The New Zealand oil and gas business?
In March I attended the 2016 New Zealand Petroleum Conference and it got me thinking. Is the New Zealand oil and gas business a dormant bear patiently waiting to emerge from hibernation, or is it just a dead dinosaur its flame finally extinguished?
Despite concerns over climate change and CO2 emissions, and the recent agreements made at last year's UN Climate Change Summit in Paris, the 2016 NZ Petroleum Conference had a clear message: hydrocarbons will remain the dominant energy/fuel source for the foreseeable future (30+ years).
The world however, is seriously tackling the transition into cleaner fuel/energy alternatives.
Simon Bridges, Minister for Energy opened the conference telling everyone he was “excited about the oil and gas business in New Zealand”. A strange comment, you would think, when you consider that the hydrocarbon business (oil price) is in a slump.
There’s no doubting that internationally the sector is now very much removed from the ‘heady days’ of US$100 for a barrel of oil. The reality is that the world currently has a glut of both oil and gas, in pipe and also proven reserves. OPEC is no longer ‘intervening’ on price and delivery, leaving the industry with the ‘new normal’ of US$40 – 50 a barrel. The resultant position is that exploration and production companies are in survival mode.
Annual capital expenditure has generally dropped by 28% (US$95b) with the ‘new norm’ focus being on near field activities (exploring ‘known’ hydrocarbon basins) and a retreat to proven core conventional plays. There is a greater emphasis upon existing assets to perform at maximum efficiency, to ensure operational overheads are kept to a minimum to maintain profit margin.
The immediate impact of this is both exposure and opportunity.
Exposure for the mid to small sized operations (fiscally geared to US$55-80 a barrel to keep share-holders relatively happy) becoming distressed and open to acquisition by wealthier companies who have the means to focus on long term strategies and capturing acreage. The additional challenge for these higher geared operations with depleted profit margins, is that cessation costs (closing down an operation) may possibly be beyond their current balance sheet - catch 22!
On the flip side of this is opportunity - to acquire (and no doubt sit on) assets, awaiting a much hoped for upturn. Other opportunities are that international governments fear a potential drop in government income (take) and are modifying their fiscal policies to encourage more activity in their respective countries. Hiring oil and gas talent available in the marketplace is currently much easier (historically attracting top notch talent in a high demand area has been a challenge). And, the ability to take advantage of ‘cost deflation’ in exploration (glut of seismic vessel and jack-up rig availability) has seen a drop of between 20–50% in costs.
So, what does this mean for New Zealand? Is it still attractive to existing and foreign investment? Simon Bridges ‘excited’ comment is probably borne out of several factors in New Zealand.
- With the C02 emission targets agreement in Paris, there is now greater pressure to move from coal fired generation to the lesser C02 emission alternative – natural gas.
- New Zealand (Taranaki) has the benefit of being seismically well developed with maturity of current and proven reserves – which is a good fit due to the ‘new approach’ previously outlined.
- New Zealand is currently in the top 5 ‘best places to invest in hydrocarbon exploration’ (along with the UK, USA and the Netherlands). In global ranking, New Zealand’s government take is 45%, with the average being 62%. Australia is sitting around 60%.
Although fossil fuel was in the main created from a pre-historic age, unlike the dinosaurs, the oil and gas business is far from dead. Fairer to say it’s a giant Grizzly simply taking a ‘snooze’.
Some economists (in as much as you can believe economists who let’s face it, didn’t see the oil price slump coming) predict an increase to US$80 a barrel by 2021 with a definite upturn towards this by 2018.
In the interim, it will be very much survival of the fittest, and we’ll see a huge emphasis on efficiencies, innovation and collaboration. For consultants to the oil and gas business, this is fertile ground and opportunities will certainly be there for the taking.