Storm clouds are casting shadows over the Government’s announcement it’s opening up 525,500 square kilometres of land and sea for oil and gas exploration.
The Minister of Energy and Resources Simon Bridges this week welcomed companies to place their bids for exploration permits in this year’s Block Offer.
Yet the invitation comes only three months after New Zealand’s leading oil and gas producer, Shell, announced it was considering shutting shop here after 105 years. It also comes three months after the Government revealed companies committed to spending 96% less in last year's Block Offer compared to 2014.
Shell in December announced it had to streamline its global portfolio given the “current environment”.
The Shell Group’s profit slumped 80% in 2015 off the back of the price of crude oil dropping below US$30, from around US$110 a barrel in June 2014.
Shell New Zealand’s country chairman Rob Jager said, “Shell is focusing on large growth opportunities, with deep water and integrated gas as growth priorities.
“The Shell business in New Zealand is a great, but a small part of the global Shell business and hence the decision to undertake a strategic review at this time.”
This begs the question, how is Shell considering a withdrawal from the New Zealand market affecting the sector – oil being our fourth largest export worth $2.2 billion?
The issue stretches far beyond Shell
Woodward Partners analyst John Kidd says he isn’t at all surprised by Shell’s call to review its interests in New Zealand.
“These sorts of things do happen from time to time. Companies do re-visit their portfolios, and some reach views there’s no longer a fit for what they do. That’s oil and gas – it’s nothing unusual, it happens routinely. It’s just happening more now with the oil price so low,” Kidd says.
He says he hasn’t heard from other companies looking to sell their assets in New Zealand – rather they are restructuring their businesses and easing back on exploration drilling.
Yet he warns we should be prepared to see a number of changes in the sector locally over the next 18 months, as companies review their commitments in light of the slumping global oil price.
TAG Oil, New Zealand Oil and Gas and Beach Energy for example have just announced they are surrendering their Kaheru permit because the “current global energy market could not support drilling the prospect before the commitment date of May 2016”.
TAG's CEO says its relinquishment of the block is the last of several divestments, which have reduced its future liabilities. It’s now in “growth mode” and plans to participate in the 2016 Block Offer.
Kidd says, “In this environment, your ability to support your overhead is paramount, and when you don’t have the cash flow or balance sheet to support your work programme, then you must look at all your options.”
The complexity of a Shell sell-off
As it reviews its New Zealand business, Kidd says Shell will be considering other companies’ appetites to buy its assets.
“Shell’s the biggest player here – its assets are very valuable and for someone to come in and buy those assets would require a big cheque book, which rules out most of the sector now.”
Kidd says another complexity is the fact Shell’s assets are so different from one another.
He describes buying Pohokura – New Zealand’s largest gas resource located off the Taranaki coast – as “buying cash flow”. The issues is whether Shell will be able to get a reasonable price for it given the current market conditions.
Then there’s the big Maui gas field, which has been in full production since 1979. Maui is nearing the end of its life, so a buyer will be have to invest in a huge decommissioning project in the near-future.
Kapuni is Shell’s other major asset, which Kidd describes as being attractive to a buyer after cash flow as well as buying an investment programme.
Adding another layer of complexity, Shell manages the above assets through joint ventures with OMV (not Kapuni) and Todd, which are both large established companies.
He says there are likely to be provisions for joint venture partners to increase their equities in the businesses.
Kidd suggests Shell’s assets could also be sold individually, as they could attract different buyers.
“It’s going to be a question for Shell, what interest is shown in the assets, in what valuation and whether it’s going to be better than the status quo.”
An Australian-based utilities investor, First State Investment, had a big enough cheque book to buy the Maui natural gas pipeline from the Maui Mining Companies (84% owned by Shell) at the end of last year. The pipeline, which transports 78% of the natural gas produced in New Zealand, had a price tag of NZ$335 million. First State Investments has also recently agreed to buy Vector's gas business for nearly NZ$953 million.
Companies seek long-term, low cost investments
Kidd doesn’t maintain talk of Shell leaving New Zealand will deter companies from bidding in the 2016 Block Offer.
He notes it takes years to get to the costly drilling stage of exploration and possibly production, so there won’t be too much holding companies back from bidding for acreage now.
He says we still saw a reasonable outcome from the 2015 Block Offer, with companies expressing interest in exploring, but not making large spend commitments.
“They don’t want to spend money on even seismic surveying, let alone drilling,” Kidd says.
Yet he maintains tough economic times won’t stop explorers getting first dibs on “virgin acreage” in places outside of Taranaki.
“I think that could actually be quite appealing for companies, because you can get large pockets of acreage here cheaply. Yes it’s frontier, it’s high risk but the economic risk you’re taking on is risk which is eight to 10 years in the future. Your five-year window is very low cost desktop studies, reviewing 2D.
“The Block Offer process could still attract quite a bit of interest from the majors for that reason.
“New Zealand is absolutely a wonderful place to do business. It’s as close to zero risk politically as you can get.”
As for the oil price, Kidd says the market’s pointing towards it picking up to the mid to late US$40s by the end of the year, and making its way up to US$70 in the medium term.
“The theme is lower for longer. It’s not a case of anyone expecting some sort of dramatic recovery over the next six to 12 months. The expectation is very much around excess capacity being worked from the system and the market pricing itself much more on a short-run basis.”
13 Comments
Oil prices signify almost nothing (other than market manipulation).
The management of Shell know the game that has been played for over a century is almost over. All the easy-to-extract oil is gone and we are in the midst of Abrupt Climate Change. They need to cash-up quickly before they get caught holding stranded 'assets' that are going to become worthless a decade from now because of runaway greenhouse.
https://www.theguardian.com/science/2016/mar/14/february-breaks-global-…
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..find all the oil and gas you like...but at some point (like yesterday) the decison will need to be made that it needs to stay where it is. Or has someone solved the issue of global warming while I was sleeping? Yep, Mr Key is really embracing the clean green image....marketing guru.
Distress in the oil and gas industry is acuteLenders went on a spree. While this is a notoriously cyclical industry, the shale gas frenzy drew in a lot of newbies, particularly among investors. The fact that so many players made heavy use of borrowings, with the Fed’s negative real interest rate policies all too successfully pushing lenders into risky assets, has amplified the damage. From the story:
From 2006 to 2014, the global oil and gas industry’s debts almost tripled, from about $1.1tn to $3tn, according to the Bank for International Settlements. The smaller and midsized companies that led the US shale boom and large state-controlled groups in emerging economies were particularly enthusiastic about taking on additional debt.
http://www.nakedcapitalism.com/2016/03/the-oil-and-gas-fire-sale-how-ba…
Except its 2006 not 2008+ Also "global" so not just shale. With prices of oil rising from 2004 as we hit peak oil which drove the price crazy the exploration and development went full bore as "economically" the price made it sensible to do so world wide as the potential returns were huge. Especially as oil CEOs, investors, nations convinced themselves that oil could go to $200, $300 even $500 a barrel, so greed stepped in. What they missed was the ability to pay, both on an individual level and on a National level. Not surprisingly they did not see it as when you are a CEO earning mega bucks just does not occur to you as you only think of your wallet or you simply dont care as you think you have a monopoly and you can bleed people no matter what. they sure got that wrong.
So a problem of geology became a problem of finance due to free market greed and incompetence. You mentioned pitchforks, ineed, Kunstler said similar a while back which I posted here several times.
The US of A becoming the worlds biggest oil producer and net exporter has changed the landscape for ever.
Not unlike the fact that the EU is now able to become worlds biggest milk producer and exporter , by a massive margin
And not unlike what will eventually happen to the Auckland property market .............. something always comes along to upset the applecart
RE: Shell selling its assets in NZ
Since Shell has bought BG early this or late last year, Shell is now under pressure to sell its assets in some parts of the world and NZ is one of them where it is a small outlet for Shell. Shell have announced to sell its $20 billion assets and over 10,000 job cuts over the next 2 years. Shell wants to concentrate on LNG business as a long term plan.
By following the media in O&G industry across the world and NZ, in my view, there may be more than one buyer for NZ operating assets as it may be too risky for one buyer. As mentioned, Maui reserves are depleting therefore there is big cost for decommissioning.
Re: Government's status
As mentioned in the article, the revenue from the NZ oil export is $2.2 billion. Part of the revenue should be used to diversification into different industries in NZ. This would help to create more jobs, not relying on dairy or O&G industries. For example, Taranaki's main industry is dairy and O&G therefore the effect of downturn in both areas can seen easily and this is only the beginning. Oil prices is predicted to be low until the end of 2017 or more as there is a over-supply in the market. If it continues as is, New Plymouth may turn into a ghost town....
For example, Norwegian government has recognised the problem O&G industry and they using some of the revenue from O&G to invest in fish farming i.e. salmon. A kilo of salmon is a lot higher than oil. Food is something that we all rely on. The food prices in general in NZ very high in comparison to Europe and other countries.
Selling other important infrastructure of NZ to foreigners:
For example, Maui gas pipeline and vector gas pipelines to an Australian investment company. To be able have some say in a such an important infrastructure assets NZ government need to either have some share in those assets or bring regulations to have some control.
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