Next steps towards oil and gas exploration

Improvements in the process for permitting exploration for oil and gas will be implemented this year.

“From 2012 we will exclusively use a ‘block offer’ annual competitive tender process to allocate permits for oil and gas exploration, and no longer use first-in, first-served permitting, known as priority-in-time,” says David Binnie, General Manager of New Zealand Petroleum & Minerals, a branch within the Ministry of Economic Development.

The change implements the government’s strategy announced last August.

“Priority-in-time permitting limited the government’s ability to strategically manage New Zealand’s oil and gas resource. It was a reactive approach, where companies could apply to explore any area in New Zealand at any time,” says Mr Binnie.

“Using an annual block offer approach enables the government to take more proactive control over where and when areas are opened for exploration. It will also provide more certainty and opportunity for upfront engagement with iwi, local government and industry.

“An annualised approach will reposition New Zealand in the international market and should attract significant inward investment. A recent report into future royalty income showed that a 50 percent increase in exploration could increase royalties to $12.7 billion. Coupled with corporate tax, the government’s revenue is 42 percent of industry profits.

The government has previously undertaken block offers over the onshore Taranaki Basin – Kahili (2010; 6.0 km2); Reinga Basin (2010; 105,226 km2); Northland Basin (2008-10; 49,554 km2); Raukumara Basin (2008-10; 17,288 km2); onshore Taranaki Basin (2007-08; 3,017 km2); Great South Basin (2006-07; 328,338 km2); offshore Taranaki Basin (2005-06; 9,011 km2); East Coast (2005-06; 43,235 km2); Northland (2005; 34,693 km2); Taranaki Basin (2003; 12,763 km2), and Canterbury Basin (2002; 31,147 km2).

There are 25 blocks proposed for competitive block offer tender in 2012.

“The proposed blocks for 2012 cover 40,285 km2 of offshore seabed and 5,704 km2 of land in Waikato, Taranaki, Tasman, the West Coast and Southland. Land listed as unavailable for mining under Schedule 4 of the Crown Minerals Act 1991 will be excluded from exploration,” says Mr Binnie.

The Ministry is consulting with iwi and local government in the areas where the proposed blocks are located. This consultation will inform final decisions on the blocks for 2012. The finalised blocks are expected to be released for competitive bidding toward the middle of this year.

New Zealand and international companies will then be invited to tender for petroleum exploration permits. Applications will be evaluated based on a number of criteria including the applicants’ corporate standing, technical and financial capability, risk management practices, operating experience and proposed work programme. Permits are expected to be awarded by the end of 2012.

“New Zealand Petroleum & Minerals is committed to continuous improvement in its processes for the management of our mineral resources, and to ensuring their responsible and safe development on behalf of New Zealanders,” says Mr Binnie. “Relevant legislation, such as the recently introduced EEZ bill and the soon to be revised Crown Minerals Act 1991support and prepare for responsible and successful industry growth.”

2012 BLOCK OFFER – QUESTIONS AND ANSWERS 

1.  What is the government proposing to do?

The government is proposing to offer 25 onshore and offshore blocks for competitive tender for oil and gas exploration toward the middle of this year, following consultation with iwi and local government.

Land listed as unavailable for mining under Schedule 4 of the Crown Minerals Act 1991 will be excluded from the finalised blocks and from exploration permitting.
Exploration permits are expected to be awarded by the end of 2012.

2.  Is this a new approach?

No, the “block offer” approach is not a new one. The government has previously undertaken block offers over the onshore Taranaki Basin – Kahili (2010; 6.0 km2); Reinga Basin (2010; 105,226 km2); Northland Basin (2008-10; 49,554 km2); Raukumara Basin (2008-10; 17,288 km2); onshore Taranaki Basin (2007-08; 3,017 km2); Great South Basin (2006-07; 328,338 km2); offshore Taranaki Basin (2005-06; 9,011 km2); East Coast (2005-06; 43,235 km2); Northland (2005; 34,693 km2); Taranaki Basin (2003; 12,763 km2), and Canterbury Basin (2002; 31,147 km2).

The government will now use the block offer approach exclusively, on an annual basis.

What is new, however, is that companies will no longer be able to apply for permits outside the block offer process. This is because of the removal (from 1 February 2012) of the reactive “priority-in-time” allocation method where companies could apply to explore any area in New Zealand at any time, with only a five day window for competitive interest to be registered by other companies potentially interested in exploring the same area.

These improvements to the way oil and gas exploration permits are allocated implement the government’s “block offer strategy” announced in August 2011.

Oil and gas development

3.  What are the benefits of an annual block offer approach?

The exclusive block offer approach allows the government to select areas identified as having oil and gas potential and offer them for competitive tender each year, following engagement with iwi and local government. Permit applications will have to be filed at specific times and for specific blocks. This approach will be more transparent, provide for improved engagement, and allows for more proactive and strategic management of the Crown’s oil and gas estate.

Competitive tendering will also foster heightened competitive interest in New Zealand resources from high-quality petroleum explorers, and will offer potential investors a regular opportunity to build or enhance a New Zealand-wide portfolio.

4.  What are the potential economic benefits of increasing New Zealand’s oil and gas production?

Oil and gas production contributes in excess of $2.5 billion to GDP.

The government receives about 42 percent of a petroleum company’s accounting profit, which includes both taxes and royalties. These taxes and royalties help pay for services that benefit all New Zealanders, such as, schools, hospitals, broadband and roads.

The government-commissioned Woodward Report shows that New Zealand has the potential to earn more than $3.0 billion in royalties alone from oil and gas fields already in production. However, if the current exploration rate were to increase by 50 percent, New Zealand could earn up to $12.7 billion in royalties alone. Royalties and levies collected in 2010-2011 totalled $384.5 million.

We also expect regional benefits including job creation and training, community investment and infrastructure development. In the case of Taranaki, for example, the only region producing oil and gas in New Zealand, Venture Taranaki estimated that the local industry, including indirect and induced effects, generated 5,090 fulltime-equivalent positions in 2009.

5.  What can a company do as part of an exploration permit and what protections are in place to ensure safe and environmentally responsible development?

An exploration permit gives the permit holder the exclusive right to explore minerals over the area specified in the permit. It does not give them automatic access to the land – this must be negotiated with the landholder, who could be a council, the Department of Conservation or a private landowner.
For onshore exploration work (or in the territorial sea out to 12 nautical miles offshore), the permit holder is required to apply, under the Resource Management Act 1991 (RMA), for any necessary environmental resource consents from the local council. The RMA is New Zealand's main piece of legislation that sets out how we should manage our environment.

For permits beyond 12 nautical miles off the coast, the new Exclusive Economic Zone and Continental Shelf (Environmental Effects) Bill will apply, once enacted. The Bill establishes a new regime to manage environmental effects of activities in the Exclusive Economic Zone (EEZ) and continental shelf. The Bill will allow the classification of activities or effects as permitted, discretionary, or prohibited. The Bill is currently before Parliament. It will come into effect once a complete set of regulations is developed later this year. The government has put in place a number of short-term measures to help address the gap in environmental regulation before the EEZ legislation comes into effect and to ensure a smooth transition to the new regime.

Permit holders need to meet health and safety requirements set by the Department of Labour and the requirements of maritime regulations.

This multi-agency process ensures that all the right checks and balances are in place to ensure sustainable management of the environment and to protect the people working or living in and around that area.

6.  What other work is the government doing to develop New Zealand’s oil, gas and minerals industries?

The proposal to offer blocks on an annual basis is just one part of the government’s work to unlock New Zealand’s resource potential in a sensible and sustainable manner. Other work includes the review of the Crown Mineral Act 1991 to ensure that it continues to reflect world’s best practice; the development of legislation for the environmental management of deep-water mining activities; a review of health and safety practices in mines and on drilling platforms; and consideration of issues raised in the Waitangi Tribunal’s 2011 report on the management of petroleum.

The block offer process

7.  What will the annual block offer process involve?

The government will select, for tender, blocks across a number of geological basins – onshore and offshore – and a range of potential resource types. Land listed as unavailable for mining under Schedule 4 of the Crown Minerals Act 1991 will be excluded from exploration.

Prior to the tender process getting underway, iwi in the areas where the blocks are located will be consulted as required by the Crown Minerals Act 1991. The government is also consulting with local government in those areas. The government will then consider all input before making final decisions on the blocks and any conditions applying to them.

The government will then invite New Zealand and international companies to bid for the rights to explore in each block and award exploration permits by the end of the year.

8.  What’s involved in bidding?

This is not a financial bidding process. The bids will have to set out how the company proposes to explore the block over the period covered by the permit, including the methods and technologies they propose to use and the timeframe. Bids can be made by individual companies or joint ventures.

9.  Who selects the successful bidder and on what grounds?

A government evaluation panel will be set up to select the best applications and applicants for each block. This will include looking at the operator’s experience, technical and financial capability, risk management practices, and the proposed work programme.

New Zealand Petroleum & Minerals, a branch of the Ministry of Economic Development, is responsible for administering the scheme.

This process may be refined in 2013 as a result of feedback on this year’s process.

10.  Will permits be issued for all blocks?

Not necessarily. If the government evaluation panel decides that none of the bids for a particular block meet its criteria, then no permit will be issued.

11.  Which areas are being offered in 2012?

The government is proposing to tender 25 blocks. These blocks cover 40,285 km2 of offshore area and 5,704 km2 of onshore land.
Areas onshore include Waikato, Taranaki, Tasman, the West Coast and Southland. Blocks proposed offshore include seabed in the East Coast Basin, Pegasus Basin, Canterbury Basin, Great South Basin and Taranaki Basin.

For more information about the specific location of the proposed blocks, please see the online map provided on www.nzpam.govt.nz.

12.  Why have these blocks been selected?

These blocks were selected because there is a high likelihood that they contain significant oil and gas resources. This was assessed using data gathered by GNS Science and other sources.
The proposed blocks also represent a wide range of resource types and sizes. This range will encourage local and international companies with different technical expertise and interests to apply.

13.  Will more blocks be offered in future?

Yes, it is proposed that around 20-30 blocks will be offered each year.

14.  Will exploration permits be exclusive – that is, will there be only one for each block?

Only one permit will be allocated for each block but there may be multiple companies involved if it is a joint venture. If oil or gas is found during exploration, the permit holder would then apply for a mining permit for that part of the block.

15.  How long does an exploration permit last?

An exploration permit is issued for an initial five years but can be renewed for a further five years if the government is satisfied that the project is feasible and warrants another permit.

After the first exploration permit expires, 50 percent of the area must be relinquished by the permit holder. For example, if they are granted 1,000 km2 for their exploration permit, when they renew it they will only be given a permit for 500 km2 of that block. This encourages development and regular competition for opportunities.

16.  Do other countries use the “block offer” method?

Similar approaches are successfully employed in other jurisdictions, including Australia, the United Kingdom, Vietnam, Indonesia and India.