A birds-eye view of the oil and gas industry, which is stronger and more resilient than ever during challenging times for this sector. Sean Rush, Spindletop Law / director of the Association of International Petroleum Negotiators.
THE GOOD NEWS – the 2016 year was another without major injury to workers or environmental incident – two primary objectives for any oil company.
It was also a year when our oil and gas industry continued to adapt to prevailing market conditions and demonstrated the type of resilience that has seen it survive previous booms and busts. It is well placed to emerge in 2017 leaner, but stronger than ever.
Last year showed no sign of a rebound from 2015 where the volume of conventional crude oil resources that received development approval globally fell to its lowest level since the 1950s.
If 2017 brings more of the same, as it appears it will, then a global supply crunch from 2020 is forecast. New Zealand’s activity levels have matched global trends. With Maui’s reserves in 2016 being halved from 2015 levels we can expect a gas supply shortage here at a time of global surplus LNG. To address the shortage, and defend market share from LNG, producers will need to renew their exploration efforts shortly.
The biggest story that didn’t happen in 2016 (at least at time of writing) was the ‘Shell Review’ of its New Zealand assets.
Shell has been part of the nation’s fabric since 1911 and has made an enormous contribution to the industry’s development and the economy generally. But Shell’s strength, globally, lies in finding large accumulations in difficult locations and deploying technological wizardry to bring them on stream – big old fields and facilities, like Maui, do not sit well within the portfolio of a super major.
They need a lot of love and attention – resources that can be better deployed to the frontier areas of the globe where the multi-billion barrel ‘elephant’ sized fields may be found.
Our frontier basins offer this kind of potential and might mean Shell stays in the Great South Basin. Shell’s other producing assets are equally ‘odd’ in the global portfolio. Pohokura, our largest producer, is tiny compared to the big, 200,000 bbl/day plus fields, which are a more natural fit. Kapuni is even smaller, less productive and profitability is complicated by legacy downstream arrangements.
Although, if Shell does exit, it should not be a cause for concern.
First, the staff resident here will likely be taken on by the new owner and, if there is more than one (and if they do exit there probably will be), then more positions will need to be filled.
Second, the UK experience shows that when a long-standing incumbent moves on from a field like Maui, their replacement almost invariably injects new capital and ideas which result in higher production and new reserves – ‘big fields get bigger’ as they say.
The strategy of these new owners is reliant on a willingness to invest in retrieving oil and gas that is harder to get at, tucked away in more difficult spots and operating as a lean, low cost operator. The approach provides a model for extending the lifespan of declining fields and ensuring all reserves are found and recovered.
If 2017 brings the news of a Shell exit then we should bid it a fond farewell, an open invitation to return, but look forward to new owners who are strategically aligned to each of the respective assets to maximise their economic return on behalf of the taxpayer. New entrants bring new innovations and new capital, which will be good for the industry overall.
Last year saw the ownership of the country’s two gas transmission systems pass into the sole ownership of an infrastructure owner and operator.
First Gas acquired the systems from the previous owners whose focus lay in other parts of the gas market. For the first time, the transmission system owner is independent of upstream or downstream concerns and is focused purely on transmission.
Independent system operatorship has been the preferred model for gas transmission in Europe. Where a pipeline owner’s revenue arises solely from transmission services then those services are enhanced, more flexible and customer focused, which facilitates new production, transmission and downstream use of gas.
This year will see the development of a single transmission code for shipping gas in the First Gas system which will hopefully make finding, shipping and using gas easier and more transparent.
The effects of Paris
The ramifications of the Paris Climate Change Agreement are still being digested by the industry. Prior to the Conference of the Parties industry majors, including New Zealand participants Shell and Statoil, called on governments to put an effective price on greenhouse gas emissions.
They acknowledged that the science in regards to greenhouse gases (GHGs) is settled, but that in a competitive carbon (equivalent) market the petroleum industry will continue to lead in the short to medium term with transition fuels – gas being a clear winner over the next 25 years.
In the longer term, hydrocarbons may not be burnt but will instead move up the value chain in the form of high-value materials, products and engineered systems. The industry will adapt and prosper. With the short to medium term reliance on gas in the Asia/Pacific region, continued exploration and production activity in New Zealand will help meet the country’s obligated ‘climate change’ objectives.
New Zealand’s emissions trading scheme (ETS) is the primary mechanism by which carbon pricing will move market participants to a net zero emission future, but has historically excluded agriculture. In March of 2016 the Treasury raised the possibility of agriculture being included in the ETS because the emissions of nitrous oxide and methane in agriculture account for 49 percent of our GHG emissions.
Although not included in the ETS, the international commitments we have made mean the country must pay for agriculture’s emissions, which means the taxpayer effectively subsidises the sector.
The petroleum sector is looking for a level playing field in this area so that an effective carbon equivalent price will drive lower emitting land use. Planting a carbon sink on farmland cleared of native bush generations ago is one way a new gas field can be emissions neutral. Look for further consideration on this front this year.
The 2016 annual Petroleum Conference held in Auckland perhaps marked a turning point in regards to the industry’s “social licence to operate”.
The conference line-up included representatives from Maori interests giving their views on the industry, the consultation process and engagement generally. Outside New Zealanders, including some Maori representatives, exercised their right to protest various aspects of the industry in a largely peaceful, non-disruptive, manner. In prior years, as one speaker acknowledged, some of the Maori representatives would have been protesting outside instead of educating the industry and engaging in constructive dialogue.
Disruptive protests are never welcome at any event, but oil companies will tell you that peaceful protest, as we have in this country, is a cornerstone of a working democracy. And political risk associated with investments is significantly reduced where people can freely share opinions – in other words, protestors are a sign of a good and stable investment environment.
In 2017 the conference will be hosted in Taranaki, the home of the industry, but will undoubtedly attract its share of those expressing their concerns – good on them I say!