A

Inaha

Kapuni

Kiwi Cogen

Rimu

Maui B

Kauri

Kupe Platform

Kapuni pipeline to: Palmerston North Hawkes Bay Wellington

Maari Platform + FPSO Manaia 0

10

Km 20

30

40

Taranaki’s unique proposition to the nation: Current contribution: ••

•• ••

••

Royalties: $432 million p.a. - to pay for services that benefit all New Zealanders 4th biggest Export earner: Oil/Methanol Centre of NZ’s O&G talent (75%): Unique expertise, technologically advanced, globally connected Security and provision of NZ’s energy supply -- Households -- Industry

Future economic transformation enabler: ••

•• •• •• ••

Taranaki is NZ’s key asset in the bid to unlock NZ’s petroleum potential - achieve economic transformation A proven O&G region Brand Taranaki (O&G) = Brand NZ (O&G) Reduces risk for the O&G investor Adds weight to NZ’s offering.

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8

Where to from here?

This report shows that an optimistic outlook for the O&G industry in New Zealand is justified.

The potential of other basins in New Zealand is also attracting increased interest suggesting it is simply a matter of time (and wells) before a commercial discovery is made outside of Taranaki.

Positive indicators from sustained strong oil and gas prices driven by demand growth, a rising trend in drilling activity, recent commissioning of production facilities at four new oil and gas fields, and a policy environment that encourages exploration, all indicate that with some careful and considered interventions a bright and longterm future is ahead.

Pictured: New Zealand's extended offshore territory.

Further, technological developments such as deepwater exploration and drilling, enhanced oil and gas recovery, new development configurations and unconventional reserves are bringing frontier production towards acceptable risk-return ratios.

Geographically, New Zealand remains very sparsely explored and with considerable prospectivity.

New Zealand now has sovereign rights over more than 5.7 million square kilometres of ocean floor, an area 22 times that of New Zealand’s land area, three quarters the size of Australia or 1 percent of the earth’s surface.

The area is likely to contain billions of dollars worth of resources including petroleum. As deep sea exploration continues and production technology is extended, increasing portions of the EEZ will become accessible to O&G companies.

New Zealand remains prospective for further discoveries.

Even in the most intensely explored parts of the Taranaki Basin there are several reasons to anticipate further discoveries: •• Numerous untested prospects and leads, step-outs

from existing discoveries, and other new plays exist.

•• The number of wells (and well density) in analogous

producing basins in Australia and elsewhere are materially higher than even onshore Taranaki.

•• Statistical analysis of extensively explored (mature) petroleum basins shows a pattern in the size and type of discovery through time. Termed the Creaming Curve, this observes that large discoveries often occur early on in exploration history (low hanging fruit), while subsequent discoveries exhibit a consistent pattern of smaller and similar size and type through time.

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Source: GNS Science

Any discoveries will generate significant economic benefit to the country in terms of: •• Investment and employment in construction, •• Employment and GDP in production, •• Exports, either direct through oil exports, or as

feedstock into further value added production, •• Energy supply.

The infrastructure and capability that continues to build from project to project can also be applied in other industries, and exported as services to the global O&G industry.

However, exploration and production remains a risk business and prospects carry increased risk (remoteness, water and target depth, reservoir characteristics, environmental) with rising cost structures partly offsetting price gains.

Development activity, which involves periods of intense activity and workforce, is intermittent, and New Zealand is currently easing off a sustained five years of unprecedented activity.

Since the development of Maui in 1976, New Zealand has observed a depleting reserves base. Even recently developed post-Maui discoveries (Pohokura, Tui, Maari, Kupe) have only temporarily arrested the decline, with years supply now testing 50 year lows. While this, and strong oil and gas prices, provides increased incentives to explore (and develop), outcomes of recent exploration have been disappointing.

Until discoveries exceed production, New Zealand’s O&G industry will struggle to maintain the growth observed over the last decade.

While many contingent factors will ultimately determine the future of New Zealand’s Oil and Gas Industry, a number of interventions and considerations that could foster growth amongst both the industry and the nation are outlined below.

8.1 A fresh approach to defining the industry

New Zealand. Further, the addition of indirect and induced impacts would extend employment flows from the O&G industry to approximately 7,700 jobs.

Similarly, prime measures of the economic benefit from O&G have focused on the royalties and export dollars, failing to address the jobs, local content and valueadd opportunities. Furthermore the intangible benefits of technological advancement, global partnerships, standards improvements, skills, industry diversification, leverage and the generosity of O&G’s community contribution should be recognised. The O&G industry should not be conceived as being insular but a highly skilled, wealth creating industry with tentacles that catalyse other wealth creating industries, boost industry performance, competitive advantage and is intrinsically linked to the nation’s broader economic and social wellbeing.

8.2 Fostering local procurement As demonstrated in this report, New Zealand companies capture 30 - 80 percent of the construction of major O&G projects, however, there is potential to capture more for local companies.

Redefinition will also create an opportunity for the

Local work not only boosts economic growth, but enhances business performance and leverages wider industries. Increased investigation into the costs and benefits of incentivising local procurement could form an outcome of this report.

industry to reposition and rebrand accommodating the changing social, economic and political environment.

8.3 Growing the entire supply chain

A change in how the O&G industry is conceptualised and promoted will enable its full economic contribution to be more comprehensively and consistently quantified.

Restrictive statistical definitions and public perceptions, the complexities of the industry and government policy predominantly focused on exploration attraction, mean that the full value and supply chain that underpins the New Zealand O&G industry is difficult to understand and rarely appreciated.

Growth opportunities for O&G supply chain companies exist domestically, internationally and through diversification into other industries. While there is already high participation in domestic activity, there exist significant opportunities for exporting our domestic skill and expertise, and taking these skills in new directions.

Whilst exploration and production is important, so is the extensive supply chain, infrastructure, systems, capability, relationships and knowledge (formal and informal), and a strong track record that underpins the industry.

Alliances with overseas companies are often a critical component in the success of offshore ventures, and leveraging these relationships to include a broader mix of the New Zealand industry could open doors to future exporters.

As an example, Statistics New Zealand indicate that the O&G industry accounts for 1345 employees12, yet research for this report conservatively shows that there are at least 3730 people directly employed in O&G work within

Such export and diversification development must be encouraged and assisted, and the constraints New Zealand’s O&G companies face internationally investigated and addressed.

12

Refer to Appendix 9a for further details

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8.4 Think Smart

Recommendations

Just as the Government redefined New Zealand’s O&G industry landscape in the early 1980s with its series of ‘Think Big’ projects, the industry itself now has to think beyond its current competitive structure and corporate silos to work collaboratively to address the future issues, and respond collectively to future opportunities.

The future wealth of New Zealand is literally beneath our feet. With a collaborative and big-picture view, a visionary political framework and a measured environmental footprint, we will be able to maximise the opportunities afforded to the people of New Zealand through geological accident. Moving forward, a recommended collective task-list should include:

If we’re to elevate the industry, its supply chains, impacts, outputs and, critically, outcomes to rival those of any other of New Zealand’s showcase industries, then we need to build on the foundations of this report to establish an ambitious framework for growth.

Industry-wide skill, innovation, investment and global competitive challenges cannot be met by a series of small interventions by individually-focused companies, no matter how deep their pockets or admirable their ambitions. This ‘Think Smart’ approach could see the industry determine its future in terms of skills, research and development, investment and legacy, encompassing the entire supply and value chain.

8.5 Partnering for Growth If we are to maximise the economic opportunities for New Zealand that a well-oiled O&G sector and supporting industries have the ability to deliver, then a stronger partnership model must underpin any forward momentum.

The new partnership will necessarily include local government, central government and the private sector to meet the needs of a nation that is host to a progressive global industry and of a proactive and future focused stakeholder of our domestic industry.

We have the opportunity to reposition the O&G industry as one of the cornerstones of the New Zealand economy, alongside tourism, dairy and food production and film, and this renewed and refocused partnership model will be critical to driving this transformation.

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A. Change our philosophical definition of the extent of the Oil and Gas Industry Expand thinking beyond exploration to embrace the capability and potential of the entire supply chain. A more integrated contemporary industry model must be advanced and promoted.

B. Build stronger partnerships to foster the industry Create a new taskforce, comprising central government, local government and industry, charged with fostering a more collaborative culture across the industry and expanding strategic thinking and action planning to embrace the entire supply chain.

C. shift the Government partnership model Realign government agencies charged with economic development to prioritise the industry as a core driver of and contributor to the New Zealand economy, rather than a niche, and adjust resource allocation and longterm thinking. This whole-of-government approach will echo similar moves in the food processing, tourism and film industries.

O&G Evolution (New Zealand/Taranaki) and Recommendations The future O&G context: •• More challenging for exploration – technically and economically. The possibility that the ‘easy oil and gas’ has been discovered.

•• Global factors impacting on the energy mix, Government policy, investment, and industry conduct.

-- Increasing environmental consciousness.

-- Aspirations towards greater use of renewable energy sources.

-- High expectations surrounding O&G H&S.

2009 (Maari; Kupe) 2007 (Tui) 2006 (Pohokura)

•• Technological advancements focusing on: -- Ways to extract difficult finds e.g. deep water exploration, maximisation of existing assets.

-- Enhancing safety in the workplace e.g. unmanned systems.

-- Innovative environmental advances.

-- Partnerships to foster cost-effective development.

Proactive Government resource policies

Cluster development, leverage, exporting

2003 (Tui)

Conventional and unconventional O&G H&S and environmental consciousness, renewables

2000 (Pohokura) 1998 (Mangahewa)

Technological advancement, harder O&G finds, maximising existing assets Oil in the wilderness era

1986 (Kupe) 1983 (Maari) 1979 (Maui)

Think Big era

1970 (Kapuni) 1969 (Maui)

Growth, evolve capability, systems

Fledging Taranaki companies work with internationals

Conventional O&G Easy O&G finds?

Low hanging fruit?

1960 (Mangahewa) 1959 (Kapuni) Wildcat Early discoveries

Major field Major field discoveries commissioning

Development Taranaki/NZ capability and government supply chain

O&G climate

OUR RECOMMENDATIONS: A. Change NEW ZEALAND’S philosophical definition of the Oil and Gas Industry B. Build stronger partnerships to foster the industry C. shift the Government partnership model

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9

Appendix A. Other statistics and economic assessments BERL Regional Database

PEPANZ Estimate of employment

In a previous report, O&G industry related employment was identified through the BERL Regional Database. In this case, the industries that made up the oil and gas sector were:

PEPANZ undertook a survey of its members to identify employment in the oil and gas exploration and production industry. These numbers are higher than those identified through the business frame as they include contractors.

Applying these numbers results in the following analysis.

•• Oil and gas extraction; •• Petroleum exploration (own account);

New Zealand

•• Petroleum exploration services; and

NZ O&G Sector (pepanz SURVEY)

•• Other mining services12.

Applying employment in these industries to national and regional multipliers provided the following outcomes for 2009.

Direct

Direct + Indirect

Total

2,111

3,080

3,326

New Zealand

Output ($mn)

NZ O&G Sector (berl database)

GDP ($mn)

1,529

2,041

2,164

Employment (FTEs)

1,032

3,501

4,674

Direct

Direct + Indirect

Total

Output ($mn)

1,620

2,369

2,561

GDP ($mn)

1,170

1,565

1,661

828

2,748

3,663

Employment (FTEs)

Source: BERL

Taranaki Taranaki O&G Sector (PEPANZ SURVEY) Direct

Direct + Indirect

Total

Source: BERL

Taranaki

Output ($mn)

1,895

2,492

2,591

Taranaki O&G Sector (berl database)

GDP ($mn)

1,368

1,715

1,759

918

2,136

2,526

Direct

Direct + Indirect

Total

1,207

1,590

1,655

GDP ($mn)

865

1,087

1,116

Employment (FTEs)

641

1,435

1,691

Output ($mn)

Source: BERL

Note that is the current analysis we have not included other mining and quarrying, which employed around 44 FTEs in Taranaki in the 2007 analysis.

At a national level, the oil and gas sector is responsible for the employment of around 3,700 FTEs and generates around $1.66 billion in GDP. Within Taranaki, the oil and gas sector employs around 1,700 FTEs and generates around $1.12 billion in regional GDP.

12 In Taranaki, other mining services are taken as associated with oil and gas. At a national level, we simply use the Taranaki employment in this industry to reflect that proportion that is associated with oil and gas.

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Employment (FTEs) Source: BERL

Under the PEPANZ analysis, national employment increases to 4,700 FTEs and contribution to GDP increases to $2.16 billion. Taranaki employment also increases to 2,500 FTEs and contribution to GDP increases to $2.53 billion.

STATISTICS NZ Utilising Statistic NZ definitions, employment in the O&G industry could be interpreted as entailing approximately 1345 employees. This analysis includes B07 Oil and Gas Extraction, B101 Exploration and B109 Other mining support services (Includes: 100% of B07; but a proportion of B101 and B109 have been excluded on the basis that these totals also include employment within the minerals industry). The Stats NZ O&G classification above, does not cover the extensive O&G supply chain or addedvalue processing. These would be categorised under other Stats NZ groupings e.g. manufacturing, business & technical services, transport etc.

Appendix B. O&G Industry Standards and Safety Currently over one million oil and gas production wells are in safe operation around the world. BP’s recent oil spill in the Gulf of Mexico was undeniably a catastrophe, highlighting the potential for system failure and the consequences of such occurrences.

However, statistically it is an aberration in both its occurrence and its scale.

undergoing regular audits of its processes. API produces

It is clearly understood that oil and gas are dangerous

global including to Taranaki, through active involvement

unless adequately controlled for the following reasons.

with the International Organization for Standardization

•• Oil and gas are highly flammable, combustible

and poisonous; •• They may contain constituents which are poisonous,

corrosive or environmentally harmful; •• Extreme pressure may exist underground, in

processing systems or in transmission; •• The industry operates in remote, challenging and

sensitive environments; and •• The industry operates large, complex equipment,

much of which is mobile (so requiring repeated transport and re-assembly).

The O&G industry has developed facilities, and adopted standards and procedures that can safely handle oil and gas products and anticipate and mitigate O&G risks.

Several entities are involved in setting and enforcing

standards, recommended practices, specifications, codes and technical publications, reports and studies that cover each segment of the O&G industry globally.

The development of consensus standards is one of API’s oldest and most successful programs. Beginning with its first standards in 1924, API now maintains some 500 standards covering all segments of the oil and gas industry. Today, the API standards program has gone

(ISO) and other international bodies.

For upstream, API publications cover offshore structures and floating production systems, tubular goods, valves and wellhead equipment, plus drilling and production equipment. In the downstream arena, API publications address marketing and pipeline operations and refinery equipment, including storage tanks, pressure-relieving systems, compressors, turbines and pumps.

Standards and Safety in New Zealand The operating characteristics of the O&G industry require compliance with rigorous health and safety standards.

The New Zealand regulatory environment leverages the various global standards. The “Minerals Programme for Petroleum” references “recognised good exploration

these standards including:

and mining practice” or, in more global parlance, “good

•• Government regulatory agencies,

technically competent manner and with the degree

•• Industry organisations such as:

-- International Association of Oil and Gas Producers (OGP)

oilfield practice”. This is taken to mean “to act in a of diligence and prudence reasonably and ordinarily exercised by experienced operators engaged in a similar activity under similar circumstances and conditions”,

-- International Petroleum Institute’s (IPI)

although noting that “good exploration and mining

-- and more generically, International Organisation

practice (good oilfield practice) cannot be defined.

of Standardisation (ISO) •• Companies themselves (as demonstrated in

New Zealand for over 50 years by Shell International).

American Petroleum Institute

Rather, it is a concept”.

International and domestic O&G companies place a high emphasis on health and safety measures for both their employees, and any hired contractors. In order

API is an American National Standards Institute (ANSI)

for New Zealand companies to secure mandates in the

accredited standards developing organization, operating

industry they must meet, or preferably exceed, rigorous

with approved standards development procedures and

international standards.

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New Zealand Company Compliance To maintain competitiveness and protect their employees and the environment, New Zealand companies must continue to comply with the most stringent international O&G industry standards into the future. However, as new international O&G standards are introduced, international E&P companies may be increasingly reluctant to expend the energy and investment required to bring New Zealand companies up to standard already achieved by offshore contractors. In order to maintain or even enhance their competitive advantage, it will be important that New Zealand companies lead the change, internalise a safety culture and continue to promote the highest standards.

Acronyms ANSI API APR AVR BERL BOE BOSIET CApENZ CSG E&P EI EIA EPCC FEED FEGL FID FLNG FPSO FTE GDP GJ HSE HUET IADC I&E IPI ISO IWCF KGPT LPG MED MW NGC NGL NZOG O&G OGP PEPANZ PJ STOS TCC VT WITT

80

American National Standards Institute American Petroleum Institute Accounting Profit Royalty Ad Veloreum Royalty Business and Economic Research Limited Barrel of Oil Equivalent Basic Offshore Safety Induction Emergency Training New Zealand International Centre of Engineering Excellence Coal Seam Gas Exploration and Production Economic Impact Economic Impact Analysis Engineering, Procurement Construction Contractor, being the Prime Contractor on a project Front-End Engineering and Design Fitzroy Engineering Group Limited Final Investment Decision Floating LNG (Liquefied Natural Gas) A Floating Production Storage and Offloading unit Full-Time Equivalent Gross Domestic Product Giga Joule Health and Safety in Employment Helicopter Underwater Escape Training International Association of Drilling Contractors Instrument and Electrical International Petroleum Institute International Organisation of Standardisation International Well Control Forum Kapuni Gas Treatment Plant Liquefied Petroleum Gas Ministry of Economic Development MegaWatt Natural Gas Corporation (now a subsidiary of Vector Energy) Natural Gas Liquids New Zealand Oil and Gas Oil and Gas International Association of Oil and Gas Producers Petroleum Exploration and Production Association of New Zealand Petajoule = 1015 Joules Shell Todd Oil Services Taranaki Combined Cycle Venture Taranaki Western Institute of Technology at Taranaki

The Wealth Beneath Our Feet

Venture Taranaki Trust is the region’s development agency. We help grow the region.

Incorporated as a charitable trust, Venture Taranaki is a dynamic organisation which has facilitated business success from enterprise inception through to sustainable growth based on international competitiveness.

Project Director: Dr. Anne Probert Email: anne@venture.org.nz Venture Taranaki is an initiative founded by: In addition to the New Plymouth District Council, Venture Taranaki is supported by: South Taranaki District Council, Stratford District Council, Taranaki Electricity Trust, New Zealand Trade and Enterprise, Foundation for Research, Science and Technology, Business in the Community and numerous other private sector organisations.

Venture Taranaki is certified carboNZero.

All work is done and services rendered at the request of, and for the purposes of the client only. Neither Venture Taranaki, its employees or stakeholders nor any of the contributing organisations or individuals accepts any responsibility on any grounds whatsoever, including negligence, to any other person. While every effort has been made to ensure that the information, opinions and forecasts provided are accurate and reliable, Venture Taranaki or any contributing organisations or individuals shall not be liable for any adverse consequences of decisions made in reliance of any report provided by these organisations. Nor shall Venture Taranaki be held to have given or implied any warranty as to whether any report provided will assist in the performance of the client’s business.

Taranaki’s development agency 9 Robe Street, PO Box 670, New Plymouth 4340, New Zealand Tel: +64 6 759 5150 Fax: +64 6 759 5154 Email: info@venture.org.nz Web: www.taranaki.info