The Wealth Beneath Our Feet - full report (6.4 MB ... - Venture Taranaki

The Wealth Beneath Our Feet - full report (6.4 MB ... - Venture Taranaki

The Wealth Beneath Our FeetThe Value of the Oil and Gas Industry to New Zealand and the Taranaki RegionA fresh perspective on the industry and its economic impact

ForwardThe oil and gas industry has been an integralpart of Taranaki’s business community sincethe 1860s, yet remains, visually at least,almost below the radar - travelling throughthe region will give only occasional glimpsesof gleaming infrastructure, oil tankersmoored off the coast or traveling on theroads, and pipelines across mountain-fedstreams.But the industry’s importance as an economic drivercannot be underestimated. This report exposes thefull extent of that impact, going beyond the commonexploration focus to independently and apolitically lookat all aspects of the supply chain for the first time.While exploration and production is a necessarycentrepiece for the industry, this is only the tip of theproverbial iceberg – a tiny rig atop a colossal oil field. TheO&G supply chain, infrastructure, systems, capability,relationships, knowledge and track record all contributeto an industry which has evolved over many years.Lifting the performance of the entire industry starts withthis report. The report builds a foundation for strongfuture growth which will enable the industry to realise itsfull economic and transformational potential and lift itscontribution to national growth.The last time the Government made a strong foray intoinfrastructural investment in the oil and gas industryit delivered a range of facilities that have had anintergenerational impact on the Taranaki region, theindustry, and the economy.These “Think Big” projects undoubtedly contributedto regional and national economic activity during theirconstruction phase, generating skills and experiencethat has opened countless doors to many businessesthroughout the industry and its entire supply chain.While the Government has recently demonstratedits commitment to partnership with marketinginterventions in the tourism and film industries, andencourages research and development into the dairyand food industries, this report ultimately encouragesinterventions that will enable the oil and gas industry togrow in both scale and profitability.STUART TRUNDLEChief Executive, Venture TaranakiDecember 2010The challenge for governments – local, regionaland national – is to ensure that the oil and gas industrygains the exposure, the networks, the infrastructure andthe support it needs to elevate investment levels andapply Kiwi innovation to one of the richest industriesin the world.The Wealth Beneath Our Feet1

Executive summaryThe Oil and Gas (O&G) industry hasthe potential to make a step-changecontribution to the New Zealand economy.The capacity and capability that hasdeveloped over a long period of timein Taranaki will be a major factor inmaximising that potential.In 2009, New Zealand produced 19.6 million barrelsof oil and 180PJ (gross) of gas. All of this came fromthe Taranaki region, and the area has the existinginfrastructure that lowers the hurdle for achieving furthercommercial success. In addition, the capability toexploit discoveries in any region of New Zealand residespredominately in Taranaki. The current climate, wherethe value of energy is high, and where Exploration andProduction (“E&P”) companies are being encouragedto explore and produce in New Zealand, provides theopportunity for industry growth.While royalties are touted as the major benefit of oilexploration, it is only a part of the significant contributionthe O&G industry makes to the New Zealand economy.Energy supply, employment, capital investment, taxes,and technology and innovation are some of the additionalbenefits the industry contributes.Often, because of the low profile that the industryencourages, and the fact that much of the activityoccurs out of sight of the public, these benefits arenot recognised.This report goes some way towardsidentifying the wider contributionsto the economy and the potentialcontribution that the Taranaki basedO&G industry could make toNew Zealand’s future prosperity.It also explores some of the issuesthat face the O&G industry inNew Zealand and in Taranaki.While the future potential captures the headlines and is thetopic of discussion, what is often overlooked is that the O&Gindustry already makes a significant contribution to theNew Zealand economy.At a minimum, the O&G industrydirectly employs 3,730 full timeequivalents (“FTEs”) and contributes$1.9 billion to the New Zealandeconomy. Adding indirect andinduced effects increasesemployment to 7,700 FTEs andGDP contribution of the O&Gindustry to $2.5 billion.This assessed benefit does not include the contributionsfrom major construction projects, which have beenexcluded because these are distinct one-off impacts,although they can have a major influence on theeconomic impact of the industry. A separate analysis,undertaken in 2007, on the last five major projects –Kupe, Cheal, Pohokura, Maari, and Tui – estimated theeconomic impact nationally to be 8,700 FTEs and $660million in GDP.As well as this, the O&G industry contributes to thenational economy through exports, taxes and royalties.At $2.9 billion in value, oil was New Zealand’s thirdlargest export sector in 2008, behind only dairy andmeat. A decline in production in 2009 saw oil exportsof $1.9 billion passed by resurgent wood exports. E&Pcompanies alone contributed $1.4 billion in company taxover the five years between 2004 and 2009, around threepercent of all company tax collected over that period.Over $430 million in royalties were paid in the year toJune 2010, down 23 percent on the $560 million collectedin the year to June 2009. Between 1979 and 2008, theO&G industry contributed over $3 billion in royalties,with the recent high receipts reflecting higher royaltystructures applying to new discoveries than were leviedon early fields such as Maui and Kapuni.The Wealth Beneath Our Feet3

While the majority of oil is exported, gas is all initiallyconsumed in the domestic market. Gas is converted intoelectricity, used directly as an energy source by industryand residents, or used as feedstock in the productionof methanol and fertiliser. Methanex Corporation iscurrently producing approximately 900,000 tonnesof methanol annually, all of which is exported, mostlyto Asia. This volume adds a further $255 million toNew Zealand’s exports.Activity generated by the companies using gas as afeedstock (namely Methanex and Ballance) directlyresults in the employment of 355 FTEs and contributes$120 million to GDP. Adding indirect and inducedeffects increases employment to 1,700 FTEs and GDPcontribution to $300 million.The O&G industry extends farbeyond the physical infrastructureof the upstream industry, and includesthe collective capability of suppliers,specialist services, engineering anddesign, fabrication and labour force.The O&G industry attracts a talented and internationalworkforce, and establishes high standards of internalsystems and processes. This capability has been ableto then be leveraged geographically and into other highvalue sectors.This infrastructure and capability is concentrated inTaranaki and has been developed over a long period oftime. This is a positive outcome in that there is sufficientconcentration to support existing and future activity, butalso that this capability can be applied within other highvalue sectors and overseas O&G projects.The benefits to the Taranaki region being the centre ofthe O&G industry are significant. Including indirect andinduced effects, activity generated by the O&G industrycontributes a total of $1.8 billion to the Taranaki region’sGDP and employs over 4,200 FTEs. Each project addsfurther value with the construction of the last fiveproduction plants adding a further $450 million andemploying over 6,300 people. Methanex and Ballanceare major companies located in the region directly as aresult of local gas production. These two petrochemicalcompanies contribute a further $180 million to theregion’s GDP and 870 FTEs.As well, the region has four modern electricity generationplants (655MW or 6.9 percent of national electricitygeneration capacity), is building a further LPG facility, andhas the infrastructure, industry capability and expertise,to service the O&G industry throughout New Zealand.Thus, the Taranaki region is firmly established asNew Zealand’s energy province. It is home to all commercialdiscoveries and production of oil and gas to date and hasspawned an extensive system of infrastructure.Taranaki will play a key role in any future activity in theO&G industry in New Zealand. The industry expertise andinfrastructure that exists in Taranaki will support activityin New Zealand regardless of where it occurs, and enableNew Zealand to capture a greater share of the economicactivity that O&G exploration and production generates.The availability of infrastructureand expertise, and the track record(where there has been discovery andproduction) in Taranaki will be a keyfactor in continuing to attract majorexploration and productionto New Zealand.The wider O&G industry supply chain is progressivelyexpanding internationally to capture project and ongoingsupply and service contracts in Australia, PNG andother offshore locations. The skills and capability gainedthrough the industry have allowed a number of Taranakicompanies to scale up and diversify into other industrieslocally and nationally, and in the O&G industry nationallyand internationally. Considering the size of the industryin New Zealand, these outcomes would have beenextremely difficult to achieve had the O&G industry notbeen concentrated in the Taranaki region.4The Wealth Beneath Our Feet

••Being global the O&G industry has contributed to thevibrancy of the region, attracting skilled workers andtheir families from around the world.••The concentration of the industry in Taranaki hasenabled the region to develop a reputation and brandfor O&G-related activity, allowing local companies tocompete on the global stage.••The specialist and exacting requirements of the O&Gindustry have seen the capability of individuals,businesses, and industries improve, resulting ininnovation and expansion.••The industry has catalysed advancements intechnology, as well as fostering greater understandingof our natural resources, careers, science, researchand engagement from a multitude of disciplines.••The Exploration and Production (E&P) companieswithin the industry have contributed to theTaranaki region in terms of supporting social andenvironmental activities.The O&G industry has unique traits. It is a high risk / highreward industry, operating around the world, often inchallenging locations with variable conditions. Activity ispurely driven by oil and gas prices and the ability to makean attractive profit on investments. The industry dealswith hazardous materials and so has exacting proceduresand standards to ensure safety.The reputation that Taranaki is continuing to buildmeans that New Zealand has an opportunity toparticipate in this industry beyond merely capturingroyalties and corporate taxes.Because of the scale of the investment, and the technicalcapability 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 tolocate in close proximity to each other and key clients.Further, current activity in New Zealand is too variableto support an effective O&G support and serviceindustry – the New Zealand industry needs to beparticipating internationally.Currently, New Zealand companies arecapturing between 30 and 80 percentof the construction of major O&Gprojects occurring in New Zealand.While they can never capture 100percent of projects, there is potentialto capture more.There are a number of ways that the industry canaddress the peaks and troughs in activity thatconstrains the growth of O&G companies. Growthopportunities 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 widerindustry 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 inNew Zealand will go some way to overcoming theseconstraints. But there are other ways that the industrycan be proactive such as through:••diversifying into other areas, such as geothermalenergy, where the industry can manage the variabilityof activity;••collaborative efforts, where New Zealand companiescan compete for international projects in niche areasas a formal collective; and••better specification, where O&G companies canimprove competitiveness in other industries.The report recommendations are:••changing New Zealand’s philosophical definition of theoil and gas industry••building stronger partnerships to foster the industry••shifting the Government partnership modelThe Wealth Beneath Our Feet5

The value of the O&GIndustry to New Zealandglobal O&G marketForeign Direct Investment intoNew Zealand by the O&G IndustryRoyalties = $432 millionCompany tax = $30 million p.aPAYE = undeterminedExports = $2.15 billion• Oil = $1.9 billion• Methanol = $255 millionEconomic, vibrancy, diversity and skillsReputation and brand (Taranaki/NZ)Security of NZ Energy SupplyInfrastructure developmentEnhancement of Business Systems, H&S,Knowledge, careers, scientific discoveryTechnological stretch, transferand innovationExpansion e.g export developmentDiversification and leverageCommunity investments ($2 million)Potential to transform NZ’s economy6The Wealth Beneath Our Feet

Total jobs = 7,700*GDP = $2.5 billionNZ Economic andsocial wellbeingEnergy companies andelectricity generationBusiness and households• 20% NZ’s primaryEnergy supply• 25% ElectricitygeneratedTangibles flow into NZ economyenhancing other businesses,industries and social wellbeingtangiblesGasO&G exploration and productionJobs = 6,000GDP = $2.18 billionMid/down stream processing (feedstock)Jobs = 1,700GDP = $298 millionIntangiblesIntangibles flow into NZ economyenhancing other businesses,industries and social wellbeing*Direct jobs = 3,730, total impact = 7,700The Wealth Beneath Our Feet7

1O&G Industry summaryCurrent producing fields••Currently some 20 oil and gas fields are in production,all in Taranaki. The key ones are (in descending orderof remaining reserves) Pohokura, Kupe, Maui, Maari,Turangi, Tui, Kowhai, Kapuni, and Mangahewa.Reserves••New Zealand’s reserves (MED* P50, as at1 Jan 2010) are 1.92TCF (2,077PJ) gas and171mmbbls (983PJ) oilOil and Gas Reserves (P50) - PJUltimately Remaining %GasRecoverableMaui (1978) 4994 322 85%Pohokura (2006) 1487 1180 78%Kapuni (1969) 1395 118 73%McKee (1981) 518 60 43%Kupe (2009) 402 400 66%Maari (2009) 320 270 0%Tui (2007) 311 150 0%All Other 1039 559 67%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 locallyGas 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 andBallance Agri-Nutrients--44.3PJ went to industrial users--7.9PJ went to commercial users--6.8PJ went to residential usersDrilling activity (2009)••Drilling activity has averaged over 35 wells per yearsince 2007, including exploration and productionwells, both conventional and coal seam gas wells.Major projects••Major projects recently completed include--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/OriginOil and Gas prices••The oil price, currently US$80/bbl, has averagedUS$75/bbl since 2005 (peak >US$150/bbl in June 2008)••Gas prices average $7/GJ (wholesale pipelinespecification, established through bilateral contracts).Energy supply••Gas provides 20 percent of New Zealand’s primaryenergy supply••Gas accounts for 25 percent of electricity generated,second only to hydro.Security of supply••The majority of New Zealand’s oil is exported due to itshigher quality••Net oil import dependency is 63 percent.Economic contribution 2009 (National)••GDP--The industry (E&P and supply chain) directlycontributed $1.9 billion in GDP--Including indirect and induced effects, the industrycontributed $2.5 billion in GDP.••Employment--The industry (E&P and supply chain) directlyemployed 3,730 FTEs--Including indirect and induced effects, the industryemployed approximately 7,700 FTEs.* Also see acroynms list at back of report8The Wealth Beneath Our Feet

Economic contribution 2009 (Taranaki)••GDP--The industry (E&P and supply chain) directlycontributed $1.8 billion in GDP--Including indirect and induced effects, the industrycontributed $2.0 billion in GDP.••Employment--The industry (E&P and supply chain) directlyemployed 3,560 FTEs--Including indirect and induced effects, the industryemployed 5,090 FTEs.Exports (2009)••$2.15 billion in export value••17.5 million barrels of oil••4th largest export sector after Dairy, Meat and Wood.Tax••Between 2004 and 2009, the E&P industrycontributed around $1.4 billion in company tax(This is around three percent of total company taxpaid over that period).Royalties••In the year to June 2010, the Government collected$432 million in royalties from O&G••Between 1970 and 2008, the Government collectedclose to $3.1 billion in total royalties.Capital expenditure••Background exploration expenditure $200 millionper annum••Background development expenditure $200 millionper annum••New projects Pohokura $1.0 billion, Tui $0.3 billion,Maari $1.0 billion, Kupe $1.3 billion.New Zealand O&G capability••Large number of O&G industry certified suppliers••Over 3,000 FTEs in Taranaki O&G industry••Awarded approximately 70 percent of O&Gdevelopment projects (higher for onshore projects,lower for offshore projects)••Professional, advisory, industry advocacyand corporate functions predominantly hubbedin Wellington••Strategic positioning and capability evolving inemerging O&G regions.E&P Expenditure - $million2,0001,500Development1,000500ExplorationPohokuraTuiMaariKupe02000 2002 2004 2006 2008Source: MED, RockpointThe Wealth Beneath Our Feet9

2Introduction2.1 Purpose of paperVenture Taranaki, as part of its New ZealandOil and Gas Industry (OGI) developmentproject commissioned this report tocomprehensively define and describe theOil and Gas (O&G) industry and assess itseconomic contribution to the Taranaki andNew Zealand economies.This document investigates:••A description of the O&G industry in Taranaki andNew Zealand that includes value and supply chainconsiderations••The economic contribution of the O&G industry toNew Zealand and Taranaki••The strategic importance of Taranaki’s O&G resourceto the New Zealand economy••The wider and future opportunities for the O&Gsupport and service industry in New Zealand.2.2 MethodologyThe approach includes statistical analysis, publicinformation, as well as interviews and a workshopwith a wide range of industry participants.The economic impact analysis uses multipliers toidentify indirect and induced activity, and includes allupstream activity, mid stream and downstream activitywhere appropriate.2.3 LayoutThe report is split into eight areas aligned to the purposeof the report. Chapters 3 and 4 provide a descriptionof the O&G industry – its history and current activity,Chapter 5 discusses local company participation inO&G activity.Chapter 6 looks at the economic impact of the O&Gindustry on the New Zealand and Taranaki economies.It determines contribution to employment and GDP fromupstream and associated activity. It also quantifies theroyalties, company tax and exports generated by theindustry. The wider benefits of the O&G industry, unableto be quantified, are identified and discussed.Chapter 7 focuses more closely on the role Taranaki playsin the O&G industry in New Zealand. Chapter 8 considersfuture opportunities and issues for the industry.There are two appendices looking at alternative measuresof economic impacts and a discussion of standards andsafety in the O&G industry.2.4 O&G terminologyThe terms ‘oil and gas’, ‘petroleum’, and ‘hydrocarbons’are broadly interchangeable, all being compoundscomprising (principally) hydrogen and carbon atoms.Natural gas comprises methane (CH4) and ethane(C2H6), while LPG is a mix of propane (C3H8) andbutane (C4H10). Larger hydrocarbon chains (and theirmore complex variants) include liquids ranging fromcondensate and light crude, through to heavy crude.2.5 AcknowledgementsVenture Taranaki would like to thank the large numberof industry participants for their willingness to contributetime and information to this report at their own expense andthe Government, through New Zealand Trade and Enterprisefor their support of this initiative. Participation by VentureSouthland, the Dunedin City Council (EDU) and Nelson EDAcontributed to the national profile. A detailed database hasbeen built up that could form the basis of future tracking andanalysis of economic activity in the industry.The report was also made possible by backgroundresearch and analysis undertaken by BERL, RockPointCorporate Finance, Arete Consulting Ltd and Red Eye Ltd.Their assistance is greatly acknowledged.Photo credits: Rob Tucker, Taranaki Newspapers Ltd,GNS Science, Fitzroy Engineering, IndependentTechnology, Arabac, Digital Insight, Hooker Pacific, WellsElectrical, Methanex, EXITO, M&O Pacific, Fitzroy Yachts,BBBS Taranaki, Venture Taranaki Trust.Design credit: C7 Design10The Wealth Beneath Our Feet

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3Redefining the O&G IndustryGlobal economic growth can only besustained by energy.Oil currently accounts for 35 percent of global primaryenergy, ahead of coal at 29 percent and natural gas at24 percent, (in aggregate accounting for 88 percent ofprimary energy consumption). Per capita primary energyconsumption globally, which reached a plateau followingthe 1970’s oil crisis, has surged during the last decadedriven by rising demand from emerging economies suchas China and India.Despite shifts and aspirations towards greater use ofrenewable energy sources, in 2050 more people andincreased wealth will raise overall energy demands,with much of this increase stemming from developingcountries, and continuing (if not increasing) overallglobal requirements for oil and gas.World energy consumption - million tonnes oil equivalent (TOE) (pa)World Consumption - million toePer Capita Consumption - toe120001.8100001.680001.460001.240001.020000.8019651970 1975 1980 1985 1990 1995 2000 20050.6Source: BP statistical Review, RockpointCHANGING ENERGY MIXMillion barrels oil equivalent per dayRISING GLOBAL ENERGY DEMAND100 = global primary energy demand 2000400300300200200highhighlowlow1001000Coal2000Gas2025*Large Scale Hydro02000 2025* 2050*OilNuclearAlternative Energy* Shell estimates Source: Royal Dutch Shell12The Wealth Beneath Our Feet

While the public at large is familiar with the downstreamO&G industry from direct experience at the petrolpump and in the home, the upstream O&G industry andmidstream activity is largely unknown*.Higher profile O&G activities periodically appear in themedia, such as the arrival of an offshore drilling rig or thecommissioning of a new field or a negative impact such asthe Gulf Coast oil spill. However, the day-to-day activitiesand economic benefits of exploration, production andprocessing of oil and gas products are more remote andconsequently not broadly acknowledged. Even withinTaranaki, the physical presence and cultural significanceof the dairy industry gives it a far greater profile than theO&G industry.When economically significantsectors hold little attention in thewider public conscious, this can leadto shortcomings in policy formulationand official data provision. This isthe case with the O&G industry,and is further exacerbated by theglobal nature of the industry, thecomplexity of the technologiesemployed, the project nature of majordevelopments, and the intricatesupply chain requirements to supportlong-term O&G resources.New Zealand benefits directly from the export ofdomestic crude oil and gas (as methanol), and viathe Government’s receipt of petroleum royalties andcorporate tax levied on the industry. A gap does existin the statistical definition of the O&G industry. Officialdefinitions capture only those companies that definethemselves as ‘oil and gas extraction’, ‘petroleumexploration’ or ‘petroleum exploration services’. Suchnarrow measurements exclude by far the larger part ofthe industry, being all suppliers to the O&G companiessuch as engineering and equipment suppliers,fabricators, service companies and consultants thatexclusively, or at least largely, operate within thesector. Similarly, the role the industry plays in enablingmidstream activity, energy supply and security,infrastructure development, and business capability aregenerally not considered. As this study demonstrates,conventional economic multiplier analysis also presentschallenges in capturing this wider economic benefit.While it is apparent that the Government understandsthe importance of and is actively fostering the explorationand production (upstream) portion of the O&G industryin New Zealand, this report seeks to better describe theimportance of the wider O&G industry to New Zealandbut also to Taranaki.The O&G Value ChainThe O&G industry can be viewed as a fully global industry,and comprising three sequential components - Upstream,Midstream and Downstream.Upsteam (E&P) Midstream Downstream••Exploration••Appraisal••Development••Production••Pre-processing••Processing••Storage••Refining*••Petrochemicals*••Transportation(pipelines, ships,trucks)••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.The Wealth Beneath Our Feet13

3.1 UpstreamUpstream activities involve the exploration for, andproduction of, commercial reserves of oil and gas.Traditionally this has involved recoverable oil and gasin deep (>500 metres) permeable reservoirs, but canalso include variants such as coal seam gas and oilshales. Exploration is a risky business where, on averageonly 1 in 10 wells drilled is considered a commercialsuccess. Furthermore, despite technological advances,there is limited ability to predict whether a discoverywill be oil or gas.Nominally, exploration and production (E&P) companiestarget oil prospects, given oil is the most valuable andreadily sold product on global markets. Yet gas hasaccounted for over 70 percent of New Zealand reservesdiscovered to date. The perceived difference between oiland gas wells is a misnomer. All proven gas fields haveassociated condensate and gas liquids, just as all oilfields also co-produce solution gas, some with a separategas ‘cap’ (such as McKee). While facilities at each fieldnaturally reflect the particular characteristics of thatfield, the structure and operations of the upstream sectorgenerally does not distinguish between Oil and Gas.In order to undertake their work, E&P companiesrequire support and services from a range of specialistcompanies 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 verticallyintegrated, linking upstream production activities withdownstream wholesale and retail markets. While a smallcoal-gas based downstream gas industry did exist priorto discovery of natural gas, the mid and downstreaminfrastructure that exists today in New Zealand is entirelythe consequence of domestic upstream natural gasproduction. For oil, there is essentially no link betweenthe upstream production and downstream processingand sales.Upstream activities in New Zealand include:••Numerous companies actively exploringthroughout New Zealand, although still largelyfocussed on Taranaki.••Producing fields in Taranaki. All gas fields (suchas Maui, Kapuni, Pohokura, Kupe, and Turangi)also produce oil (condensate and LPG), while all oilfields (such as McKee, Waihapa, Tui, Maari, Rimu-Kauri, and Ngatoro-Kaimiro) also produce gas,particularly in the latter stages of field production.••Pre-processing facilities at most fields to separate oiland condensate from raw gas and sediments.••Gas gathering pipelines, interlinking to atransmission network.14The Wealth Beneath Our Feet

Tui Oil FieldThe Tui field, brought into production inJuly 2007, has been an outstanding success.While certainly benefiting from its peakproduction coinciding with peak oil prices,resulting in full payback within 4 1/2 months,technical success has also been apparent.The project was completed on-time, on-budget. Theproduction system has operated effectively since, andprogressive upgrades have seen field reserves doublesince investment decision. However, taking the full historyof the Tui permit into consideration, the success at Tui-1involved drilling seven dry wells.Exploration is a risk industry. The rewards for successare very high, especially so since global oil and domesticmarkets have firmed in recent years. This is offset by thehigh cost of exploration wells, $5-10 million for a typicalonshore well, and $40-60 million for an offshore well,with only a 1 in 10 chance of success. In evaluating theO&G industry, therefore, we most take into account thestatistical average of 9 dry wells for every discovery.The “Tui” permit was awarded in 1996, and while the Tui-1discovery was the second well drilled, to date 8 of the 11exploration wells have been dry, despite some of the wellsbeing close to project timeline1008060$ million $ million404002001995Permit AwardedSeismicCumulative Expenditure $m (rhs)*Hochstetter-1DiscoveryTui-13D seismicPukeko-1Kiwi-1Amokura-1Pateke-1FIDHector-1, Taranui-1, Tieke-1Expenditure $m4 Development WellsProduction1997 1999 2001 2003 2005 2007 2009Tui-SW1, Kahu-110008006002000*RHS = Right hand scaleThe Wealth Beneath Our Feet15

3.2 MidstreamMidstream comprises the refining of raw crude oiland natural gas into marketable products, and theirtransmission to those markets. While some users maytolerate petroleum products within a wider range ofspecifications, most shared delivery systems (pipelines)and logistics require tight product specifications toensure user safety, that the product meets environmentalstandards, and the narrowing tolerances of end userequipment such as car engines, turbines and householdappliances. Accordingly, refineries produce a wideningrange 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 gasare quite distinct from oil. Such activities include:••Gas processing facilities to ensure gas meets pipelinespecifications (for transmission). This may includeseparation of liquids (condensate, LPG) andremoval of various impurities (nitrogen, CO2, sulphur);••The gas transmission network linking Taranaki fields tomarkets, comprising Vector, linking most North Islandurban centres, and the high-capacity Maui pipeline,owned by Maui Development Companies, from Oaonuito Rotowaro (Waikato);Midstream oil activities separate from gas activities atfield production stations. These include:••Pipeline and road transport infrastructure from thefields to central storage facilities near Port Taranaki(in a variety of ownership);••Export from Port Taranaki of almost all of New Zealand’scrude oil products, principally to Australian and Asianrefineries. These are able to pay a higher price thanNew Zealand’s own refinery at Marsden Point;••Processing of imported crude oil products (largelyfrom Mid-East and Asia) at Marsden Point refinery. TheMarsden Point refinery was materially upgraded duringthe 1980’s and is not optimally configured to processNew Zealand’s sweet light crude oils; and••Transportation of processed products to nationalstorage 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 petroleumproducts (increasingly important as nationaldemand rises - now accounts for 30 percentof market demand).••Major wholesale / industrial users such as electricitygenerators and petrochemical plants (sometimesconsidered part of the downstream); and••Import–export links, which are limited to:--Methanol – exports by Methanex, dependent onaccess to domestic gas;--LPG – imported and exported to balance supplyand demand variations; and--Urea – local production by Ballance Agri-NutrientsLtd (40 percent of total New Zealand urea demand),supplemented by imports (60 percent).16The Wealth Beneath Our Feet

3.3 DownstreamThe downstream O&G industry covers the marketing, tradingand local distribution of petroleum (and petrochemical)products to end users. These range from major wholesaleusers such as electricity generators and industrial plants,to retail markets. The largest volumes of petroleumproducts are diesel (fuel oil), petrol (gasoline) and avgas(jet kerosene). Petroleum is also the feedstock for thepetrochemical industry which produces pharmaceuticals,solvents, fertilisers, pesticides, and plastics.New Zealand’s downstream natural gas activities arelargely governed by the capacity and location of theNorth Island’s current gas reticulation network.Natural Gas industry summary 2009Downstream gas activities include:••Gas trading, marketing and retailing;••Oil product marketing and trading;••Local distribution by truck; and••Storage and retailing.There are numerous companies involved, mostly integratedwith mid- and upstream activities (such as Genesis Energy,Contact Energy, Vector, Todd Energy) and others simply asdownstream gas companies (traders and retailers). Thematerial downstream players in the New Zealand O&Gindustry are Shell (now Greenstone), BP, Mobil, and Caltex/Challenge, with smaller new entrants such as Gull operatingin some regions.The O&G industry is often defined by upstream activity,which is the primary determinant of incremental economicactivity in Taranaki and New Zealand. However, thisreport also considers demand-based midstream anddownstream activities.MAJOR GASFIELDS (PJ)Mckee10.64Mangahewa5.85Maui56.11Kapuni17.53Kaimiro/Ngatoro1.84Turangi7.70Pohokura69.02PRODUCERSWHOLESALERSTodd Taranaki100%Operator ToddEnergyShell 83.75%OMV 10%Todd Energy 6.25%OperatorSTOSShell 50%Todd Energy 50%OperatorSTOSWholesale Market (bilateral)Greymouth 100%OperatorGreymouthShell 45%OMV 26%Todd 26%OperatorShellTRANSMISSIONHIGH PRESSUREMDLVectorDISTRIBUTIONLOW PRESSUREGenesisPowerco Nova Energy Vector WanganuiGasGreymouthPetroleumRETAILERSEnergyCONSUMERSMethanexChemicalMethanolManufactureSource: MED, RockpointBallance Agri-Nutrients(Kapuni) LimitedAmmonia/UreamanufactureContact EnergyGenesis EnergyElectricityGenerationOther major users supplieddirectly from transmissionsystemBHP NZ SteelCarter Holt HarveyDegussa PeroxideFonterraTodd EnergyKiwi CogenerationNZ Refining CompanySouthdown CogenerationTasman Pulp and PaperUsers suppliedfrom distributionsystemOther IndustryCommercialResidentialThe Wealth Beneath Our Feet17

3.4 the oil and gas industry - advancing an integrated approachA conceptual way the industry could be viewed encompassing E&P, supply chain and a more extended view of the valuechain is highlighted below. The chart provides a starting point, advocating a more integrated industry perspectivethat could be further refined and built upon by others. Its purpose is to break traditional silos, to fuel lateral thinkingabout the interventions that could occur at different points of the value and supply chain and to enhance industryconnectivity. Further discussion of its components and application to New Zealand O&G activity occurs in chapter 5.Supply ChainCrown & LocalGovernmentUpstream Oiland GasCompaniesMainContractorsSystemIntegratorsProductSuppliersSpecialistTechnologyServiceCompaniesSpecialistAdvisory ServiceCompaniesSpecialisedInstitutionsIdentificationExploration &AppraisalReservoirDrillingSeismic ModellingDrilling Systems & EquipmentOil and Gas Value ChainUpstream (Life Cycle)Downstream (processes and companies)GasTransformationGas GatheringGas ProcessingGas TradingGasTransmissionGasDistributionDevelopmentProductionAbandonmentOilTransportationOil StorageOil TradingOil RefiningGovernment Ministries, Regional Councils, Economic Development AgenciesProject Managementand EngineeringOperationsFabrication and Package SuppliersSubseaMarine SystemsMechanical, I & E, TelecommunicationsMaintenance & ModificationsEnvironmental Protection, Emission & Carbon ManagementDownstream EPCDecommissioningDownstream Maintenance and ModificationLogistics &TransportationDownhole & Well ServicesConsulting, Legal, HS&E, FinanceIndependentTrading andMarketing –Petroleum/PetroleumproductsCrown Research Institutes, R&D, Universities, Training Centres, Industry Associationssource: AretÊ Consulting Ltd18The Wealth Beneath Our Feet

Fostering an Attitudinal ShiftThe 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 yearsThe industry is not insular, butinextricably interwoven with:••New Zealand’s past, present and futureeconomic development••The nation’s energy needs••The development of other high-growth industriesand New Zealand’s global competitiveness.Redefining the O&G industry isimportant to:••Fully understand the industry and its contributionto the nation’s economy••Encompass changing relationships occurring withinthe industry••Maximise its value and transformation potential••Comprehend the benefits of O&G beyond ‘royalties’,and the leverage potential at many points in the Valueand Supply Chain.The Wealth Beneath Our Feet19

4O&G Industry evolution in Taranaki and New Zealand4.1 New Zealand O&G historyFor such a remote country, New Zealandhas a remarkably long history of oil and gasexploration. In the 1860s a well was “dug”adjacent to the Motoroa oil seeps near NewPlymouth. Its success spurred a nascent oilindustry, with the sporadic production andrefining 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 deeprotary drilling. This resulted in the discovery of the Kapunigas-condensate field in onshore Taranaki in 1959. Thegovernment considered the Kapuni gas reserves, thenassessed at 350PJ, sufficient to invest in the North Islandgas transmission network, and to foster natural gasreticulation within all connected urban centres.The development of seismic imaging for offshore explorationsoon resulted in the discovery of the giant 4,000PJ Mauigas-condensate field in 1969. This bounty of gas, combinedwith the first oil crisis in the 1970s, spawned “Think Big”projects to both create new markets for gas and to reducethe country’s dependence on oil imports.That these two large discoveries, Kapuni and Maui,were both gas and occurred so very early in the modernexploration era has coloured New Zealand’s reputationas being both gas prone and constrained by a smallsaturated domestic gas market.From 1985 to 2005, low global oil prices and abundantcheap Maui gas reduced local and global anxiety over theprice and supply of oil, and further served to discourageexploration and development drilling activity in Taranakiand New Zealand. The consequence was a long period ofreserve depletion as depicted in the chart.Over the last decade rising global oil prices and introducedroyalty incentives to find and develop gas reserves havereinvigorated exploration activities, resulting in materialincreases in drilling activity since 2003.Concurrent with the activity and success in exploration,the capability of New Zealand companies to support andservice the O&G industry has grown. There are nowNew Zealand companies supporting and enablingexploration activity, building the production andprocessing plants and undertaking maintenance of alltypes of facilities. Almost all of these companies arebased in Taranaki and are accustomed to operating tothe global standards of the O&G industry and workingcollaboratively with the other industry participants.Gas Reserves - 000 PJ54MauiKupePohokuraNZ drilling history50NZ Wells per yearUS $/bbl (rhs)40100803All othersKapuni306022040110201970 1975 1980 1985 1990 1995 2000 2005 2010 2015Source: MED, Rockpoint0198001985 1990 1995 2000 2005 2010Source: MED, Rockpoint20The Wealth Beneath Our Feet

4.2 Field developmentCommercialisation of oil discoveries involves fewervariables than gas. A global market for oil always exists,albeit as a price taker rather than a price setter, and sothe rate of production can be optimised by geological andengineering factors, unconstrained by concerns aboutfinding a market. New Zealand’s premium (sweet light)crudes find a ready export market, mainly with “simpleand older” Australian refineries. Quite separately,New Zealand imports a range of Mid-East and Asian heavycrudes, which are more optimally suited to the MarsdenPoint refinery, in quantities to match domestic demand.At an economic level, exports offset imports.At an operational level oil exports and oil imports arevery different markets / products.Gas discoveries, however, are quite different. Gasproducers are captive to the small domestic market.During the Maui years (1979 to 2003), there was no unmetmarket need, with the Maui contract setting a low baseprice. Accordingly, several gas fields were produced tostrip out marketable liquids such as condensate andLPG and either flared the “waste” gas (as occurred atStratford for some years), or re-injected gas for laterrecovery (as at Kapuni).More commonly, gas discoveries remainedundeveloped until market opportunities finallyemerged and prices rose sufficiently for these fieldsto become commercial. For example:••Mangahewa – discovered in 1960 and redrilled 1997, inproduction in 1998••Kupe – discovered in 1986, in production in 2009••Pohokura – discovered in 2000, in production in 2006Production rates are often dictated by gas marketrequirements rather than optimising field performance.Post-Maui (or post the influence of the Maui gascontract), a gas market has emerged, driven by multiplesuppliers meeting demand for multiple wholesale buyers(as observed in the following figure). Price and deliveryterms are set through bilateral contracts, on both termand spot.Two recent turning points in thedomestic gas market can beobserved.First was the drilling of Mangahewa-2 in 1997. Whilethis 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 thedrilling of Pohokura-1, a major gas-condensate discoveryon the adjacent structure.NZ GAS PRODUCTION - PJ P.A.30060Maui25050Kupe20040PohokuraPJ15030YearsAll Others10020Kapuni5010Demand019701975 1980 1985 1990 1995 2000 2005 2010 20150Years Supply (rhs)Source: MED, RockpointThe Wealth Beneath Our Feet21

Second was the Maui reserves “redetermination”, whichmaterially reduced remaining contracted gas reservesand so crystallised the realisation that gas supply wasdiminishing. This saw curtailment of gas supplies toMethanex (hence the large fall in gas production on theprior chart) post-2003.This success has inevitably attracted the most explorationattention, with onshore Taranaki accounting for 48percent of all wells, and 56 percent of total metresdrilled, while combined onshore and offshore Taranakiexploration accounts for 62 percent of wells and 80percent of all metres respectively.New Zealand’s O&G discoveries by field and type arepresented in the following chart.Oil and gas reservesAll OtherTui (2007)Maari (2009)Kupe (2009)McKee (1981)Kapuni (1969)Pohokura (2006)Maui (1978)Oil - remaining67% of reserves as gas0%0%66%43%73%78%82%1 2 3 4 5000’s PJOil - produced Gas - remaining Gas - producedSource: MED, Rockpoint22The Wealth Beneath Our Feet

Kupe FieldThe offshore Kupe gas-condensate fieldoffers valuable insights into both gasmarkets and the field commissioningprocess. Operated by Origin Energy, Kupewas discovered in 1986 by NZOG, whichremains part-owner of the project.However, through the Maui era, no new market for gasexisted and so it was not until June 2006 that the fieldowners made the Final Investment Decision (FID) todeveloping 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 unmannedwell-head platform on the field. An umbilical pipelineincorporating a shore crossing linked the platform to anonshore gas processing facility.Based on public disclosures and the Kupe Gas Projectbooklet we have constructed the following chart toindicate the elements and staging of the project.Origin Energy, and its key contractor Technip, soughtto maximise the local content. In the final event, $620million of the $1.3 billion project cost was awarded to375 local companies (recognising that some of thosecompanies may have sourced parts and materials fromoffshore). Further, local companies were awarded 73percent of the expenditure they were capable of, andwill undertake most contracts associated with ongoingoperations. 6.2 million man-hours were worked from FIDto commissioning.kupe project indicative COST timeline$NZm monthly1008060$ million 40Discover 1986Shore CrossingSubseaPipelineProduction500400300200Tank FarmPipelineWellsProductions StationFTE 000 hours (rhs)20FID1000Dec-05 Dec-06 Dec-07 Dec-08 Dec-090Source: Public data, RockpointThe Wealth Beneath Our Feet23

The Think Big EraTaranaki’s methanol plants and the countriesonly ammonia-urea manufacturing plant,had their beginnings in the late 1970s andearly 1980s when the New Zealand NationalGovernment initiated Think Big as aninterventionist state economic strategy.In the face of a global oil crisis, the Government sawopportunity in the substantial reserves of naturalgas off the Taranaki coast as a means of making NewZealand more self-sufficient in transport fuels. Projectsincluded the development of a methanol plant atWaitara and the synthetic–petrol plant at Motonui.During the time of construction, over 2000 workerswere employed, and at the height of production therewere over 400 employees. However making syntheticpetrol proved uneconomic when the price of crudewent down. Motonui was sold to Fletcher Challengewho later on-sold it to Canadian- headquarteredMethanex. The company constructed distillation unitsat the facility, commenced methanol production,and ended synthetic petrol manufacturing. Reevaluationof the Maui gas reserves in 2003 curtailedgas supplies to Methanex, leading to the closureof the Motonui facility in 2004 with the company’sremaining operations focusing on the Waitara Valleyplant. However in 2008, Methanex reopened one ofits two production units at Motonui after a $70 millionrefurbishment project, and closed its Waitara Valleyplant. With global methanol prices buoyant, in 2010Methanex has signalled a desire to refurbish Motonui-1,to avoid the need to stop methanol production in theface of their required code-of-compliance inspections.The ammonia-urea plant at Kapuni was also builtto make use of the Government’s ‘Take or Pay’ gasarrangements. Early production was initially exported,but internal demand now absorbs all of the productproduced. Now owned by Ballance Agri-NutrientsLtd, the plant has been significantly upgraded. It is avaluable source of jobs, added-value manufacturingand its product is utilised on New Zealand farms toenhance plant growth and productivity.The concept of State Interventionand the ‘Think Big’ era has been thesubject of critical review, with manystill unconvinced of its business case.However the projects which stemmedfrom it have contributed positivelyand widely to New Zealand’seconomic and social well-being,and have been instrumental in thecreation of a viable gas market.The importance of facilities such as Methanex, withinthe overall context and attractiveness of New Zealand’soil and gas industry, should not be underestimated.Explorers invest significant money, time and expertiseto find oil and gas, and then develop the fields. Thepresence of major gas customers plays an importantrole by providing oil and gas producers with a localmarket for their indigenous gas.24The Wealth Beneath Our Feet

Construction of the gas-to-gasoline plant at Motunui, early 1980.The Wealth Beneath Our Feet25

4.3 Emergence of local capabilityThe discovery, development and operationof the Kapuni and offshore Maui fieldsheralded the development of considerablelocal O&G industry expertise in Taranaki.Oil major Royal Dutch Shell (Shell) has been the primarydriver of this process. Active in New Zealand since1955 as part of the Shell Todd Oil Services joint venture(STOS, previously Shell BP Todd), Shell brought withit a combination of internal technical capability andcompliance with, and development of, international oilindustry systems and standards of which Taranaki hasbeen a significant beneficiary.Shell’s continuous presence as an operating companyhas provided an invaluable opportunity for localservice industries to learn and develop O&G capability,an exposure that has since been supplemented by asuccession of other major global companies participatingin the New Zealand O&G industry at both the upstreamand midstream levels.Working alongside the internationalcompanies, Taranaki companiesgrew on the back of the oil and gasindustry – not only as a result of thegrowth stemming from the additionalwork, but the development of skillsacquired from participation in the oiland gas industry and exposure tosophisticated international systems.The global O&G industry demands high standardsin construction and operations, reflecting the needto handle flammable and corrosive materials underhigh temperatures and pressures. Arguably the mostexacting global industry, O&G has presented a significantopportunity for local contractors to up-skill from otherindustrial sectors. A long standing commitment exists byE&P companies to foster and develop, where possible,this local capability in Taranaki.The evolution of expertise has included a diversity ofsupport industry roles such as consultancy concerning entrystrategies, land access, professional services, collection ofseismic information, district planning, environmental advice,health and safety training, engineering, design, electricaland mechanical work, and transportation.In the early years, processes wereevolutionary as oil companies,local authorities and the Taranakicommunity grappled with themushrooming onshore developmentand new territory.Taranaki’s rural community had for many years, beendriven by dairy farming. Few had experienced large scalecommercial development. The arrival of the oil andgas companies meant the introduction of a whole newindustry and change to the rural landscape, traditionand lifestyle once known. Noise and roading wereparticularly affected.Communication, monitoring and the use of developmentlevies fostered conformity in approach with respect todistrict planning. New systems included the developmentof model agreements e.g. the voluntary land access codeby Federated Farmers and PEANZ (now PEPANZ).26The Wealth Beneath Our Feet

The economic impacts of the onshore petroleumdevelopment in Taranaki were not analysed to theextent of the Think Big projects (which arose in the late1970s, early 1980s), however many sectors benefittedconsiderably from this earlier phase such as metal androading contractors, trucking firms, engineering andspecialist servicing industries.The effects of Think Big were more pronounced. Theirdevelopments created benefits and also pressures for theTaranaki community, such as housing and workforce.Construction progress featured almost daily in the mediaand on national news. People were in awe of the hugevessels and engineering modules being transported totheir sites. Drilling rigs and support vessels dwarfed othervessels on the coastline. Then, from the mid-1980s thislarge scale activity began to wind down.The oil and gas industry of Taranaki today reflects aculmination of this experience. Taranaki has evolvedan extensive system of infrastructure that supportsupstream and midstream industry. Infrastructureincludes gas production and storage facilities, PortTaranaki, and the pipelines that transport gas throughoutthe north island. Feedstock includes Methanex andBallance Agri-nutrients, which are significant companieswithin the region that exist in New Zealand because of theavailability of local gas. The energy sector is supportedthrough three power stations within the region and gassupply to others (including Huntly) as well as a soonto be completed LPG production facility, and supply tocommercial and residential end users.There is maturity to the region’s O&G systems, knowledgeand capability and to relationships, both formal andinformal in nature, that have evolved over the years.As the region is home to all thecommercial discoveries andproduction of oil and gas to date,New Zealand’s expertise hasremained concentrated in Taranaki.Local industry continues to be actively involved in theoperations and maintenance of O&G activity and issupporting the new exploration and development workpresently occurring in New Zealand.However the limited size and scale of New Zealand’sO&G industry means that few supply chain businessesare totally focused on the oil and gas industry. O&Gtends to comprise one element of a diversified industryportfolio mix. They have evolved expertise to becomeglobally competitive – exporting products and servicesto international O&G markets. Consortiums have evolvedfor added leverage, and companies have developed nichespecialities and technological advancements.The Wealth Beneath Our Feet27

Fitzroy Engineering GroupFitzroy Engineering is a provider of heavyengineering, construction and maintenanceservices particularly to the O&G industry.Starting in O&G on the Maui project in the1970s, Fitzroy Engineering is often citedas a key success story for Taranaki.Once a small engineering firm, the company developedsignificantly as a result of their participation in the O&Gindustry. Today Fitzroy employs 385 FTEs and derivesover 80 percent of its revenue from the O&G industry,which has included substantial projects for the fourNew Plymouth domiciled E&P companies, Shell, Origin,AWE and OMV.Fitzroy identifies three types of project based work, beingfabrication, construction (installation and assembly) andmaintenance (offshore and onshore processing plants),with only maintenance contracts providing a steady workflow. Like most local contractors, Fitzroy has struggled to becost competitive against Asian fabricators. However, unitsfabricated 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 iscurrently expanding through acquisitions and has wona $25m contract for Origin to build an accommodationunit for the Yolla offshore platform. Fitzroy is targetinggrowth in coal seam gas and LNG.Duplex vessels, kupe gas projectScope of Work: Design and fabricate duplex HighPressure Separator and Condensate Flash Drum. TheHP Separator is 49mm thick and is the largest heavywalled duplex vessel built in Australasia to date.28The Wealth Beneath Our Feet

STOSShell Todd Oil Services Limited (STOS)is a pioneering gas and oil operator thathas been active in New Zealand for morethan 50 years and is owned by ShellPetroleum Mining and Todd PetroleumMining who each hold a 50 percent stakein the company.STOS operates a number of gas fields, production stationsand a tank farm for joint venture partners including Shell,Todd Energy and OMV New Zealand. These fields includeMaui and Kapuni.As New Zealand’s largest operator, STOS has set safety,operational and environmental benchmarks in theindustry, underpinned by Shell’s global standards. Thecompany employs some 300 personnel in a wide varietyof roles including operations, sub-surface analysis,drilling, engineering, and support services.It indirectly employs many more through a wide range ofsubstantial contracts.STOS has a Goal Zero operating philosophy, no harmto people and protect the environment, and values itsstrong community relationships built up over its 50 yearhistory in Taranaki.The Wealth Beneath Our Feet29

ArabacArabac (Aerial Abseil Access (NZ) Limited)is an industrial abseiling company whosespecialist clients include the O&G industry.In 1995 they were the first company to introduce andprovide Industrial Rope Access Services to the ShellTodd Oil Offshore Oil and Gas installations ‐ Maui A,Maui B and Whaakaropai (Offshore Floating StorageInstallation). Today the company undertakes contractsnation-wide and internationally, but retains its primebase in Taranaki. Arabac's advanced abseiling techniquesare used where other forms of access are impracticable.While the majority of contracts involve industry blastingand painting, inspections and fitter/welding, Arabac alsooffers many other trade skills accessed through allianceswith other local specialist companies.Digital InsightDigital Insight is a small company, operatingout of a farm shed near Inglewood. It specialisesin in-situ inspection of industrial processequipment in O&G (60 percent offshore), andnow operates globally, catapulted bya contract for Conoco Phillips in 2003.With innovation in surveying, inspection plans andcertification the company has since worked for a varietyof major and mid-sized E&P companies. Digital Insightdevelops and adapts technology itself, providing amaterial advantage over its global competitors.Whilst Digital Insight has become one of the leadingcompanies globally in their field, it is a very specificniche market. The company intends to remain based inTaranaki for lifestyle reasons and because New Zealandoffers the right sort of people for the roles theyundertake. The support of the Taranaki O&G Cluster isalso important because it provides market intelligenceand collaborative marketing opportunities.30The Wealth Beneath Our Feet

ITLITL was established in 1988 and providesengineering design and build solutions forindustrial process plants, principally in O&G.With 4 principals it grew to 10 staff by 2003.However, a strategic rethink in 2003 has seen growthsince assume a steeper trajectory, with 55 staff now andan anticipated 100 FTE within 2 years. 80 percent of ITL’swork is Taranaki-based, 90 percent in O&G. The upstreamwork is with onshore facilities, with offshore work limitedto topsides (above water). ITL are extensively involved inpipeline work (midstream) and opportunistically considernon-O&G projects.ITL differentiate themselves by providing E&P companieswith turnkey options on some projects, working inpartnership with other providers such as FitzroyEngineering, but also maintaining strong relationshipswith other key providers. This collaborative approach isconsidered key to the continued success of the TaranakiO&G companies. Recently ITL has expanded offshore,establishing an office in Brisbane principally to pursuecoal-seam gas opportunities.The Wealth Beneath Our Feet31

An evident feature of Taranaki’s O&Gindustry is the collegiality of thesupply chain. This is not to say thatcompanies don’t compete, but ratherthat an acknowledgement existedwhere, through co-operation, thecollective capability was greater thanthe individual parts.Timelines in O&G projects are often tight, and the scaleof projects can prove a test for individual companies.Partnerships reside between companies concerningworking relationships, project structure, collaborativemarketing, the sharing of market intelligence and themanagement of peaks and troughs. There are benefits byworking together.Despite advances in communication technology and theincreased flexibility of long distance travel, there are clearsynergies available for O&G service providers that arelocated in close proximity to each other and key clients.The following table summarises the positive externalitiesavailable by locating in close proximity to potentialclients, and to complementary, and competing,service providers.The importance of geographic proximityLocated nearPotential ClientsComplementary ServicesCompeting ServicesBenefits Include••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••Referrals••Collaborative marketing••Collaborative industry training programmes••Economies of scale from a greater service base••Access to a larger pool of skilled labour••Ability for potential clients (especially international) to more easily visit andcompare competitive service offerings••Faster recognition of new competitive initiatives and / or new technologies••Potential supply chain synergiesIt is no coincidence that Taranaki, representing the entire upstream O&G market is home to almost all of New Zealand’sO&G service providers (and FTE employees).Taranaki represents the logical location for companies involved in O&G, which recognises the merits in obtaining theidentified synergies. As exploration expands to other regions, strategic hub and spoke relationships between Taranakiand the emerging areas is anticipated to emerge.32The Wealth Beneath Our Feet

Transfield Worley LtdTransfield Worley Ltd is a New Zealandbased company with two ASX listedshareholders Transfield Services andWorleyParsons.They offer a complete range of project management,engineering and construction services across a widespectrum of industries with a proud 25 year history ofinvolvement and success in New Zealand’s Oil and Gasindustry. With its New Zealand head office based inNew Plymouth, the O&G industry is a key focus for thecompany including 200 of its 260 local staff.The company provides services for many of New Zealand’sE&P companies ranging from concept evaluation andfeasibility studies, through detailed engineering anddesign, to procurement and construction, maintenanceand operations support. Key clients include Shell ToddOil Services, Todd Energy, Origin Energy, Contact Energy,Prosafe, OMV and AWE.The Wealth Beneath Our Feet33

36countries) to sustain capability across all technical andspecialist sectors, especially given the discontinuous(project based) nature of O&G activities. Accordingly,global centres of excellence develop to support theO&G industry, such as shipbuilding, offshore platformfabrication and specialist technical services. Localcompanies benefit most from production operationswhere the focus is on ongoing maintenance andmonitoring.••Location of E&P project teams: The activities withineach exploration joint venture are managed by theoperating company. An operators’ geological teamdrives the exploration and appraisal activities, whilethe engineering/project team drives the design anddevelopment. Given most E&P companies operateglobally, they will tend to develop centralised geologicaland project capability, often close to a regional centreof activity in O&G, such as Houston, Aberdeen or Perth.Production, once established, is typically managedby operation teams located close to the field/project,providing greater opportunity for local companyparticipation.Based on discussions with O&G participants, and ourresearch on the O&G industry, the costs associatedwith a variety of “type” projects are represented toindicate the degree of participation of local companiesthroughout a project lifecycle.These are illustrative only, and are not based on theactual cost of any project. Note that:••Success rates for exploration drilling are typicallyassumed to average 1:10. Accordingly, for everycommercial discovery (which leads to a fielddevelopment) the cost of nine dry exploration andappraisal wells (in which local companies canparticipate) needs to be considered.••Production costs are largely operational (some capitalexpenditure relating to maintenance and upgrades),and are incurred over the field lifetime (decades).••An estimate of the portion of project lifecycle costs ineach cost category that has been made in the table onpage 37 as well as the amount that could conceivablybe incurred by engaging local contractors.The Wealth Beneath Our FeetLocation of EngineeringProcurement ConstructionCompaniesOnce the E&P company has finalised itsFront End Engineering Design (“FEED”) theywill then contract the entire project withan Engineering Procurement Construction(“EPC”) provider.The companies that provide these services are allbased in Australia given the far larger O&G industry thatexists there. There are 8 – 9 EPC companies active inAustralasia including Bechtel, Technip, Cloughs, WorleyParsons, AMEC and TECQ.These companies will contract to manage the entireconstruction process against an agreed design, timelineand budget. They have discretion on how this is achieved,on how the project is broken down and who is contracted toprovide the required components. As part of the contractthey enter into they will typically accept the obligation topay liquidated damages for failure to deliver on time andto specified standard. The scale of such potential damageswill always preclude any New Zealand company fromgaining these sorts of roles as they do not have thefinancial strength.The EPC will determine how the total project is brokendown and will contract with a range of parties for eachof these packages. Some packages will be supplied byindividual companies all contracting directly with the EPCand others will be supplied by a prime contractor who inturn will form a project specific J/V and enter into a rangeof contracts with sub-contractors. The prime contractorwill accept responsibility for that portion of the contractthey are supplying directly as well as responsibility for coordinatingthe work of all of its sub-contractors.There are a few New Zealand companies that have the abilityto contract directly with the EPCs for the supply of majorcomponents. Fitzroy Engineering is an example of such a companyand has carved out a niche for itself in the area of high pressurevessels. However, by O&G industry standards Fitzroy, whilstprobably the largest heavy engineering company in New Zealand,is still a very small company. The overseas location of all of the EPCcompanies is a further barrier to New Zealand companies buildingup strong relationships and credibility.

Indicative Project Cost Breakdown - and NZ Content - NZ $mProject Stage Onshore Oil(shallow)Onshore Oil(deep)Onshore Gas(deep)Offshore Oil(FPSO)Offshore Gas(onshore facilitIes)NZ NZ NZ NZ NZPre-exploration 5 5 5 4 5 5 5 3 5 3Exploration 30 20 70 45 100 66 300 84 300 86Appraisal 12 9 42 29 60 43 60 22 60 23Design/FEED/FID 6 5 11 8 16 11 50 18 50 17Development 25 17 60 38 55 34 55 13 900 394Production 20 19 30 28 60 55 120 76 300 210Decommissioning 1 1 3 2 3 2 30 10 100 3699 75 221 155 299 217 620 225 1715 767% NZ Content 76% 70% 73% 36% 45%Research confirms local companies enjoy a high potential share in the exploration/appraisal stage of an onshore project, anddominate in longer-term production stages of both onshore and offshore projects. Offshore projects tend to be larger andmore technically complex, requiring technical and engineering expertise unavailable locally.NZ content in O&G projectNZ ContentNon-NZ ContentOffshore Gas(onshore facilities)Offshore Oil (FPSO)Onshore Gas (deep)Onshore Oil (deep)Onshore Oil (shallow)0 5001,000 1,500NZ$ million2,000(Source: Rockpoint)While only one example, Origin Energy’s Kupe project broadly corresponds to these estimates, where New Zealandcompanies were awarded around $600 million (40 percent) of the total $1.35 billion project cost, representing 73 percentof the capacity they were eligible for. By implication, the potential local content was over $800 million, or 60 percent ofthe overall project.The Wealth Beneath Our Feet37

5.2 Growth AvenuesMany Taranaki companies presently hold significantongoing contracts with the major E&P companies forthe maintenance of platforms, processing plants andother significant infrastructure. The contracts typicallyunderwrite local companies as their core business withany major projects being in addition to this.There has been substantial development work overrecent years on the Pohokura, Maari, Tui and Kupeprojects that have now come to an end. Having investedin their workforces and capabilities, many companiesare now looking to pursue O&G or energy contracts inoffshore markets and / or expand into other sectors inNew Zealand.The primary growth opportunities forO&G supply chain companies fall intothree categories:• O&G in Taranaki, or elsewhere inNew Zealand• O&G overseas; and• Diversification into other industries.O&G Expansion: Domestic and InternationalSome Taranaki based companies already participatein O&G activities elsewhere in New Zealand. Severalhave established offices elsewhere in New Zealand oroverseas, building from their Taranaki O&G base, andoften forming alliances with companies established inthese target markets.Most have sought participation inthe Australian O&G industry wherethe sheer scale of activity providesgreater opportunity.Taranaki companies are targeting O&G, Coal Seam Gas(CSG) and / or LNG projects in Australia and PapuaNew Guinea. To do this, they are leveraging their existingrelationships with Australian based companies into theprojects being undertaken by these companies.Over the next few years it is also anticipated that therewill be several major LNG projects based on the CSGreserves of Queensland.A number of New Zealand based companies arecollaborating to pursue participation in these projects.In part such collaboration is due to the recognition thatNew Zealand companies are typically seen as being toosmall by the project teams of the major E&P companiesand the EPC companies to be taken seriously for overseasprojects. Collectively they can demonstrate and train toachieve the capability sought by the industry.38The Wealth Beneath Our Feet

To date New Zealand companies have had limited successwinning contracts in the Australian market. Our researchsuggests this can be attributed to a number of factors:••It is difficult to build strong relationships with theE&P company project teams and with the EPCcompanies as none of these are New Zealand based,and the project-based nature and high mobility ofpersonnel in these organisations limits contact andrelationship building.••Overseas, the New Zealand companies do not possessthe same natural advantages they enjoy in theirdomestic market.••Stronger competition from the major internationalengineering and service providers overseas.••Strong competition from their Australian equivalentswho enjoy a domestic advantage. This is heightenedby the relationships that the Australian companies willhave with the Australian based E&P project teams andEPC contractors.Industry DiversificationA secondary strategy being pursued by a number of theNew Zealand O&G companies is to diversify into othersectors in New Zealand. The principal sectors they arefocusing on include geothermal generation, electricitygeneration, the dairy industry, wood processing andother major industrial plants.Whilst they undoubtedly possess the technicalcompetence to be successful in these sectors, manyfeel disadvantaged by the cost structures inherent inthe companies from their ongoing work in the O&Gindustry. The factors contributing to this issue are variedbut include higher overheads from additional qualityassurance staff, higher health and safety standards, andhigher wages, salaries and ongoing training costs.Having established a corporate culture and processesthat attain and maintain the standards required by theO&G industry, it is difficult to set different standard levelswithin the one company.On the other hand, more stringent health and safetystandards can offer a comparative advantage forcompanies to market when seeking to leverage expertiseinto non O&G related sectors. While the servicesand products they can offer may be marginally moreexpensive, the intangible benefits, including reducedaccidents, stronger / more durable equipment, lowerpollution, and increased goodwill in the community, canbe attractive to prospective customers.Workforce and TalentCapability is frequently interwoven with workforce requirements. Key issues confronting the O&G industrypresently include difficulties attracting good and qualified specialist staff and the replenishment of the agingdemographics. The aging demographics is due in large part to the downsizing that occurred in the global O&Gindustry in the mid 1980s and subsequent lack of recruitment over the next 15 years. Active promotion of the industrywithin New Zealand schools and universities is being led by industry and training agencies such as the PetroleumSkills Association, Western Institute of Technology at Taranaki (WITT) and the Extractive Industries TrainingOrganisation (EXCITO).International recruitment of staff is frequently necessary by the O&G companies due to their specialist skillrequirements. 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’sO&G capability and growth.The Wealth Beneath Our Feet39

Wells Instrument and ElectricalWells was formed in 1984 with a Taranakifocus on the local emerging petrochemicaland oil and gas industries.Initial contracts included the carrying out ofinstrumentation & electrical work on gas pipelineblock valve and compressor stations and on initialcommissioning activities on the “Gas to Gasoline”plant at Motunui. This enabled the company to developcapability and a positive client track record in the O&Gindustry. Wells has maintained ongoing relationships withindividual clients which now stretch to close to 20 yearsWells has been involved internationally in assisting withinstallation, commissioning and inspection activitiesfor oil and gas and hazardous chemical operators inAustralia, Japan, Singapore and New Caledonia. Recentprojects for Wells include the provision of over 100 trade/technical staff over an 18 month period for the executionof the I&E construction activities for the Kupe ProductionStation in South Taranaki and the carrying out of the I&Econstruction activities at the Contact Energy StratfordPeaker Power Station. The Wells Group currently employsover 475 staff and about 35% of its business focuses onthe oil, gas and petrochemical industry with another 55%in the wider energy sector.“Not only has the O&G industrybeen the backbone of Wells’ growthbut exposure to this industry hasbeen instrumental in the formationof our high-spec health and safety,and management systems. Thesesystems have, in turn, opened doorsto broader energy and industryprojects and formed an importantpart of our company philosophy,competitive advantage and point ofdifference. So the benefits for us notonly include the O&G work itself, butthe opportunities and in-roads it hasprovided for wider leverage”.Graham WellsManaging Director, Wells Group Limited40The Wealth Beneath Our Feet

Hooker PacificHooker Pacific (“Hookers”) is a Taranaki-basedtransport company that traces its roots backto 1869 and 17-year old entrepreneur, JohnHooker. Hooker Pacific is owned by the privateTIL Group which also owns TNL Freighting,PLPL and Actus Transport.Hookers have been heavily involved in the O&G industrysince the first major commercial discovery of the KapuniField 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 thelast decade has been the Fuel Haulage division. Theysuccessfully tendered to take over the nationwidedistribution for Rockgas and earlier this year celebratedthe 10th anniversary of this contract. Then, six yearsago, they successfully tendered for the Chevronpetroleum product haulage contract, which transformedHookers into a major O&G transport provider. Hookersalso commenced a very similar contract in 2009 forGreenstone to distribute Shell products nationwide.Hooker Pacific Fuel Haulage is now one of the majorplayers in this industry utilising 170 trucks, brandedHookers, with operations integrated across these threeseparate contracts.These fuel haulage contracts demand high standardsfor technology, monitoring, training and health & safety,and are subject to regular audit. The industry providesa significant positive for Hookers such as drivingefficiencies, staff up-skilling, new technologyand 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 forTodd Energy, Origin, Kupe and Tag Oil from field orprocessing plant to storage facilities••Storage and logistics services for the off shore well sites••International and domestic furniture relocations••International freight forwarding and customsclearances.The Wealth Beneath Our Feet41

6Economic impact of the Oil and Gas IndustryThis section explores the economic impactof the O&G industry on New Zealand andTaranaki in particular.The Economic Impact Analysis (EIA) focuses primarilyon upstream activity as a core driver of O&G industryflow-on activity. However, it is acknowledged that thesuccess of the industry is often inextricably limited tomidstream and downstream activity. The difficulty withboth midstream and downstream activity is proving andquantifying the additionality of their contribution.In terms of midstream and downstream activity, it couldbe suggested that much of this activity would not haveoccurred in New Zealand, and definitely not in Taranakiwere it not for the discovery and production of oil andgas in the region. With the industry and associatedinfrastructure established and concentrated withinTaranaki, it provides the base for further activity, not onlywithin the region, but nationally and internationally.6.1 METHODThe EIA follows the accepted practice of identifying thedirect activity associated with the industry and thenapplying multipliers 1 to determine the indirect andinduced effects of that initial activity.For this analysis we have used employment as the measureof activity. Employment has been identified through a varietyof sources, including the BERL Regional Database, publicinformation (such as websites and annual reports) andthrough direct contact with businesses in the O&G industry.The approach to identifying industry activity differs fromthat used in the BERL 2007 report. The 2007 analysisrelied on Statistics New Zealand data to identify directemployment in the O&G sector and then used multipliersto determine the indirect and induced effects.Based on the interviews we havesubsequently undertaken we believethat these numbers grossly underestimatethe direct employmentresulting from investment and activityin the O&G sector.This under-estimate results from the classification of keyO&G support companies to industry segments outsidetraditional O&G groupings despite the fact that O&Gcompanies form their primary customers.To avoid double counting, where the company mightbe included in the indirect multiplier as well, we haveexcluded the first round effect when calculating theindirect and induced impacts for the industry. However,for downstream and project impacts, where we have notidentified the major suppliers, we have included the firstround effects in the calculations.1At 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 53industries. We have used GDP deflators that take into account inflation to provide real prices and have allowed for the difference in industrybreakdowns to ensure consistency across the two sets of multipliers.42The Wealth Beneath Our Feet

Kingsway MenswearKingsway Menswear has been selling men’sclothing from a high-profile corner site incentral New Plymouth for 75 years, and hasseen the oil and gas sector expand from asmall niche industry to a major driver of thelocal economy.Paul Clarke and his son Matthew own and run the business,which specialises in high quality and high service men’sfashion with a specialty store focusing on Canterburybranded apparel and corporate team wear. While a clothingstore may not be an obvious benefactor from Taranaki’soil and gas industry, the business is quick to acknowledgethree positive impacts of having the sector - and its globallyconnected workforce - based in Taranaki.“There’s an obvious retail spinoff, as the many overseascontract workers come into the region and seek qualitybrands and service,” says Paul.“It has also contributed to our move into team wearfeaturing iconic Kiwi brands like Canterbury to meet theneeds of corporate groups. There’s strong demand forcompany branded gear and event clothing for trainingcourses and conferences.”The third main benefit is a little less obvious, and relates tothe myriad ways the sector supports the wider community.“CEOs, managers and staff, with international experienceand links, have made a real impact by getting out thereand supporting community groups and organisations,through sponsorship, but also by sharing their timeand expertise.”“Sitting at business and community events, you can beat the same table as international business leaders. It’sfantastic,” enthuses Paul.He sees the flipside as the contract nature of the industry.“While we do get a lot of nationalities through the door, andin many cases become friends with them, we see a lot ofcustomers from the industry come and go,” says Paul.“In that regard it’s a lot like film” he says, in referenceto the Warner Brothers production of Last Samurai,which injected around $50 million, Tom Cruise and BillyConnelly into the region in 2002-2003.This constant flow of people with international spendingpower has enabled Kingsway to focus on building asuccessful business to meet their needs.“We stock a number of high quality classically styled,more hardwearing brands almost exclusively for the oiland gas industry market, but we’re really known for ourquality and service. This seems to be well respected bythe international customers we see regularly.”But when it comes to the broader economic impact of theoil and gas industry, he is unequivocal.“There’s no question the industry is a huge benefit tothe region. It’s certainly played a part in Taranaki’sweathering of the economic storm better than most, andwe have traded well throughout the recession, thanks inpart to them.”The Wealth Beneath Our Feet43

6.2 OIL AND GAS – UPSTREAMAs a part of the project we identified companies thatwere either directly active in the O&G industry or wereheavily involved in the industry as first round contractorsor suppliers. We do not consider this a definitive list andin some cases an estimate of FTEs has been necessary.However, these shortcomings are likely to result in anunderestimate of the size of the industry and so the finalEIA can be considered conservative.Through a combination of face-to-face and telephoneinterviews, supplemented with publicly availableinformation and best estimates, we were able toidentify employment for the majority of O&G associatedcompanies both nationally and within the Taranaki region.At this stage we can comfortablysuggest that, although higher thanthe figure achieved through othermeans 2 , this economic impact is aconservative estimate.The following table breaks down employment within thecompanies assessed to nine industry sectors.Our analysis to date has identified 139 companies wherea significant identifiable portion of their activity is directlyassociated with the oil and gas sector in New Zealand.The authors believe that this list includes all of theupstream industry participants and the majority of themidstream companies operating in the New ZealandO&G industry. These companies employ approximately3,400 FTEs in New Zealand, 3,200 of which work in theTaranaki region.With estimates of employment at a national and Taranakilevel, we are able to apply multipliers to determinecontributions to GDP and output, not only from directO&G companies but also incorporating indirect andinduced effects.Employment BreakdownNumber of Companies New Zealand TaranakiE&P Companies 19 666 605Drilling 6 173 173Engineering 23 1,073 1,053Government Agencies 4 13 2Logistics 13 467 466Professional Services 11 22 13Research and Training 8 53 31Technical Services 47 479 466Wholesale Trade 8 428 396Total 139 3,374 3,205Employment in O&G (Source: BERL, Rockpoint)2Such as Business Frame data or PEPANZ membership estimates. Economic impacts applying these sources are included in the appendix.44The Wealth Beneath Our Feet

Directly, the O&G industry accounts for approximately one percent of national GDP and one fifth of one percent ofnational employment. However, within Taranaki, the O&G industry accounts for almost a third of regional GDP, and sevenpercent of employment.NZ O&G SectorDirect Direct +IndirectTotalImpactOutput ($mn) 2,703 3,184 3,544GDP ($mn) 1,782 2,003 2,182Employment (FTEs) 3,375 4,694 6,062Source: BERL, RockpointBased on 3,375 3 FTEs employed directly in O&G upstreamactivity, the industry contributes $1.78 billion to theNew Zealand economy. Adding indirect and inducedeffects to the figures increases employment to 6,026 FTEsand GDP to $2.18 billion.Taranaki O&G SectorDirect Direct +IndirectTotalImpactOutput ($mn) 2,541 2,737 2,894GDP ($mn) 1,684 1,771 1,843Employment (FTEs) 3,206 3,681 4,221Source: BERL, RockpointWithin Taranaki, employment is only slightly lower than thenational level at 3,206 FTEs and contributes $1.68 billion tothe 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 theO&G industry occurs in Taranaki.4 Employees spend money (induced)1 O&G companies are attractedto Taranaki/NZ by potentialO&G economic prospectsLeads to more activity andemployment by local businesses2 O&G industry spend money inTaranaki/NZ undertaking exploration,construction and production,creating employment (direct)$3 Local companies buy goodsand services (indirect)3Note that the numbers do not add up exactly due to rounding. Similarly, reporting of numbers in the text are rounded to avoid spurious accuracyand legibility.The Wealth Beneath Our Feet45

O&G vs dairyThe O&G industry in Taranaki can be compared to theother major industries in the region. A good gauge of itssignificance is a comparison to the dairy industry 4 .Indicator O&G Dairy TaranakiTotalEmployment (FTEs) 3,206 6,436 47,930GDP ($mn) 1,684 678 5,307Labour525,296 105,345 103,162Productivity (NZ$/FTE)Business units 130 2,621 14,517Source: BERL regional database, Statistics NZWhile the O&G industry employs lessthan half as many people as the dairyindustry, it contributes almost 2.5times more to regional GDP. This islargely a result of the capital intensityof the industry, which results in highlabour productivity of the sector atover $525,000 per FTE.4This includes both dairy cattle farming and dairy processing.6.3 MAJOR CONSTRUCTION PROJECTSThe approach applied in this report differs from that in the2007 BERL EIA report in that a full life-cycle assessmenthas been undertaken. The process assessed spans fromexploration through to production and decommissioning,and is broken down to a project or well basis.As such, industry activity has peaks and troughsdepending upon the projects in train and the stage ofdevelopment. In recent times, there have been a numberof field and well development projects (new well projectsas well as existing well development projects) that haveseen the industry operate at a relatively high level ofactivity for a number of years. These ‘major’ projectsare 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&Gindustry has resulted in changes to how developments arelikely to be undertaken in the future and also provides theopportunity to extend the productive life of existing fields.For example, the Maui field was anticipated to bewritten off as fully depleted several years ago. However,new technology has enabled small pockets of gas tobe detected and other areas of low pressure gas tobe extracted. In addition much of the remaining gas istrapped between layers of water and is being accessedby horizontal drilling.46The Wealth Beneath Our Feet

Each project has a different economic impact, dependingupon where the activity occurs (onshore vs. offshore), howthe resource is extracted (piped onshore or direct export viaFPSO), and what is being extracted (oil, gas or both).This report considers projects asseparate to the general economicactivity, as activity can potentiallychange dramatically depending onthe success or failure of projects. Theeconomic impact of individual projectscan be significant and would skewthe economic impact of the industry ifincluded.6.4 ROYALTIES AND TAXE&P companies are required to pay royalties on the oiland gas produced as well as company tax on profitsgenerated in New Zealand.6.4.1 RoyaltiesRoyalties on the oil and gas produced make up themajor proportion of total royalties collected by theNew Zealand Government.In the year to June 2010, total royalties collected by theGovernment amounted to $451 million.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, onaverage, 92 percent of total annual royalties collectedby the Government. However, over the last two years,O&G royalties have accounted for closer to 97 percent ofall royalties collected. This coincides with a significant(fivefold) increase in royalties in the 2008/2009 year,predominantly an outcome of increased oil production 5 .Exclusion of projects from the EIAOur EIA does not include the activity generated fromsignificant construction projects. This is due to the valueand the variability of these projects, which could skewthe EIA results.For example, the Kupe project cost $1.3 billion and tookseveral years to reach production. While a large portionof this expenditure was spent offshore (on goods andinternational consultancy) a good portion of it was spentin New Zealand on local production and services.The earlier report (BERL, 2007), estimated that around$620 million of this project would have been spentwithin New Zealand (including imported equipmentand services), mostly in Taranaki.That report looked at the construction costs of the fivemost recent projects undertaken in New Zealand – Kupe,Cheal, Pohokura, Maari, and Tui.Nationally, it was estimated that the last five projectsresulted in total employment of 8,715 FTEs for one yearand contributed around $660 million to GDP.Last five projects (New Zealand)Direct Direct +IndirectTotalImpactOutput ($mn) 954.2 1,493.8 2,046.6GDP ($mn) 276.7 455.3 658.2Employment (FTEs) 4,053.1 6,424.4 8,715.1Source: BERLWithin Taranaki, the construction of the last five projectscontributed $450 million to the regional economy andemployed 6,350 FTEs for one year.Last five projects (Taranaki)Direct Direct +IndirectTotalImpactOutput ($mn) 756.5 1,210.4 1,354.2GDP ($mn) 219.4 379.5 454.1Employment(FTEs)3,506.3 5,680.3 6,346.5Source: BERL5Mineral royalties have also increased each year, although off a significantly lower base ($11.3 million in 2009/2010).The Wealth Beneath Our Feet47

Royalties60050040030020010002004/20052005/2006 2006/2007 2007/2008 2008/2009 2009/2010Energy Resource Levies Gas Royalties - Petroleum Total Royalties and leviesSince the 1970s, the O&G industry has supplied a steady income stream to the Government via royalties.National Royalty Statistics40035030025020015010050019701972197419761978198019821984198619881990199219941996199820002002200420062008Source: Crown MineralsTotal royalties started increasing in 1976 before easing offto between $100 and $150 million per annum through to2008, when royalties spiked to over $350 million 6 .Between 1970 and 2008, the Government received closeto $3.1 billion in royalties. An important observation isthat over ten percent of that came in one year (2008) andthat annual royalties only surpassed $100 million in 1998.6.4.2 TaxAs well as royalty payments, oil and gas companies paycompany tax on profits.The upstream oil and gas sector contributed around $1.4billion in company tax between 2004 and 2009. This isequivalent to around three percent of the entire companytax take in New Zealand over the period 6 .6Source: 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.48The Wealth Beneath Our Feet

Royalty RegimeNew Zealand’s petroleum royalty regimeis based on the greater of 5 percent of thevalue of production (AVR) or 20 percent offield profits (APT), in most cases the latter.Economic returns are also derived from E&P companytax, and the wider benefits of local employment.The correlation between royalties and production(chart below) shows the sharp rise in royalties as newfields such as Pohokura (June 2006), Tui (July 2007)Maari (February 2009) and Kupe (August 2009) cameon-stream. The increase reflects both the oil/liquidsrich new fields, and that the older fields (Maui andKapuni) were subject to a different gas-based royaltystructure.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 andcorporate taxes) will be as high elsewhere, butnevertheless this provides an initial gauge.Petroleum Production vs RoyaltiesGas - PJ Oil - PJ O&G Royalties - $million400300800600200400100200020002001 2002 2003 2004 2005 2006 2007 2008 200902010 estJune YearSource: MED, IRD, RockpointThe Wealth Beneath Our Feet49

6.5 EXPORTSThe O&G industry is a major contributor to New Zealand’sexport earnings. Oil was New Zealand’s fourth largestexport earner by value in 2009, though in 2008 movedinto third place ahead of wood. It currently sits justbehind the wood industry in terms of export value as seenin the following chart.In 2008, oil exports were valued at $2.95 billion or sevenpercent of total exports. In 2009, the value of oil exportseased to $1.9 billion or five percent of total exports.The top four sectors presented in the chart account foraround 40 percent of all exports out of New Zealand.That the increase to $3 billion in 2008was due to two oil fields coming onstreamindicates that a major discoveryor increased production from existingfields could have a profound effecton New Zealand’s export earningcapability. This is in contrast to theproductivity and activity effortsrequired to increase the potentialearnings from other industries.The significance of the O&G industry in terms of exportearnings cannot be understated. Export earnings from theO&G industry are well above other, much more heraldedindustries such as viticulture and aquaculture.NEW ZEALAND’S LARGEST EXPORT$10$9$8Dairy$7$6$5Meat$4$3$2$1WoodOil$02000 2001 2002 2003 2004 2005 2006 2007 2008 2009SOURCE: STATISTICS NEW ZEALAND50The Wealth Beneath Our Feet

6.6 OIL AND GAS – MIDSTREAM ANDDOWNSTREAMMidstream and Downstream reflects the gas extractioncomponent of the oil and gas sector. Only a very smallproportion of oil produced is refined locally 7 , whereas allgas is consumed or processed domestically.Users of gas are generally split between electricitygeneration, the petrochemical industry (methanoland urea) and direct reticulated users (household andbusiness consumers).Downstream natural gas activities are largely governed bythe capacity and location of the North Island’s current gasreticulation network. Total annual consumption of gashas fallen from 235PJ in 2000 to 165PJ in 2009. In 2009,the electricity generation and co-generation sector wasthe largest consumer of New Zealand gas representing79PJ collectively (electricity 35 percent, co-generation 12percent) down from 92PJ (40 percent) in 2000.Industrial users, spanning chemical manufacturing, meatprocessing, dairy and other primary industries, comprisethe second largest sector, consuming 44PJ in 2009 (27percent of total gas production).Commercial5%Residential4%Commercial users, spanning wholesale and retail trading,health care and other services represented 6.1PJ in 2009.Finally, residential users represented just 6.8PJ(4 percent) for the same year.Once piped, gas is either converted into electricity byenergy companies, methanol by Methanex, urea fertiliserby Ballance Agri-nutrients, or consumed directly bycommercial or residential users.As noted earlier, Taranaki production stations or gastreatment plants are located at Oaonui, Kapuni, Waihapa,Rimu, Kaimiro and the McKee oil and gas fields. There arelarge gas-fired power stations at nearby Stratfordand Whareroa.While it is difficult to argue that downstream activity iscompletely the result of upstream activity (due to theneed to meet the energy requirements of local industryand consumers, and the availability of alternativesources) 8 , a strong case can be made for a number ofincremental activities occurring in Taranaki as a result,particularly around feedstock.Petrochemicals16%GAS USE 2009Industrial28%Electricitygeneration35%Cogeneration12%SOURCE: STATISTICS NEW ZEALAND7Less 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, youwould expect that alternative energy sources would have been used for energy generation – most likely coal or imported fuels. However, you could alsoargue the benefits of gas over alternative non-renewables from an environmental sustainability perspective.The Wealth Beneath Our Feet51

6.6.1 FeedstockThe two main feedstock users of gas are Methanexand Ballance, who produce methanol and fertiliserrespectively. The majority of Methanex’s production isexported, while Ballance fertiliser is mainly supplied tothe domestic market.Both of these industries would not exist without theavailability of the gas feedstock. Despite this, technicallythey are not part of the O&G industry. Hence, theeconomic impact of feedstock (namely, Methanex andBallance) is considered separately from the base EIAand the benefits in terms of exports, output, GDP andemployment could be considered additive.Dynea is a global leader in providinghigh performance adhesion and surfacingsolutions.At the company’s New Zealand branch in New Plymouth,the company uses both domestically produced methanoland urea (as well as burning some gas) to produceformaldehyde (used by Ballance) and urea formaldehyderesin in the timber products industry. The company employsapproximately 25 staff. Its activities not only contributeto economic activity, but they attract new technologiesand add-value to New Zealand’s manufacturing base.Arguably Dynea would not exist in New Zealand withoutboth urea and methanol production.Ballance Agri-nutrients Limited is one ofNew Zealand's leading fertiliser specialists.Its head office is in Tauranga (MountMaunganui) and it has four manufacturingplants spread throughout New Zealand.Ballance employs around 170 FTEs at its ammonia-ureamanufacturing plant (Petrochem) at Kapuni in Taranaki.Using natural gas from offshore fields around the TaranakiCoast, this plant produces 150,000 tonnes of ammoniaand 260,000 tonnes of urea a year.The vast majority of the urea is destined for use onNew Zealand farms and a small quantity of ammoniaand urea goes to non-farming commercial markets. Theurea fertiliser produced by Ballance is an essential inputto New Zealand’s primary sector and is a strategicallyimportant source of import substitution as it provides theagricultural industries with some protection fromthe price fluctuations of global commodity marketsand currencies.52The Wealth Beneath Our Feet

Methanex produces methanol and owns twoNew Zealand methanol production facilitiesin New Plymouth. Gas is the key feedstock inthe methanol process and the availability ofgas at a competitive price in the methanolmarket can see major increases in feedstockactivity. It could be argued that withouta ready and reliable access to gas supplyMethanex would cease to operate in theTaranaki region.Equally importantly the presence of Methanex and therelatively easy scalability of its operations provide strongreassurance of market demand to gas producers inNew Zealand. This alleviates industry concerns about thecommercial prospects for gas rich discoveries.Methanex, based on current production facilities, hasthe ability to significantly increase production. In 2008,Methanex restarted Motonui 1 and is currently producingaround 830,000 tonnes of methanol per annum. Throughrecommissioning Motonui 2, Methanex could potentiallyincrease production to around 1.5 million tonnes perannum and increase employment by around 20 percent 9 .The second plant in Waitara Valley could also berecommissioned if desired, providing Methanexwith the capability to produce 2.4 million tonnes ofmethanol annually.9Methanex 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 potentiallygear up production if feedstock were available at the appropriate price.Methanex New Zealand is New Zealand’s only methanolmanufacturer. The company has two Taranaki-based facilities– one at Motonui and the other in the Waitara valley.The Wealth Beneath Our Feet53

6.6.2 Economic Impact of Feedstock CompaniesCombining the employment at Methanex and Ballance there are 295 FTEs employed in the manufacture of methanol andfertiliser nationally, with 290 of those employed in the Taranaki region. There are a further 60 contractors on site eachday. Applying national and regional multipliers for this activity we arrive at the following tables.DOWNSTREAM USERS (NZ)DOWNSTREAM USERS (Taranaki)Direct Direct +TotalDirect Direct +TotalIndirectImpactIndirectImpactOutput ($mn) 401 706 799GDP ($mn) 121 251 298Employment (FTEs) 355 1,267 1,712Source: BERL, RockpointNationally, Methanex and Ballance directly contributeover $120 million to GDP. Applying multipliers,employment increases to over 1,700 and GDPcontribution increases to almost $300 million.Output ($mn) 352 490 522GDP ($mn) 106 164 179Employment (FTEs) 350 735 868Source: BERL, RockpointWithin Taranaki, these two companies provide directemployment for 350 FTEs and contribute $106 millionto the regional economy. Applying multipliers increasesemployment 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 activitywould not occur at all in New Zealand if gas feedstock was not available.54The Wealth Beneath Our Feet

6.7 INFRASTRUCTUREThe concentration of New Zealand’s O&G industryin Taranaki has resulted in the development of keyinfrastructure, both in Taranaki and the North Island ofNew Zealand.6.7.1 Field facilities (upstream)All producing oil and gas fields in New Zealand arelocated within the Taranaki basin. Development of eachfield has required the construction and installationof physical infrastructure including production wells,control equipment, surface gathering systems andproduction stations.6.7.2 Specialised facilities (midstream)Most production facilities in Taranaki enable thepreliminary separation of the produced fluids - intofractions of oil, gas, water and sediment - to yieldproduct suited to existing wholesale markets and whichcan be safely transported. When onsite facilities do notyield marketable products, some specialist facilitiesare available including the Kapuni Gas Treatment Plant(KGTP), Oaonui Production Station, and the McKeeProduction Station (currently being upgraded).In addition to extracting high value oil/liquid fractionssuch as NGL and LPG, they are also able to separateout impurities such as CO2, nitrogen and sulphur (suchas KGTP). Unless a market tolerant of non-specificationgas can be served by a dedicated pipeline, all fieldproduction stations export ‘specification’ gas toindustrial, commercial and retail markets.Storage and dispatch facilities for crude oil operate ator near Port Taranaki, while most other ports providestorage for processed oil products. The Maui pipeline,owned by the Maui Development Companies, providesa strong link between the Maui field and a major hub atRotowara (Waikato), while Vector owns and operates agas transmission pipeline network which carries gas tomajor load centres around the North Island.The New Zealand Refining Company owns and operatesNew Zealand’s only oil refinery, at Marsden Point, whichconverts imported crude oil into marketable productssuch as diesel, petrol, bitumen and by-products.The Wealth Beneath Our Feet55

6.7.3 Downstream facilitiesDownstream infrastructure provides transport anddelivery of processed (marketable) product from thegas transmission pipes or oil product storage facilitiesto the various end markets such as industry, homes andbusinesses. This is achieved via local gas distributionnetworks owned by Vector, Powerco, Todd and others.There are three gas-fired power stations in Taranaki, twolocated at Stratford (Contact Energy’s 370MW TCC andthe new 200MW Stratford peaking plant), and Hawera(Todd Energy’s 70MW cogeneration plant at Fonterra’sWhareroa plant). Over recent years Contact Energy hasdecommissioned two old plants, the original 240MWStratford Station and the 525MW New Plymouth station.While gas-fired plants could potentially be locatedanywhere in the North Island, each of these is located inTaranaki due to the ready availability of gas.In terms of electricity supply, gasaccounts for 25 percent of generationand three-quarters of non renewablegeneration.Oil products are similarly distributed from storagefacilities at the ports through to the retail network(petrol stations) by road 10 . Downstream activities includemarketing and trading operations.6.7.4 Maui Pipeline and Gas PipelineInfrastructureThe Maui pipeline is a 313 kilometre gas pipelineconnecting the Maui production station at Oaonui(Taranaki) to Rotowaro (South of Auckland). It receivesgas from Maui, Pohokura, Turangi, and Kowhai anddelivers these to the Vector transmission systemat Frankley Road, Pokuru and Rotowaro, as well asMethanex and the Genisis generators at Huntly.In addition, more than 2,300 kilometres of high pressuregas pipelines throughout the North Island are owned andoperated by Vector. They transport gas at high pressurefrom production stations in Taranaki to a range ofindustrial and domestic consumers.This gas pipe system has been builtsolely as a result of the discoveryand extraction of gas out of theTaranaki region. It is difficult to valuethe economic impact of this system.However, it is safe to assume that itis supported by a business case thatprovides cheaper energy solutions interms of transportation and availability.The following map presents the current extent of TaranakiBasin oil and gas activity and infrastructure.10Via specialised trucks modified to transport hazardous substances.56The Wealth Beneath Our Feet

Selected examples of infrastructure investment stemming from the O&Gindustry in New Zealand include:TARANAKI OIL AND GAS INFRASTRUCTUREGas FieldOil FieldPower StationPetrochemical PlantProduction StationPipelinesRoadsMoturoaPort TaranakiNew PlymouthKaimiroWindsorNgatoraPohokuraMangahewaTurangiKapuni / Maui pipeline to:AucklandMotonui(Mx)Urenui / OhangoWaitara (Mx)McKeeKahiliTariki / AhuroaRadnorPatekeTCC / StratfordWaihapa / NgaereAmokuraTui FPSOOaonuiAmmonia UreaChealKapuniMaui AInahaKiwi CogenMaui BRimuKauriKupe PlatformKapuni pipeline to:Palmerston NorthHawkes BayWellingtonMaari Platform + FPSOManaiaKm0 10 20 30 40The Wealth Beneath Our Feet57

6.7.5 RoadingDue to the nature of industry in Taranaki, and in particularO&G, the roading system has been built to support heavy(in terms of weight) and bulky loads. Roads to the porthave been built to a higher specification to handle heavierloads and the routes enable clear access to allow forlarger/higher loads.Increasing transport congestion and funding limitationsfor state highway improvements have created realchallenges for the urban roading network in New Plymouth.Additional investment may be required to meet thegrowth aspirations of the O&G sector.6.7.6 Port TaranakiPort Taranaki has developed the necessary infrastructureto store and transport petrochemicals and serviceonshore/offshore production facilities. Pre-processingfacilities, petrochemical storage and gas pipelines havealso been developed to support the O&G industry.Around half of all Port Taranaki employees are focusedon O&G related activity. The Port is well placed andhas the expertise to support O&G activity throughoutNew Zealand. Moreover, the Port is looking at ways toencourage further activity within the industry in Taranakithrough providing facilities and resources to service theindustry nationally and internationally.The port is effectively the “Hub” forservicing and supporting all of theoffshore Taranaki O&G fields.Given the specialist expertise required to undertake thisrole and the closest offshore facilities being in Australiaor Singapore it is possible Port Taranaki would be themain hub to support any offshore exploration activityin New Zealand. It is also the only New Zealand portwith significant experience in the operational and safetystandards required to handle crude oil, LPG,and methanol.Accordingly, if there is a substantial discovery elsewherein New Zealand it is likely that Port Taranaki will beinvolved in some capacity in establishing the requiredhandling capability.58The Wealth Beneath Our Feet

Port TaranakiA report on the economic impact ofPort Taranaki (BERL, 2007) suggestedthat the Port and the O&G industry wereinextricably linked. The O&G industrycould not function without a port, and asignificant proportion of Port Taranaki’sactivity is related to the industry.Port Taranaki is geared to deal with the O&G activityand has the infrastructure and expertise necessaryto service it. Crude oil is the most significant productitem transported through Port Taranaki, followed bymethanol and petrol / fuel oil.The report found that Port Taranaki contributed around $290million to regional GDP and accounted for the employmentof close to 1,500 FTEs. As an enabler of business, most of thePort’s impact was through related industry activity, includingservices to the oil and gas sector.The direct economic impact of the Port’s role as anemployer suggests a contribution to employment ofaround 228 FTEs and $22 million to regional GDP.Port OperationsDirect TotalOutput ($mn) 32 49Value added (GDP $mn) 14 22Employment (FTEs) 137 228Port related activityDirect TotalOutput ($mn) 370 555Value added (GDP $mn) 174 268Employment (FTEs) 770 1,257Total impactDirect TotalOutput ($mn) 402 604Value added (GDP $mn) 188 290Employment (FTEs) 908 1,485Source: BERLThe Wealth Beneath Our Feet59

6.7.7 Todd Energy’s LPG facilityTodd Energy is in the process of building an LPGplant in Taranaki at a cost of $65 million. The LPG plantwill enable Todd Energy to produce LPG sourced fromits Mangahewa and Pohokura fields and deliver theproduct to customers via Todd Energy’s retail company,Nova Energy.It is expected that the project will create in excess of200,000 man hours of work over an 18 month period. Theproject will have a site workforce of around 45 people at anyone time, with up to 100 workers on site during peak activity.The project is expected to be completed by July 2011.A number of New Zealand companies are involved in theproject. Transfield Worley will carry out the engineering,procurement and construction. Plant & Platformis involved in pipeline modifications. Fabrication,mechanical and electrical installation work is tendered tolocal contractors.It is unlikely that this activity would have occurred inTaranaki if it were not for the O&G industry. This facility willprovide a domestic supply capability, which is important forthe majority of gas users in the South Island. There are LPGreticulation facilities in Christchurch and Queenstown and itis a growing source of energy for industrial users that do nothave access to reticulated natural gas.6.7.8 New Zealand Refining Company 11In contrast to Todd Energy’s LPG facility, a key exampleof midstream O&G activity that is unrelated to upstreamO&G activity in Taranaki is the New Zealand Oil Refinery.Based in Whangarei, the New Zealand Refining Companyoperates the only oil refining facility in New Zealand.The company provides 70 percent of the domesticmarket’s petrol, 84 percent of its diesel, 83 percent of itsaviation fuel, 100 percent of the fuel oil and 75 percentof domestic bitumen. A pipeline delivers fuel to Wiriin South Auckland, for supply to the Auckland market,and the rest of New Zealand is serviced through coastalshipping and trucking.The refinery processes approximately five million tonnesof crude oil per year. It sources its crude mainly offshore,from the Far East, Indonesia, and Australia. Less than 10percent of feedstock comes from within New Zealand.The New Zealand Refining Company directly employsaround 330 people, with a further 47 employed at theIndependent Petroleum Laboratory, which is a subsidiarycompany. At any one time, a further 130 contractors areon site. The company paid out $43.6 million in wages inthe year to June 2009, suggesting an average wage ofaround $130,000.Applying employment activity to national multiplierssuggests that the company has an economic impactof over 3,400 FTEs, contributing $1.1 billion to theNew Zealand economy.oil refiningDirect Direct + TotalIndirectOutput ($mn) 1,646 2,458 2,617GDP ($mn) 571 1,008 1,091Employment (FTEs) 507 2,645 3,434Source: BERL, RockpointA submission by the New Zealand Refining Company tothe Electricity Commission suggested that the foreignexchange savings to New Zealand by purchasing andrefining crude oil rather than importing more expensivefinished product is in excess of $300 million per annumand that in 2006, the direct tax revenue generated forNew Zealand was in excess of $70 million.According to their 2009 annual report, the New ZealandRefining Company had turnover of $250 million and paidcompany tax of $9.8 million.However, this activity is not attributable to the upstreamO&G sector in that it would exist even if there were noexploration and production in New Zealand.11Information on the New Zealand Refining Company is taken from their 2009 annual report, their website and a submission dated25 October 2007, which was downloaded from the electricity commission website at Wealth Beneath Our Feet

Summary of Quantified ImpactsEconomic Impacts NZ TaranakiO&G Industry Baseline EIGDP ($m) 2,182 1,843Employment (FTEs) 6,026 4,221Last 5 Construction Projects EIGDP ($m) 658 454Employment (FTEs) 8,715 6,346Feedstock EIGDP ($m) 298 179Employment (FTEs) 1,712 868Port Taranaki EIGDP 290Employment (FTEs) 1,485NZ Refining EIGDP 1,091Employment (FTEs) 507Other BenefitsExports ($m, 2009) 1,900Royalties ($m, 2010) 432Company Tax ($m, 2004-2009) 1,400Energy SupplyNet Oil Import Dependency 63%Electricity Generation 20%The Wealth Beneath Our Feet61

6.8 WIDER ECONOMIC IMPACTSAside from employment, GDP, royalties, tax, and exports, the O&G industry provides a wider setof economic benefits to Taranaki and New Zealand. These are the intangible benefits that areassociated with a highly technical, capital-intensive industry being established in the regionwhere outcomes are not easily quantifiable into employment or GDP. They remain, however, veryimportant facilitators of economic growth and, in some cases, may have a greater impact thansome 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 itsemployees and the specialist inputs into the broader industry base. These other economic benefits are specified in thefollowing diagram.Contributing to a vibrant,growing regionCommunityinvestmentReputation(regionally andnationally)Diversificationand leverageWiderEconomicBenefitsSecurity ofsupplyOpportunities forindustry expansion(offshore and intoother sections)InfrastructuredevelopmentTechnologytransfer andinnovation62The Wealth Beneath Our Feet

6.8.1 Contributing to a vibrantgrowing regionOil and gas is a major industry in theTaranaki region and plays a key role in itsviability and vibrancy. The O&G industryattracts skilled individuals and their familiesto Taranaki, benefiting the region in termsof employment and the quality and value ofthat employment.The O&G industry in Taranaki competes globally for itsworkforce, with a focus on skills rather than nationalities.A large proportion of the oil and gas workforce are globalexperts and bring a high level of experience. Their payrates reflect this accordingly.They also contribute an international dimension tothe region, including cultural diversity and new ideas.A number of O&G industry employees apply these skillsand experiences in other industry sectors and across thecommunity. They become active participants within theregion and often, because of their expertise, take corporategovernance roles in social and community organisations.Smaller, rural regions similar to Taranaki have found itextremely difficult to attract people of this calibre.At the same time, locals in the industry often workglobally, and so are exposed to international ideas andcultures, bringing these experiences back with themto the region. Taranaki benefits from this internationalexposure, which overcomes challenges of insularity andisolation and encourages diversity.The Wealth Beneath Our Feet63

6.8.3 Security of SupplyWhile the vast majority of oil is exported directly,gas plays a key role in meeting the energy needs ofNew Zealand.Indigenous crude and condensate accounted for onlythree percent of feedstock into New Zealand Refining in2009, with the remainder imported. However, a measureof security of supply, where net imports are determinedsuggests that Net Oil Import Dependency was 63 percent(in 2009). Therefore if supply was threatened, localcontent could increase to supply up to 37 percent of localdemand for oil.From a broader energy perspective, gas accounts foraround 20 percent of energy supply in New Zealand.It is also a major input into electricity generation, alsoaccounting for 25 percent of total generation. However,in terms of non-renewable generation, it accounts forcloser to three-quarters of generation. This is importantwhen considering the need for uninterrupted supplyand the variability and irregularities that can occur withrenewable sources, for example in prologued windlessperiods or droughts.6.8.4 Infrastructure developmentInvestment by the O&G industry has fostered theconstruction and utilisation of infrastructure. Notonly have developments fostered industry specificinfrastructure, such as pipelines, but catalysedinvestments in roading, shipping and air transport. Thepresence of the industry also increases use of generalinfrastructure such as use of the provincial airport fornational and connections to international flights.The importance of gas to New Zealand••New Zealand is heavily reliant on weatherdependent renewable generation••Government’s 90 percent renewable target is agood long-term goal – but not at the expense ofsecurity of supply.••Gas is a key player in managing peak demand inNew Zealand generation.••Gas and geothermal – the most cost-effectivegeneration options with a lower CO2 footprint.••Consenting hurdles and unit cost dampencompetitiveness of hydro and wind.Source Origin Energy: The future of Gas in New ZealandThe Wealth Beneath Our Feet65

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 onlycompany accredited to carry out the OPITO training in New Zealand.6.8.5 business system enhancementThe specialist requirements of theO&G industry have triggered overallimprovements in business systems,especially health and safety.The complexity and high specifications required bythe sector has resulted in requirements for suppliersto upskill. For example, the O&G industry places greatemphasis on environmental issues and health andsafety standards, and in doing so have raised boththe awareness and proactive management ofenvironmental and safety issues, through their systemsand industry leadership.A number of the engineering and O&G companies haveadopted a leadership position with respect to H&S e.g.formation of the industry-led initiative Be Safe TaranakiCentre (BEST) which promotes and offers health andsafety for the region.M&O PacificThe head office for M&O Pacific is inNew Plymouth, Taranaki, the heart of the oiland gas industry within New Zealand.M&O Pacific are a registered private trainingestablishment offering OPITO BOSIET (Basic OffshoreSafety Induction & Emergency Training) which includesHUET (Helicopter Underwater Escape Training) for thepetroleum industry. All offshore workers in the oil and gasindustry are required to hold either a current BOSIET orHUET certification. M&O also offer the STCW95 Maritimetraining for the support vessels to the rigs.M&O are also NZQA accredited for fire, first aid andHSE training and IADC and IWCF accredited for WellControl training. The company has a specialised “hotfire” facility located in Taranaki. Their specialist coursesand facilities are being utilised by a range of industries inNew Zealand and around the Pacific Rim, highlighting thetransferability and leveraging possibilities thatextend from O&G.66The Wealth Beneath Our Feet

6.8.6 Knowledge, skills and careersThe presence and potential of the O&G industry for NewZealand has catalysed the advancement of knowledge ina cross-section of disciplines within the nation’s researchinstitutes, universities, schools and businesses.Education, careers, skill development and research inrelation to New Zealand’s natural resources, and energypotential have been encouraged.Industry scholarships, O&G papers and electives, tradesand training have been introduced at tertiary level,including Universities, Polytechnics (such as WITT atTaranaki) and ITOs (e.g. EXITO).Toolkits about the O&G industry have been distributedto secondary schools throughout the country, and pilotedin Taranaki.The O&G industry attracts and encourages a highly skilledworkforce. Pay rates tend to be above average and careeropportunities can be global in nature.Specialist ‘hot fire’ training facilitiesare available in Taranaki for the O&Gindustry. This knowledge is beingleveraged by other industries.Pictured: A trainee (EXITO) watches on as a sample analysisis conducted at Shell Todd Oil Services.Pictured: Health and safety (H&S) is extremely importantin the O&G industry, and this consciousness has raised H&Sawareness generally in the Taranaki region.The Extractive Industries Training Organisation (EXITO)provides petrochemical qualifications for people workingin New Zealand’s upstream oil and gas industry. Mosttraining takes place on-the-job so trainees can apply theskills they gain to their job immediately.The Wealth Beneath Our Feet67

GNS Science, the nation’s prime provider of knowledgeand research in earth processes is actively engaged inactivities to enhance understanding of New Zealand’spetroleum resources with the aim of hastening theirdiscovery. Their research played a major role with respectto New Zealand’s successful bid to the UN concerning theextension of the nation’s offshore territory beyond its EEZ.The potential of New Zealand’sO&G industry has encouraged theadvancement of knowledge aboutthe nation’s natural resources.6.8.7 technological advancementThe presence of O&G projects and its internationalconnections and developments has catalysed theintroduction of new technologies, required innovativesolutions and encouraged technology stretch.Examples include:Maari••This project included installation of the world’s tallestself-installing wellhead platform••Drilling the longest well ever in NZ (7943m)••Executing the world’s largest size casing-with-drillingapplication better than scheduleKupe: Achieved a world first in horizontal drilling:At 2.2km, this project set a world record for horizontaldirectional drilling of a shore line. Furthermore,the project:••Resulted in no disturbance or damage to the shoreline••Required installation of two tunnels under the cliffPohokura:In a New Zealand first, as a result of state-of-the-artengineering the Pohokura plant is operated remotely.Other innovative & sustainable developments associatedwith the Pohokura Plant project include:••The production station having a storm waterdisposal system that includes a natural bio-filterof 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 GNSand University staff to progress investigations.Source: GNS science68The Wealth Beneath Our Feet

6.8.8 Expansion, Diversification and leverageThe skills, technology, standards and capabilities developedthrough the O&G industry are often able to be applied toother industries and these have enabled New Zealandcompanies to expand and pursue offshore opportunities.These are technical capabilities that would have arguablybeen imported into the country had they not beendeveloped locally through the O&G industry.The presence of the oil and gasindustry provides economicdiversification helping to reducepeaks and troughs which can emergefrom dependency on industries suchas dairy and agriculture.However, O&G also provides the potential for its industrytechniques and capabilities to be applied and adopted inother industries and for other purposes.For example, Fitzroy Engineering Group Ltd (“FEGL”)has adapted and applied the project management skillslearnt in the O&G industry to the construction of superyachts, resulting in the establishment of Fitzroy Yachts.Similarly, the technology requirements have added toNew Zealand’s engineering capability and are transferableto other industries that require the containment andtransportation of high pressure products. This includestransferability into geothermal projects, where a numberof Taranaki businesses have become involved.Pictured: 20% of New Zealand’s super yacht industy isbased in Taranaki, catalysed by skills evolved through theO&G industry.The Wealth Beneath Our Feet69

6.8.9 Investment in the communityExploration and production companies lie at the heartof the O&G industry through generating projects andproviding the funding required to develop and operateoil and gas fields. In doing so, E&P companies generaterevenues from marketable products providing returns totheir stakeholders and the Government though royaltiesand taxes. As large multinationals, E&P companiesgenerate significant activity, revenues and employment intheir own right.In addition to their commercialinvestments, the O&G industrymakes substantial contributions tocommunity initiatives, events, socialand education programmes.These investments enhance the vibrancy of the region,and boost not only the economic but social fabric of theregion and nation.WOMADWorld of Music, Arts and Dance, is aninternationally established Festival, whichcelebrates the world’s many forms of music,arts and dance.Shell and Todd Energy are event partners of the NewZealand WOMAD festival, which is proudly hostedannually in Taranaki. WOMAD encourages experiences inculture and diversity, attracts national and internationalvisitors to the Taranaki region and advocates positivevalues such as environmental sustainability andfriendship. Todd Energy and Shell have both made along term commitment to WOMAD, an event whichover the years has become a part of the social fabric ofthe Taranaki community and a national icon. This year,as a result of increased sponsorship from the energycompanies, the organisers are able to take WOMADperformance workshops into local schools.For example, both Todd Energy and Shell are majorsponsors of the WOMAD festival in Taranaki, whichencourages and promotes cultural diversity. Todd energyalso sponsors the aquatic centre and raceway in NewPlymouth, as well as a number of smaller programmesand initiatives. Shell is also a major sponsor of Puke Ariki,the regional museum.Similar contributions can be identified for most O&Gcompanies in the region. For example, Port Taranakiis a major sponsor of Taranaki rugby and the TaranakiArts Festival.The contribution of the O&G industry to communityinitiatives is in excess of $1 million per annum,potentially closer to $2 million.70The Wealth Beneath Our Feet

Big Brothers Big SistersBig Brothers Big Sisters (BBBS) is aninternational mentoring organisation thathas been operating for over 100 years andis active in many countries world-wide.The BBBS programme is active in New Zealand, andTaranaki in particular, largely due to the significantsupport the programme receives from AWE and theTui Joint Venture partners. BBBS seeks to match youngpeople (aged 7 to 17 years) with older mentors in a bid toprovide positive, stable and independent role models.AWE have stated that their fundamental aim is to leaveany local community in better shape after they haveconducted their O&G operations.Extensive research in the USA examining the effects ofmentoring on the young person have discovered thatmentored 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 familiesThe Taranaki branch is extremely active and is the largestBBBS agency in New Zealand. The whole communitybenefits from this partnership.The Wealth Beneath Our Feet71

7Economic significance of Taranaki to the nationStatistically Taranaki has a small populationand business base (circa 2.5 percent ofNew Zealand total). However, thesemeasures fail to accommodate the strategicimportance of the region to New Zealand’scurrent and future economic development.Taranaki is home to the nation’s commercial discoveriesand the production of its oil and gas resources. Royaltiesfrom this activity are provided to the Government andthey pay for services that all New Zealanders can benefitfrom ($432m in 09/10). Within the region is also anextensive system of infrastructure and capability thatsupports upstream and midstream industry. The region’sinfrastructure includes gas production and storagefacilities, Port Taranaki, and the pipelines that transportgas throughout the north island. Feedstock includesMethanex and Ballance Agri-nutrients, and these aresignificant companies within the region that exist in NewZealand because of the availability of local gas. Fertiliserand urea made in Taranaki adds to the productivity ofNew Zealand’s farming industry.Methanol, along with the oil from Taranaki’s fields, is asignificant export earner for the nation. Their presence,combined with the proven and developed reserves ofTaranaki’s fields, create a more attractive investmentproposition for international explorers to come toNew Zealand.The energy sector supports four power stations withinthe region and supplies gas to others (including Huntlyand Otahuhu). There is also the soon to be completedLPG production facility within the region. These facilitiessupply to commercial and residential end users.Taranaki’s oil and gas industry is thus a crucial player inensuring the supply of energy that supports economicgrowth in New Zealand.The Taranaki region is the operating base for most of theE&P companies as well as the supply chains that supportthe industry. Taranaki accounts for around 3,560 of the3,730 FTEs directly employed in the industry. These arehigh calibre skilled individuals that add to New Zealand’sprofessional, engineering and scientific talent and theirprojects attract new technologies to the nation.The concentration of O&G activityin Taranaki is a key strength for theNew Zealand O&G industry and pivotal tothe nation’s economic agenda. Arguably,no other industry has the same potentialto radically transform New Zealand’seconomic and social well-being as the oiland gas industry may do, if the anticipatedreserves are successfully realised anddeveloped. And the nation needs Taranakito help make this happen.To achieve transformation, New Zealand mustsuccessfully attract exploration investment from aglobally competitive arena.Whilst the Government may promote the nation’spotential prospectivity and user-friendly policies,Taranaki reaffirms to the potential investor theexistence of New Zealand’s proven reserves, developedinfrastructure, O&G capability, and systems. This reducesthe risk and enhances the attractiveness of New Zealand’sproposition. ‘Brand Taranaki’ becomes inextricablylinked with Brand New Zealand (O&G), as Taranaki isrecognised globally as a region capable of supportingO&G exploration and activity within New Zealand. Oftenit is not the country that is the focus within O&G globalcircles, but its prime O&G zones.Taranaki will thus play a critical role in any future activityof the O&G industry in New Zealand. The industryexpertise and infrastructure that reside in Taranakiwill attract and support O&G activity in New Zealandregardless of where it occurs, and will enableNew Zealand to capture a greater share of theeconomic activity that the industry generates.The experiences of Taranaki can beshared with the country’s emergingO&G regions, and its skills leveraged.As the industry grows in New Zealand, local businesseswill have increasing capability to secure project workoffshore, thus continuing to build New Zealand’s exportdevelopment. New Zealand will achieve its growthaspirations of more jobs, higher skills, wealth creationand export development.72The Wealth Beneath Our Feet

Changing the way we look at TaranakiTaranakiHome of all NZ’s O&G fields,infrastructure, production, processingPatekeplants and industry supply chain.AmokuraTui FPSOGas FieldOil FieldPower StationPetrochemical PlantProduction StationPipelinesRoadsMoturoaPort TaranakiNew PlymouthOaonuiKaimiroWindsorAmmonia UreaNgatoraRadnorPohokuraMangahewaTurangiTCC / StratfordKapuniKapuni / Maui pipeline to:AucklandMotonui(Mx)Urenui / OhangoWaitara (Mx)ChealMcKeeKahiliTariki / AhuroaWaihapa / NgaereMaui AInahaKiwi CogenMaui BRimuKauriKupe PlatformKapuni pipeline to:Palmerston NorthHawkes BayWellingtonMaari Platform + FPSOManaiaKm0 10 20 30 40Taranaki’s unique proposition to the nation:Current contribution:••Royalties: $432 million p.a. - to pay forservices that benefit all New Zealanders••4th biggest Export earner: Oil/Methanol••Centre of NZ’s O&G talent (75%): Uniqueexpertise, technologically advanced,globally connected••Security and provision of NZ’s energy supply--Households--IndustryFuture economic transformation enabler:••Taranaki is NZ’s key asset in the bid tounlock NZ’s petroleum potential - achieveeconomic 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.The Wealth Beneath Our Feet73

8Where to from here?This report shows that an optimisticoutlook for the O&G industry in New Zealandis justified.Positive indicators from sustained strong oil and gasprices driven by demand growth, a rising trend in drillingactivity, recent commissioning of production facilitiesat four new oil and gas fields, and a policy environmentthat encourages exploration, all indicate that with somecareful and considered interventions a bright and longtermfuture is ahead.The potential of other basins in New Zealand is alsoattracting increased interest suggesting it is simply amatter of time (and wells) before a commercial discoveryis made outside of Taranaki.Pictured: New Zealand's extendedoffshore territory.Further, technological developments such as deepwaterexploration and drilling, enhanced oil and gas recovery,new development configurations and unconventionalreserves are bringing frontier production towardsacceptable risk-return ratios.Geographically, New Zealand remains very sparselyexplored and with considerable prospectivity.New Zealand now has sovereign rights over more than5.7 million square kilometres of ocean floor, an area22 times that of New Zealand’s land area, three quartersthe size of Australia or 1 percent of the earth’s surface.The area is likely to contain billions of dollars worth ofresources including petroleum. As deep sea explorationcontinues and production technology is extended,increasing portions of the EEZ will become accessible toO&G companies.New Zealand remains prospective for further discoveries.Even in the most intensely explored parts of the TaranakiBasin there are several reasons to anticipate furtherdiscoveries:••Numerous untested prospects and leads, step-outsfrom existing discoveries, and other new plays exist.••The number of wells (and well density) in analogousproducing basins in Australia and elsewhere arematerially higher than even onshore Taranaki.••Statistical analysis of extensively explored (mature)petroleum basins shows a pattern in the size and type ofdiscovery through time. Termed the Creaming Curve, thisobserves that large discoveries often occur early on inexploration history (low hanging fruit), while subsequentdiscoveries exhibit a consistent pattern of smaller andsimilar size and type through time.Source: GNS ScienceAny discoveries will generate significant economic benefitto the country in terms of:••Investment and employment in construction,••Employment and GDP in production,••Exports, either direct through oil exports, or asfeedstock into further value added production,••Energy supply.The infrastructure and capability that continues to buildfrom project to project can also be applied in otherindustries, and exported as services to the globalO&G industry.However, exploration and production remains a riskbusiness and prospects carry increased risk (remoteness,water and target depth, reservoir characteristics,environmental) with rising cost structures partlyoffsetting price gains.Development activity, which involves periods of intenseactivity and workforce, is intermittent, and NewZealand is currently easing off a sustained five years ofunprecedented activity.74The Wealth Beneath Our Feet

Since the development of Maui in 1976, New Zealandhas observed a depleting reserves base. Even recentlydeveloped post-Maui discoveries (Pohokura, Tui, Maari,Kupe) have only temporarily arrested the decline, withyears supply now testing 50 year lows. While this, andstrong oil and gas prices, provides increased incentivesto explore (and develop), outcomes of recent explorationhave been disappointing.Until discoveries exceed production, New Zealand’s O&Gindustry will struggle to maintain the growth observedover the last decade.While many contingent factors willultimately determine the future ofNew Zealand’s Oil and Gas Industry,a number of interventions andconsiderations that could fostergrowth amongst both the industryand the nation are outlined below.8.1 A fresh approach to defining theindustryA change in how the O&G industry is conceptualised andpromoted will enable its full economic contribution to bemore comprehensively and consistently quantified.Redefinition will also create an opportunity for theindustry to reposition and rebrand accommodating thechanging social, economic and political environment.Restrictive statistical definitions and public perceptions,the complexities of the industry and government policypredominantly focused on exploration attraction, meanthat the full value and supply chain that underpins theNew Zealand O&G industry is difficult to understand andrarely appreciated.Whilst exploration and production is important, so is theextensive supply chain, infrastructure, systems, capability,relationships and knowledge (formal and informal), and astrong track record that underpins the industry.As an example, Statistics New Zealand indicate that theO&G industry accounts for 1345 employees 12 , yet researchfor this report conservatively shows that there are at least3730 people directly employed in O&G work within12 Refer to Appendix 9a for further detailsNew Zealand. Further, the addition of indirect andinduced impacts would extend employment flows fromthe O&G industry to approximately 7,700 jobs.Similarly, prime measures of the economic benefit fromO&G have focused on the royalties and export dollars,failing to address the jobs, local content and valueaddopportunities. Furthermore the intangible benefits oftechnological advancement, global partnerships, standardsimprovements, skills, industry diversification, leverage andthe generosity of O&G’s community contribution should berecognised. The O&G industry should not be conceived asbeing insular but a highly skilled, wealth creating industrywith tentacles that catalyse other wealth creating industries,boost industry performance, competitive advantage andis intrinsically linked to the nation’s broader economic andsocial wellbeing.8.2 Fostering local procurementAs demonstrated in this report, New Zealand companiescapture 30 - 80 percent of the construction of major O&Gprojects, however, there is potential to capture more forlocal companies.Local work not only boosts economic growth, butenhances business performance and leverages widerindustries. Increased investigation into the costs andbenefits of incentivising local procurement could form anoutcome of this report.8.3 Growing the entire supply chainGrowth opportunities for O&G supply chain companiesexist domestically, internationally and throughdiversification into other industries. While there isalready high participation in domestic activity, there existsignificant opportunities for exporting our domestic skilland expertise, and taking these skills in new directions.Alliances with overseas companies are often a criticalcomponent in the success of offshore ventures, andleveraging these relationships to include a broadermix of the New Zealand industry could open doors tofuture exporters.Such export and diversification development mustbe encouraged and assisted, and the constraintsNew Zealand’s O&G companies face internationallyinvestigated and addressed.The Wealth Beneath Our Feet75

8.4 Think SmartJust as the Government redefined New Zealand’s O&Gindustry landscape in the early 1980s with its series of‘Think Big’ projects, the industry itself now has to thinkbeyond its current competitive structure and corporatesilos to work collaboratively to address the future issues,and respond collectively to future opportunities.If we’re to elevate the industry, its supply chains,impacts, outputs and, critically, outcomes to rival thoseof any other of New Zealand’s showcase industries, thenwe need to build on the foundations of this report toestablish an ambitious framework for growth.Industry-wide skill, innovation, investment and globalcompetitive challenges cannot be met by a series ofsmall interventions by individually-focused companies,no matter how deep their pockets or admirable theirambitions. This ‘Think Smart’ approach could see theindustry determine its future in terms of skills, researchand development, investment and legacy, encompassingthe entire supply and value chain.8.5 Partnering for GrowthIf we are to maximise the economic opportunitiesfor New Zealand that a well-oiled O&G sector andsupporting industries have the ability to deliver, thena stronger partnership model must underpin any forwardmomentum.The new partnership will necessarily include localgovernment, central government and the private sectorto meet the needs of a nation that is host to a progressiveglobal industry and of a proactive and future focusedstakeholder of our domestic industry.RecommendationsThe future wealth of New Zealand is literally beneathour feet. With a collaborative and big-picture view,a visionary political framework and a measuredenvironmental footprint, we will be able to maximisethe opportunities afforded to the people of New Zealandthrough geological accident. Moving forward,a recommended collective task-list should include:A. Change our philosophical definition of theextent of the Oil and Gas IndustryExpand thinking beyond exploration to embrace thecapability and potential of the entire supply chain. Amore integrated contemporary industry model must beadvanced and promoted.B. Build stronger partnerships to foster theindustryCreate a new taskforce, comprising central government,local government and industry, charged with fosteringa more collaborative culture across the industry andexpanding strategic thinking and action planning toembrace the entire supply chain.C. shift the Government partnership modelRealign government agencies charged with economicdevelopment to prioritise the industry as a core driverof and contributor to the New Zealand economy, ratherthan a niche, and adjust resource allocation and longtermthinking. This whole-of-government approach willecho similar moves in the food processing, tourism andfilm industries.We have the opportunity to reposition the O&G industryas one of the cornerstones of the New Zealand economy,alongside tourism, dairy and food production and film,and this renewed and refocused partnership model willbe critical to driving this transformation.76The Wealth Beneath Our Feet

O&G Evolution (New Zealand/Taranaki) and RecommendationsThe future O&G context:••More challenging for exploration – technically andeconomically. The possibility that the ‘easy oil and gas’has been discovered.••Global factors impacting on the energy mix, Governmentpolicy, investment, and industry conduct.--Increasing environmental consciousness.--Aspirations towards greater use of renewable energy sources.--High expectations surrounding O&G H&S.••Technological advancements focusing on:--Ways to extract difficult finds e.g. deep waterexploration, maximisation of existing assets.--Enhancing safety in the workplacee.g. unmanned systems.--Innovative environmental advances.--Partnerships to foster cost-effective development.2009 (Maari; Kupe)2007 (Tui)2006 (Pohokura)ProactiveGovernmentresource policiesCluster development,leverage, exportingConventional andunconventional O&G2003 (Tui)2000 (Pohokura)1998 (Mangahewa)H&S and environmentalconsciousness, renewablesTechnological advancement,harder O&G finds, maximisingexisting assets1986 (Kupe)1983 (Maari)1979 (Maui)Oil in thewilderness eraThink Big eraGrowth, evolvecapability, systems1960 (Mangahewa)1959 (Kapuni)1970 (Kapuni)1969 (Maui)Fledging Taranakicompanieswork withinternationalsConventional O&GEasy O&G finds?Low hanging fruit?WildcatEarly discoveriesMajor fielddiscoveriesMajor fieldcommissioningDevelopmentand governmentTaranaki/NZ capabilitysupply chainO&G climateOUR RECOMMENDATIONS:A. Change NEW ZEALAND’S philosophical definition of the Oil and Gas IndustryB. Build stronger partnerships to foster the industryC. shift the Government partnership modelThe Wealth Beneath Our Feet77

9Appendix A.Other statistics and economic assessmentsBERL Regional DatabaseIn a previous report, O&G industry related employmentwas identified through the BERL Regional Database. Inthis case, the industries that made up the oil and gassector were:••Oil and gas extraction;••Petroleum exploration (own account);••Petroleum exploration services; and••Other mining services 12 .Applying employment in these industries to national andregional multipliers provided the following outcomes for 2009.New ZealandNZ O&G Sector (berl database)Direct Direct +IndirectTotalOutput ($mn) 1,620 2,369 2,561GDP ($mn) 1,170 1,565 1,661Employment (FTEs) 828 2,748 3,663Source: BERLTaranakiTaranaki O&G Sector (berl database)Direct Direct +IndirectTotalOutput ($mn) 1,207 1,590 1,655GDP ($mn) 865 1,087 1,116Employment (FTEs) 641 1,435 1,691Source: BERLNote that is the current analysis we have not includedother mining and quarrying, which employed around 44FTEs in Taranaki in the 2007 analysis.At a national level, the oil and gas sector is responsiblefor the employment of around 3,700 FTEs and generatesaround $1.66 billion in GDP.Within Taranaki, the oil and gas sector employs around 1,700FTEs and generates around $1.12 billion in regional GDP.12In Taranaki, other mining services are taken as associated with oil andgas. At a national level, we simply use the Taranaki employment in thisindustry to reflect that proportion that is associated with oil and gas.PEPANZ Estimate of employmentPEPANZ undertook a survey of its members to identifyemployment in the oil and gas exploration and productionindustry. These numbers are higher than those identifiedthrough the business frame as they include contractors.Applying these numbers results in the following analysis.New ZealandNZ O&G Sector (pepanz SURVEY)Direct Direct + TotalIndirectOutput ($mn) 2,111 3,080 3,326GDP ($mn) 1,529 2,041 2,164Employment (FTEs) 1,032 3,501 4,674Source: BERLTaranakiTaranaki O&G Sector (PEPANZ SURVEY)Direct Direct + TotalIndirectOutput ($mn) 1,895 2,492 2,591GDP ($mn) 1,368 1,715 1,759Employment (FTEs) 918 2,136 2,526Source: BERLUnder the PEPANZ analysis, national employmentincreases to 4,700 FTEs and contribution to GDPincreases to $2.16 billion. Taranaki employment alsoincreases to 2,500 FTEs and contribution to GDPincreases to $2.53 billion.STATISTICS NZUtilising Statistic NZ definitions, employment in the O&Gindustry could be interpreted as entailing approximately1345 employees. This analysis includes B07 Oil and GasExtraction, B101 Exploration and B109 Other miningsupport services (Includes: 100% of B07; but a proportionof B101 and B109 have been excluded on the basis thatthese totals also include employment within the mineralsindustry). The Stats NZ O&G classification above, doesnot cover the extensive O&G supply chain or addedvalueprocessing. These would be categorised underother Stats NZ groupings e.g. manufacturing, business &technical services, transport etc.78The Wealth Beneath Our Feet

Appendix B.O&G Industry Standards and SafetyCurrently over one million oil and gasproduction wells are in safe operation aroundthe world. BP’s recent oil spill in the Gulfof Mexico was undeniably a catastrophe,highlighting the potential for system failureand the consequences of such occurrences.However, statistically it is an aberration inboth its occurrence and its scale.It is clearly understood that oil and gas are dangerousunless adequately controlled for the following reasons.••Oil and gas are highly flammable, combustibleand poisonous;••They may contain constituents which are poisonous,corrosive or environmentally harmful;••Extreme pressure may exist underground, inprocessing systems or in transmission;••The industry operates in remote, challenging andsensitive environments; and••The industry operates large, complex equipment,much of which is mobile (so requiring repeatedtransport and re-assembly).The O&G industry has developed facilities, and adoptedstandards and procedures that can safely handle oil andgas products and anticipate and mitigate O&G risks.Several entities are involved in setting and enforcingthese standards including:••Government regulatory agencies,••Industry organisations such as:--International Association ofOil and Gas Producers (OGP)--International Petroleum Institute’s (IPI)--and more generically, International Organisationof Standardisation (ISO)••Companies themselves (as demonstrated inNew Zealand for over 50 years by Shell International).American Petroleum InstituteAPI is an American National Standards Institute (ANSI)accredited standards developing organization, operatingwith approved standards development procedures andundergoing regular audits of its processes. API producesstandards, recommended practices, specifications, codesand technical publications, reports and studies that covereach segment of the O&G industry globally.The development of consensus standards is one ofAPI’s oldest and most successful programs. Beginningwith its first standards in 1924, API now maintains some500 standards covering all segments of the oil and gasindustry. Today, the API standards program has goneglobal including to Taranaki, through active involvementwith the International Organization for Standardization(ISO) and other international bodies.For upstream, API publications cover offshore structuresand floating production systems, tubular goods, valvesand wellhead equipment, plus drilling and productionequipment. In the downstream arena, API publicationsaddress marketing and pipeline operations and refineryequipment, including storage tanks, pressure-relievingsystems, compressors, turbines and pumps.Standards and Safety in New ZealandThe operating characteristics of the O&G industry requirecompliance with rigorous health and safety standards.The New Zealand regulatory environment leverages thevarious global standards. The “Minerals Programme forPetroleum” references “recognised good explorationand mining practice” or, in more global parlance, “goodoilfield practice”. This is taken to mean “to act in atechnically competent manner and with the degreeof diligence and prudence reasonably and ordinarilyexercised by experienced operators engaged in a similaractivity under similar circumstances and conditions”,although noting that “good exploration and miningpractice (good oilfield practice) cannot be defined.Rather, it is a concept”.International and domestic O&G companies place ahigh emphasis on health and safety measures for boththeir employees, and any hired contractors. In orderfor New Zealand companies to secure mandates in theindustry they must meet, or preferably exceed, rigorousinternational standards.The Wealth Beneath Our Feet79

New Zealand Company ComplianceTo maintain competitiveness and protect their employees and the environment, New Zealand companies mustcontinue to comply with the most stringent international O&G industry standards into the future. However, as newinternational O&G standards are introduced, international E&P companies may be increasingly reluctant to expendthe energy and investment required to bring New Zealand companies up to standard already achieved by offshorecontractors. In order to maintain or even enhance their competitive advantage, it will be important thatNew Zealand companies lead the change, internalise a safety culture and continue to promote the highest standards.AcronymsANSIAPIAPRAVRBERLBOEBOSIETCApENZCSGE&PEIEIAEPCCFEEDFEGLFIDFLNGFPSOFTEGDPGJHSEHUETIADCI&EIPIISOIWCFKGPTLPGMEDMWNGCNGLNZOGO&GOGPPEPANZPJSTOSTCCVTWITTAmerican National Standards InstituteAmerican Petroleum InstituteAccounting Profit RoyaltyAd Veloreum RoyaltyBusiness and Economic Research LimitedBarrel of Oil EquivalentBasic Offshore Safety Induction Emergency TrainingNew Zealand International Centre of Engineering ExcellenceCoal Seam GasExploration and ProductionEconomic ImpactEconomic Impact AnalysisEngineering, Procurement Construction Contractor, being the Prime Contractor on a projectFront-End Engineering and DesignFitzroy Engineering Group LimitedFinal Investment DecisionFloating LNG (Liquefied Natural Gas)A Floating Production Storage and Offloading unitFull-Time EquivalentGross Domestic ProductGiga JouleHealth and Safety in EmploymentHelicopter Underwater Escape TrainingInternational Association of Drilling ContractorsInstrument and ElectricalInternational Petroleum InstituteInternational Organisation of StandardisationInternational Well Control ForumKapuni Gas Treatment PlantLiquefied Petroleum GasMinistry of Economic DevelopmentMegaWattNatural Gas Corporation (now a subsidiary of Vector Energy)Natural Gas LiquidsNew Zealand Oil and GasOil and GasInternational Association of Oil and Gas ProducersPetroleum Exploration and Production Association of New ZealandPetajoule = 1015 JoulesShell Todd Oil ServicesTaranaki Combined CycleVenture TaranakiWestern Institute of Technology at Taranaki80The Wealth Beneath Our Feet

Venture Taranaki Trust is the region’sdevelopment agency. We help grow the region.Incorporated as a charitable trust, Venture Taranaki is a dynamic organisation which has facilitated businesssuccess from enterprise inception through to sustainable growth based on international competitiveness.Project Director: Dr. Anne ProbertEmail: Taranaki is an initiative founded by:In addition to the New Plymouth District Council, Venture Taranaki is supported by: South TaranakiDistrict Council, Stratford District Council, Taranaki Electricity Trust, New Zealand Trade and Enterprise,Foundation for Research, Science and Technology, Business in the Community and numerous otherprivate sector organisations.Venture Taranaki is certified carboNZero.All work is done and services rendered at therequest of, and for the purposes of the clientonly. Neither Venture Taranaki, its employeesor stakeholders nor any of the contributingorganisations or individuals accepts anyresponsibility on any grounds whatsoever,including negligence, to any other person. Whileevery effort has been made to ensure that theinformation, opinions and forecasts provided areaccurate and reliable, Venture Taranaki or anycontributing organisations or individuals shallnot be liable for any adverse consequences ofdecisions made in reliance of any report providedby these organisations. Nor shall VentureTaranaki be held to have given or implied anywarranty as to whether any report provided willassist in the performance of the client’s business.

Taranaki’s development agency9 Robe Street, PO Box 670, New Plymouth 4340, New ZealandTel: +64 6 759 5150Fax: +64 6 759 5154Email:

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