tag ceo has strong belief in the nz petroleum sector - TAG Oil

AUSTRALASIA’S LEADING OIL AND GAS JOURNAL FEBRUARY 2006TAG CEO HAS STRONG BELIEF IN THE NZ PETROLEUM SECTORDrew Cadenhead is the chief executiveofficer and president of Calgary,Canada‐based TAG Oil with holdings of4,063,706 gross acres of high potentialexploration lands in New Zealand.Mr. Cadenhead’s background includessenior positions at Canadian HunterExploration, Summit Resources andUlster Petroleum, as well as a‐three yeartenure at PetroCorp, the New Zealandgovernment‐owned oil and gas explorationcompany. He holds a Bachelor’s degree inGeology from the University of Calgary.Mr. Cadenhead lives in New Plymouth,New Zealand.Recently, Mr. Cadenhead provided Oil& Gas Australia with an insight on NewZealand’s current energy supplies andTAG Oil’s future prospects for oil and gasdiscoveries.TEN years ago TAG Oil, formerly knownas Durum Energy, was a small juniorinternational sniffing around the Australasianarea when an opportunity to JointVenture in the Canterbury Basin of NewZealand came to light.According to Drew Cadenhead, NewZealand’s political, fiscal and economicclimate, as well as its technical opportunity,made it extremely attractive to TAG.TAG <strong>ceo</strong>, Drew Cadenhead, <strong>has</strong> a gooddeal of experience in the New Zealandoil and gas sector.“New Zealand is a safe, democratic, Englishspeaking government that welcomesNorth American companies into the oilpatch. The country <strong>has</strong> a world‐class fiscalregime, with a one per cent royalty onall new gas discoveries for the next fiveyears, as well as high net‐back production.To date there <strong>has</strong> been very little drilling‐ a total of just 350 wells ‐ with some veryimpressive large scale discoveries. Wethink there are more of those to be made.“As for TAG’s current operations, we’rein a growth mode. I am a geologist withexperience in New Zealand and I joinedTAG, then Durum Energy, three yearsago. We changed the name to TAG, tookthe company onto the TSX and becameserious explorers in New Zealand. Weexpanded our land base (now 4,063,706gross acres), shot 2D and 3D seismicover our newly acquired land base andlaunched a 15 well drilling programme.“Our plan is to control as much of the highpotential areas of New Zealand as possible.We’re well financed, having raisedNZ$22.5 million dollars, and are five wellsin to our 15 well drilling programme. Theresults? Two discoveries so far and threedry holes. We’re also shooting seismicover newly acquired lands and taking overinactive companies in the area.”NEW ZEALAND’S ENERGYSUPPLIES: 1980s ‐ 2006Since the early 1980s, New Zealand’sworld class Maui reservoir <strong>has</strong> met 85per cent of the country’s total natural gasdemands. In early 2003, an independentexpert reassessed the recoverable amountsof oil and gas from the Maui reservoir. Theresults of this “redetermination” clearlyconfirmed the fast approaching end tothe cheap Maui gas era and created muchanxiety on the part of the New Zealandpower producers, as well as, large naturalgas customers.“After considering the impact of some ofNew Zealand’s new sources of natural gas,due to come on‐stream over the next 18months (the Pohokura and Kupe developments),there is still a considerable gapbetween the amount of natural gas that canbe supplied and the expected consumptiononce the Maui supply is no longer available,”Mr. Cadenhead says.“The New Zealand Government <strong>has</strong> stateda strong preference for solving the loomingenergy supply problem through domesticnatural gas supplies as opposed toother alternatives such as imported LNG.The government realises that the country’sconsumption of energy is relatively small,giving it little leverage in the global LNGmarket.“New Zealand is under explored comparedwith most other notable oil andgas producing regions of the world. Thefew wells that have been drilled and theresultant large discoveries confirm thereis still plenty of potential for the developmentof domestic natural gas supplies thatcan reliably meet the country’s needs wellinto the future.“New Zealand is a superb opportunity foran aggressive and capable company suc<strong>has</strong> TAG and the company looks forwardto exploring numerous world‐classprospects.”FUTURE ENERGY SUPPLIESThe New Zealand Ministry of EconomicDevelopment’s Crown Minerals group isresponsible for the effective managementof the country’s petroleum reserves.In January 2005, Crown Minerals publisheda “programme” for petroleum minerals,which outlined a sensible frameworkfor promoting oil and gas exploration anddevelopment.“The government recognised that‘indigenous’ petroleum reserves areunsubsidised, competitively priced andutilisation of these reserves contributes toNew Zealand’s economy in a substantial

AUSTRALASIA’S LEADING OIL AND GAS JOURNAL FEBRUARY 2006New Zealand oil and gas exploration.They include:• New Zealand <strong>has</strong> a stable democraticgovernment, which <strong>has</strong> demonstrateda willingness to promote oil and gasexploration. Even though there was anelection in September 2005, both thepredominant political parties (Nationaland Labour) have publicly stated strongongoing support for domestic oil andgas exploration.• New Zealand <strong>has</strong> a superior fiscal regime,with royalties substantially belowother possible investment locations withsimilar (very low) political risk profiles.• There is the potential for large scalediscoveries as the region <strong>has</strong> not beenexplored to the extent that other regionshave. For example, the drilling densityin the Taranaki region is approximatelyone well for every 120,000 acres(compared with one well for every 1500acres across Western Canada). In theCanterbury Basin (South Island), thedrilling density drops to one well every600,000 acres in an area that <strong>has</strong> worldclass prospects.• There <strong>has</strong> been a three to five foldincrease in domestic natural gas pricesover the past 18 months as a result ofthe dwindling Maui reserves.• Low operational costs and existing infrastructureaccess results in high profitpotential, at least twice what would benormally expected in North America.TAG’S OBJECTIVES IN NEWZEALANDMr. Cadenhead said TAG <strong>has</strong> developed arisk managed business plan that combinesshallow (less than 2500 metres) lowrisk oil opportunities with deeper (4000metres), high reward gas opportunities.“TAG will initially build our reserve andcash flow base on several shallow oiltargets that are drill‐ready now and presentlywaiting rig availability. It is expectedthat six to eight of these shallow wells willbe drilled over the next 12 to 18 months.These 3D seismically identified prospectsare expected to deliver good results andprovide strong cash flow to support furtherwork. Given the type of crude that isgenerally found (sweet 42° API), developmentcosts are low. There is generallylittle formation water associated with theseMiocene‐aged reservoirs, and crude canbe locally trucked to a point of sale. Cashgeneration is ‘immediate’ and ongoingoperational costs are extremely low.“Complementing TAG’s shallow low‐riskoil programme are a number of deeper,primarily gas prone prospects, which canbe considered TAG’s ‘home run swings’.These world‐class prospects offer thepotential of significant reward but bringwith them higher drilling costs and hencehigher risk.“TAG also looks to acquire 100 per centownership/operatorship in each of thepermits that we consider ‘key’ to our ongoingsuccess. This approach allows TAGto control both the timing of operationsand the associated cash flow generatedfrom success, which in turn maximisesshareholder return.“By balancing our drilling portfolio withboth low and high risk targets, TAG <strong>has</strong>created a sustainable business model.TAG’s objectives can therefore be simplystated as ‘creating value for shareholdersthrough a balanced, risk‐managedexploration programme in a proven butunderexplored region with a stable andinvestment friendly government’.”WHERE IS TAG EXPLORING?Mr. Cadenhead said TAG’s primaryexploration area is within the onshoreTaranaki Basin of the West Central NorthIsland. This is the only existing oil andgas production area of New Zealand and<strong>has</strong> the associated infrastructure necessaryto bring new discoveries to early commercialisation.“Within the eastern part of the TaranakiBasin is a proven discovery ‘fairway’ thatextends in a North‐South direction to theEast of Mount Taranaki. This onshoreregion <strong>has</strong> been producing from about adozen different pools for more than 40years and is well serviced by all weatherroads, as well as gas and oil pipeline infrastructure.All seven of TAG’s TaranakiPermits are situated within this fairway, inmany cases surrounded by existing pools.“Two of our prospects in the Northernsection of Taranaki (‘Supplejack’ and‘Waitoriki’) have aggregate P50 resourcepotential estimates of approximately 11to 15 million bbls of oil and 65 bcf ofgas (Sproule International IndependentResource Assessment.)”TAG is also active in the CanterburyBasin, located on the East coast of theSouth Island. The Canterbury Basin <strong>has</strong> asimilar Basin style to prolific oil and gasareas of Southern Australia, California,and the Gulf of Mexico. This is a largelyunexplored region of New Zealand, butimportantly, two of the four offshore wellsdrilled to date in the Canterbury Basinhave discovered hydrocarbons.TAG <strong>has</strong> three permits in the CanterburyBasin totalling four million acres (1.4million acres net), which is larger thanthe entire Taranaki Basin. TAG’s offshorePetroleum Exploration Permit PEP‐38258contains a number of very large prospectsand leads. Based on the results of previousdrilling and testing, Sproule International<strong>has</strong> estimated the resource potential of oneof TAG’s offshore prospects, “Corvette”,at 700 bcf and 150 million bbls on a P50TAG is building a strong portfolio.

AUSTRALASIA’S LEADING OIL AND GAS JOURNAL FEBRUARY 2006basis. Corvette is one of many prospectsin this Permit that TAG is moving to thedrill‐ready s<strong>tag</strong>e.“Perhaps the most exciting prospect thatTAG currently <strong>has</strong> is ‘Kate’, which islocated in the onshore portion of one ofour Canterbury permits. The Kate prospectis located at a surface ‘anticline’ which isessentially a 15 sq.. km ,’mound’, protrudingout of the surrounding CanterburyPlains. A number of high grade oil seepsare visible at the surface along the perimeterof this anticline. The seeping oil <strong>has</strong>been confirmed as ‘thermogenic’.”“Initial 2D seismic <strong>has</strong> been completedand <strong>has</strong> confirmed that the anticline formationcontinues at depth. A potentialreservoir is located at approximately 1200metres depth and if this reservoir structureis full, TAG’s volumetric calculationsindicate as much as 200 million barrels ofoil may be associated with this structure.Further seismic is planned in the next sixmonths to locate an optimal drilling locationto test this very exciting prospect,” hesaid.THE FUTURE FOR NZ ENERGYSUPPLIESMr. Cadenhead said TAG supports thecurrent government initiative to promoteexploration and development.“We believe that there is very realpotential in New Zealand, but the countryfaces the dilemma of being a small fish ina big ocean. Although TAG believes thepotential for discovery in New Zealand isenormous, we believe this potential willcontinue to slide under the radar screenof most of the world’s larger explorers.This leaves an opportunity for smallercompanies like TAG to have a realistic opportunityat international size discoverieswithout the pressure of competing againstmulti‐nationals.“TAG remains confident that NewZealand’s natural gas needs can be metindigenously without the need for alternativessuch as imported LNG.”WORKING WITH GOVERNMENTS“We see New Zealand as a very stablelocation to operate and government policyis consistent.“New Zealand <strong>has</strong> put in place legislationand regulations to protect the environment.These regulations are well understoodand have little impact on exploration anddevelopment by those, such as TAG, whoact responsibly.“Rules and regulations governing explorationand the subsequent granting of mininglicences are also well developed and wellunderstood. As a result of the urgent needfor an increase in natural gas supply,Crown Minerals <strong>has</strong> been more closelyenforcing permit conditions to ensurethat exploration commitments are met.TAG <strong>has</strong> every intention of meeting all ofour permit commitments and welcomesstricter permit compliance.“Therefore, TAG does not see any ‘challenges’in dealing with any level of NewZealand government.”RISKS OF WORKING IN NEWZEALAND“Mr. Cadenhead said although NewZealand is remote, it is not as isolated assome might think.“There is certainly not the oil and gasexploration and production support that isavailable in North America, however thereis adequate support for the present levelsof activity.The large Kate prospect looks promising.“TAG is well organised and disciplinedwith respect to completion of our explorationactivities. With careful planning andmanagement of those providing servicesto us, we are highly confident that we canaccomplish what we want without unduedelays caused by lack of support services.“We are also confident that the significantincrease in drilling activities will bringwith it an increase in locally availableservices, including drilling equipment.“If we see bottlenecks ahead of us, we canand will take steps to minimize or eliminateany delays that could occur. Thesesteps might involve bringing in additionalsupport services from North Americaand/or reorganising schedules to makemaximum use of equipment and servicesthat are locally available.”OVERVIEWTAG Oil holds interests in six oil andgas exploration permits in the TaranakiBasin and three permits in the CanterburyBasin, totalling 4,063,706 gross acres inNew Zealand. In Taranaki, TAG Oil isfocusing on shallow oil and gas pools inknown Miocene reservoirs and on deepergas prospects in the producing Tariki andKapuni Sands, which are widespreadthroughout the basin.TAG Oil’s frontier interests in Canterburyinclude a number of untested structuresand provide the company exposure tohigh‐impact oil and gas exploration atreasonable drilling costs. •