New Zealand's Oil Bonanza... Yeah Right! | The Jackal

31 Aug 2011

New Zealand's Oil Bonanza... Yeah Right!

For more than 25 years, New Zealand has explored its oil and gas reserves with hundreds of exploratory wells being drilled across the country.

Recently, new oil and gas exploration has increased, driven by a soaring price for crude oil and a dwindling worldwide supply. In 18 months up to June 2010, 68 new exploratory wells were drilled, to the detriment of our clean and green image.

Back in 2009, Energy and Resources Minister Gerry Brownlee said that the number of non-resident offshore rigs operating in NZ more than doubled over the previous 5 years, and the numbers of offshore wells drilled had risen from 12 in 2000-05 to 62 since 2006.

Offshore gas reserves increased by 364 Petajoules (PJ) from 2005 to 2008, with notable reserve upgrades at Maui and Pohokura. So there's a lot of activity and production going on in the New Zealand oil and gas industry.
Petroleum Refinery at Marsden Point Port, Whangarei, Northland.
There are about 161 different internationally traded crude oils. They vary in terms of characteristics, quality, and market penetration. Two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil include West Texas Intermediate (WTI) and Brent. 

Most of New Zealand's crude oil is high quality, meaning that it requires less refining to produce gasoline, kerosene, refinery gas, light and heavy gas-oils and asphalt. This also means it's worth top dollar. The current price of New Zealand's crude oil is US$131 per barrel and climbing again.

According to NZ Petroleum & Minerals, in 2008 the country's mean crude production rate was 58,728 barrels per day. At current prices, that's worth US$7,693,368. Production has since fallen slightly from a peak in 1997 of 58880 barrels per day to 52,882. In 2010 New Zealand's crude oil production was worth a staggering US$2,521,625,288 or (at current exchange rates) $2.97 billion New Zealand Dollars.

The governments tax take on that is only $148 m or roughly the same amount given away to oil companies as sweeteners like free seismic mapping research and additional funding to promote investment.

The Ministry of Economic Development's 2009 Energy Data File, showed the spending on oil exploration was the highest in a decade. The expenditure in petroleum exploration increased to $314 million from $136 million in 2007. However there is no tax payable on this.

Even the New Zealand Petroleum Refining plant is majority owned by BP, Chevron and ExxonMobil, which means very little profit goes to New Zealand, the country where the resources are located.
Greenpeace protest against seismic testing ship the Orient Explorer
So this begs the question, why isn't New Zealand already filthy rich from this resource? The simple answer is that very little profit stays in New Zealand. This is because the Energy and Resources Minister Gerry Brownlee ensured that the 2009 Budget would continue an exemption from tax on the profits of non-resident operators of offshore rigs and seismic vessels, introduced in 2004, extending it out to December 31, 2014.

New Zealand's royalty and tax exemption regime is extremely generous, even by international comparison, with companies only required to pay the Government 5% of the value of the oil and 1% of the value of the gas or 20% of accounting profits, whatever figure is higher. In terms of the investment the government makes to facilitate exploration, the returns to New Zealand are a pittance of the profits being made.

Despite the low returns, National has recently reiterated its support for the petroleum industry, saying that it needs to expand so that the government can meet its financial obligations. They promote new exploration and drilling for oil and gas to be the countries saving grace. Their motivation is the $17.6 billion dollar deficit National has created since they gained office in 2008.

To make matters worse, National has further ensured the oil companies get a free ride by implementing nearly all of the recommendations made by the main petroleum industry lobby group, the Petroleum Exploration and Production Association of New Zealand. In its submissions in February to the National government’s Petroleum Plan of Action 2010 document, PEPANZ proposed changes to help the oil and gas industry even more.
Having fewer agencies from which to gain approvals would assist industry and improve the efficiency of the sector. Looking ahead, Government proposals for greater regulation in the EEZ make it likely that we are likely to have to deal with more agencies, not fewer. There are opportunities to ensure those new functions are administered by agencies with which the industry already deals, such as Maritime NZ – and these should be carefully considered.
The rules that preside over oil drilling outside the Exclusive Economic Zone (EEZ), are currently makeshift and incomplete, and only governed by Marine NZ's Environmental Best Practice Guidelines (PDF). These Guidelines are not intended to be legally enforceable.

However under the Resource Management Act 1991, which governs drilling within New Zealand's Territorial Sea (12 mile limit), the Petroleum Industry is liable to pay a maximum fine of only $200,000 in the event of an oil spill or other disaster. The Deepwater Horizon oil spill was estimated to cost over $6 million per day. In April this year, BP estimated that the spill would cost US$41.3 billion.

New Zealand’s response capabilities can be considered non-existent in comparison, while the risk is just as great.

Under the Resource Management Act 1991, the maximum penalties are up to 2 years in jail and fines not exceeding $200,000 plus if it is a continuing offence up to $10,000 per day. However there are a number of exemptions to the Resource Management Act that exist in other statutes. This includes: Section 467 of the Maritime Transport Act to powers of the Director of Maritime Transport in relation to hazardous ships and structures and action taken, in response to oil spill action.

A year and a half after that monumental disaster in the Gulf of Mexico, which destroyed many lives and decimated the fishing and tourism industries; Environment Minister Nick Smith has finally introduced a Bill to Parliament to manage the environmental effects of activities in the EEZ and the extended continental shelf (ECS).

The newly formed Environmental Protection Authority (EPA) will be responsible for consenting, monitoring and enforcing activities with environmental impacts, like oil exploration, seabed mining, deepwater aquaculture and marine energy development. It's yet more window dressing with weak legislation.

The (unconfirmed) fine limitation has also been set well below potential costs for even a small oil leak lasting a few days. The Deepwater Horizon spill lasted 87 days, and was only plugged because another drilling rig was available. This oversight remains under the revised legislation.
“These measures complement last week’s announcements by the Minister of Labour on the establishment of a High Hazards Unit with four inspectors specifically for the petroleum industry.  The Minister of Transport is also reviewing the liability insurance requirements for the industry and is looking to raise it above the current level of NZ$30 million,” Nick Smith said.
As previously mentioned, the current limit of liability for spills within the 12 mile EEZ is only $200,000. No legally enforceable fine for spills outside the EEZ is in place. The government does not require oil and gas industries to have insurance to cover costs in the event of an oil spill. The Minister for the Environment, Nick Smith is telling porkies!

Even the oil industry says that safety assurances for deep sea oil drilling cannot be given; therefore projects with significant and unacceptable environmental risks should not get consent ie all deep sea oil drilling. However the new legislation means the Minister in charge will have final say, and projects of significance to National will automatically get the green light.

Back in Dec 2010 Greenpeace raised some concerns:
“Gerry Brownlee is trying to close the stable door after the horse has bolted – he has given permits without the correct regulations being in place. This is bad governance and now calls into question whether the regulatory review can be conducted honestly given that international oil companies will be lobbying for the weakest standards possible to protect profits,” says Greenpeace New Zealand Senior Climate Campaigner Simon Boxer.
There is very little economic benefit for New Zealand in continuing fossil fuel developments, in comparison to the potential and realized negative environmental impact, low returns and increased CO2 emissions. Continuing down a fossil fuel path is counter-productive to our clean and green image. There is an alternative to dirty fossil fuels, that's what the government should be promoting and investing in.