Deep-sea drilling: the oil rush is on

by Fiona Rae / 07 April, 2012
The Government is keen, writes Greg Shand, but what are the risks to New Zealand's environment?

When actress Lucy Lawless and six other Greenpeace activists boarded an Arctic-bound oil rig in Port Taranaki in late February, their target – the oil giant Shell – was soon hit by a tsunami-size wave of international condemnation. Over the next four days the inboxes of Shell Oil executives were flooded with emails – 125,000 of them – from supporters of the Greenpeace action.

When Shell effectively blocked the email traffic, Greenpeace changed tack, turning the email campaign into an online petition to try to persuade Shell to abandon its controversial plans to drill for oil in previously unexplored Alaskan waters. In just a few weeks, the petition gathered 341,000 signatures – 15,000 from New Zealanders. According to Greenpeace New Zealand head Bunny McDiarmid, it was a much bigger and more rapid turnout than for previous Greenpeace petitions, and will almost certainly mean Lawless and her celebrity ilk will be much in demand by Greenpeace in future to promote its protests.

And next time the target may be here. Greenpeace and other environmental groups are not ruling out similar protests over the Government’s new drive to promote more intensive oil, gas and mineral exploration much closer to home. In what some observers liken to a 21st-century oil rush, equivalent to the gold rush in the 19th century, New Zealand – like many other countries, including our Pacific neighbours – is keen to encourage oil, gas and mineral companies to explore the vast stretch of water that forms New Zealand’s “exclusive economic zone” beyond our 12-mile territorial limit.

At 400,000sq km, New Zealand’s exclusive zone is 20 times as big as its landmass, and is the fourth-largest in the world. It is perhaps not surprising, then, that the National Government has decided it’s time to get serious about exploring it for potential riches.

Until now, the Government has focused on three key pillars for its economic growth agenda: growing and diversifying exports through high-value manufacturing and services; exporting more value-added food and beverages; and encouraging higher-value tourism. Now there is a fourth pillar: prospecting for fossil fuels and minerals. Although this new cornerstone is yet to gain much public attention, the Government is making no secret of its hopes that it could yet prove a quicker way to boost the country’s economic prospects than the first three.

Oil is already New Zealand’s fourth-largest merchandise export behind dairy, meat and wood. It earned us around $2.2 billion last year, according to the Ministry of Economic Development. In his last major interview before his sudden resignation, then Environment Minister Nick Smith talked to the ­Listener about the Government’s plan. “If we do this right, the economic potential for New Zealand is great in jobs created and economic returns from mining existing resources and new discoveries.”

But not surprisingly, the Government’s bullishness is alarming local environmental groups concerned that this fervour for deep ocean drilling could come at the expense of New Zealand’s ocean and coastal environment. Well-known local conservationist Guy Salmon, who these days is head of Nelson-based environmental foundation Ecologic, says moving to drill our deep ocean is a big step “with a lot of unknowns and big technical challenges, and the potential risks to our environment are huge”.

Environmental Defence Society chairman Gary Taylor sees New Zealand’s massive surrounding ocean as the “last unregulated frontier”. It’s also a rich biodiversity reservoir, he notes, supporting a vast array of wildlife, as well as such critical industries as fishing and aquaculture. “Our long coastline forms such a big part of the New Zealand way of life and also underpins our ‘clean green’ international branding and image. So the risks of exploitation are great, and the non-negotiable bottom line is that in going ahead with development, we don’t put our environment in danger.”

For its part, the Government says it is not underestimating the technical challenges and public sensitivity to its plans. Smith, who will continue to be involved in the issue, agrees it is imperative the Government is seen as environmentally responsible. “We know this and we are putting in place a robust process to protect the environment. We are confident most New Zealanders will support development and the benefits to our economy and job growth if they are satisfied the right safeguards are in place.”

Political insiders say other senior MPs are “acutely conscious” of the need to get the balance right. From Prime Minister John Key down, the Cabinet and backbench are said to have been surprised when their earlier plans to mine protected lands on the conservation estate were rolled by the depth of public opposition. And the rise and rise of the Green Party, which gained an unprecedented 11% of votes at last year’s election, has served as an even bigger reminder of the risk of upsetting increasingly environmentally minded Kiwis.

Hence the appearance of Key himself, for the first time, at the National Party’s annual gathering of its green wing, the Bluegreens, on March 3. Key was reported by delegates to have been at pains to emphasise the Government’s awareness of the tricky path it has to tread. Key told the Bluegreens the Government had three key criteria that would have to be met before it gave the green light to more intensive exploration and development: job creation; the “need to create real value in financial returns to New Zealand”; and ensuring the environment was protected. He suggested that as Minister of Tourism he knew better than anyone what was at stake if the Government risked the country’s green credentials internationally.

Key also insisted the Government would not permit any new drilling in the deep ocean until it was satisfied it was backed up by a robust and integrated environmental protection plan.

Although the Prime Minister’s assurances sounded soothing, prominent environmentalists remain deeply concerned. Some, like Salmon and Taylor, attended the Bluegreens conference. Their current focus is on the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Bill, which is currently before a parliamentary select committee. The bill’s aim is to ensure that the environmental effects of new petroleum and mineral drilling in the sea surrounding New Zealand are managed. According to the Government, it will put in place a robust system of environmental controls for a huge area of the ocean and seabed that is currently unregulated.

Under the proposed legislation, the new Environmental Protection Authority will be responsible for consenting, monitoring and enforcement related to activities such as oil and gas exploration, seabed mining, deepwater aquaculture and marine-energy development. The authority will appoint special environment panels that will oversee public hearings on applications and make consent recommendations.

Environmental impact assessments will need to be done and submitted to the new authority for oil and gas drilling operations, and operators will also need to comply with the latest drilling safety rules developed in the United States following the Gulf of Mexico disaster. However, the bill has come in for strong criticism from the legal profession, environmental groups and the independent watchdog on green issues, Parliamentary Commissioner for the Environment Jan Wright.

One of Wright’s concerns is that the bill would allow the Environmental Protection Authority to apply a “final and separate test” for a marine consent. This would allow drilling or other activity provided its contribution to New Zealand’s economic development outweighed its adverse effects on the environment.

She says this sweeping clause undermines other decision-making criteria of the bill because it sets out a single over­riding criterion for making decisions. Because economic benefits can be quantified much more readily than environmental benefits, it is likely to mean the process would be heavily weighted towards granting marine consents. “This is a serious error,” she says. “To get this right, the bill’s purpose statement needs to be changed to make economic development conditional on protecting the ocean environment.

Taylor is also concerned about the marine-consenting process. He agrees it would enable economic considerations to override adverse effects on the environment, irrespective of their severity. If the Government goes ahead with this approach, he warns, it will result in environmental degradation, loss of precious biodiversity and damage to New Zealand’s international reputation.

Meanwhile, the Law Society has raised concerns the bill does not meet New Zealand’s international obligations. According to spokesman Robert Makgill, the bill does not match the Law of the Sea’s requirement that nations adopt a “precautionary” approach to managing adverse impacts. It also neglects to mention “sustainable development” as a key principle in allowing oil drilling and mining of the seabed.

Nick Smith disputes the Law Society’s interpretation as simply “wrong”. Like Key, he stresses that the Government wants an “integrated” approach to open-sea prospecting. He also notes that the bill is just one of a number of policies officials are working on with the aim of delivering a comprehensive approach to the issue.

Another critical issue is what financial return New Zealand will extract from the extractors. Smith confirms the Government is looking closely at the royalties prospectors and developers will pay for the right to explore our extended ocean zone. The petroleum sector currently hands over to the Government some 43c in the dollar (in levies, taxes and GST), which Smith says compares favourably with the return other countries get. However, the minerals sector (gold, coal, ironsands) delivers only about 8c in the dollar. He flags the likelihood of a big hike in what miners like Newmont Mining, the world’s second-biggest gold-mining company, will have to pay if it wins the right to dig up a new and much bigger gold mine under Waihi.

Officials are also looking closely at the massive $700 billion sovereign fund Norway has helped build up from its North Sea oil development, which is earmarked to fund present and future government infrastructure, education, health and welfare. No doubt the Government is also cognisant of Brazil’s discovery four years ago of potentially huge oil reserves several kilometres below the sea, which could see it pass Arab states as a leading oil producer. And just a few weeks ago, it was announced that oil had been struck off the coast of Ireland, a possibly multi­billion-euro discovery that could help drag Ireland’s recession-stricken economy out of the mire.

The chief executive of the company drilling the Barryroe well is Tony O’Reilly jnr, son of the Irish media baron who retains a share in APN News & Media (publisher of the Listener), which is a leading player in New Zealand’s media industry. It is the first big find in Irish territorial waters, and O’Reilly jnr has described it as a “seminal day for Ireland”.

It has been calculated that New Zealand’s petroleum and minerals industries collectively contributed more than $4.2 billion to GDP in 2009. The Government is hoping that figure will at least triple over the next decade. In November, it commissioned a report from financial advisory firm Woodward Partners, which predicted New Zealand could earn an extra $8.5 billion in royalties over the next 10 years if recent patterns of exploration and development continue. If current exploration rates increased by 50%, New Zealand could earn an extra $12.7 billion, the report concluded. That figure includes $3.2 billion from existing production facilities in Taranaki, and up to $9.5 billion if exploration activity accelerates.

Key told the Bluegreens if ocean mining produced a big enough return, he was open to the idea of investing this money in a New Zealand-style sovereign fund, and there is a clear gleam in ministers’ eyes as they and officials dream of what could be – especially in light of the economic blow of the Christchurch earthquakes.

Unlike Greenpeace, Salmon and Taylor don’t oppose development but emphasise the need for a far more cautious approach than the Government appears to be adopting. “You can’t help worrying that as the economy grows, the environment shrinks. We have just got to get this right,” says Salmon.

Says Taylor: “We should need no reminding of the risks to our marine environment and coastline highlighted by the Rena disaster.”

Smith says comparing a one-off shipping accident to the potential risks of offshore drilling is pretty unfair “when you consider we have had a petroleum industry operating offshore without major incident for 30 years”. He also points to how much Taranaki as a region has benefited from its long-established oil and gas industry (see sidebar on previous page).

However, he concedes the Government will have its work cut out promoting the benefits of deep-sea mining to the public. Unlike Australians, who are much more familiar with the pros and cons of the resources sector, New Zealanders don’t yet have a very good grasp of what is at stake, he suggests.

Last month, a Government-appointed task force, the Green Growth Advisory Group, produced a comprehensive study into the challenges and opportunities for the “greening” of New Zealand’s economy. It devoted a special section to the Government’s extraction plans, and urged caution. The authors, including Business New Zealand chief Phil O’Reilly and Salmon, suggested the Government might find it tricky convincing the public, given the “polarised and unsophisticated debate” that already surrounded complex economic-development initiatives.

“New Zealanders have often found difficulty resolving tensions between economic development and environmental protection,” the group noted. Their answer to this dilemma is to call on the Government to launch a “national conversation” about the issues. Is the Government up for such a major challenge? “We are,” insists Smith, who is still expected to have a key role in helping the bill become law by July 1.

Still, groups such as Greenpeace, Ecologic and the Environmental Defence Society are united in their fear that New Zealand could – if it is not extremely careful – face a catastrophe on the scale of the Deepwater Horizon explosion in 2010. That explosion killed 11 rig workers and spewed hundreds of thousands of tonnes of oil into the Gulf of Mexico, wreaking havoc on the environment and the people living along the coast.

BP has already paid out almost US$50 billion in clean-up and compensation costs for Deepwater Horizon, and could be liable for a further US$20 billion in federal fines once the US Government has finished litigation. Which is why environmental groups are alarmed that Shell Oil last month filed court action to gain approvals for a multibillion-dollar oil and gas drilling programme in Alaskan waters.

Here, environmentalists predict that as the Government rolls out its legislative programme to facilitate development, and as its plans to encourage more extraction of resources – both offshore and on land – come under further scrutiny, this issue has the potential to be as controversial as its plans to partly privatise state assets. They can even foresee an increasingly environmentally conscious public again marching in their thousands in protest – as they did to successfully stop the Government’s first-term attempt to promote the mining of conservation land on the Coromandel Peninsula and Great Barrier Island.

No doubt the mining lobby – like Greenpeace – will be waging a PR campaign. John Key, Economic Development Minister Steven Joyce and Nick Smith’s successor in the environment portfolio, Chris Finlayson, all know very well they will have to be at their most persuasive to win this looming public debate and the ocean of votes it could win or cost them at the next election.

Black gold

New Zealand has just one producing petroleum basin, in Taranaki, where it is estimated the oil and gas industry is responsible for over 5000 jobs, including local businesses that have thrived on the back of the region's thriving economy. Together, these businesses are estimated to have contributed $2 billion to the GDP.

Since 1866, more than 1000 petroleum wells have been drilled in New Zealand. Around a third of these have been drilled in the past decade, mostly offshore from Taranaki, where 19 fields are already producing oil and gas. All the gas is used domestically, and a significant amount of it (18%) is used to help generate electricity.

But New Zealand has a further 17 recognised petroleum basins, where the Government is now keen to encourage exploration. It also wants to push for more exploration for minerals and coal. Currently, the West Coast produces about half of New Zealand's coal and around a quarter of our gold. According to the Ministry of Economic Development, mining is responsible for more than 4000 jobs, and about a third of household incomes on the West Coast.

In the past, the ministry has granted permits on a first-come, first-served basis, but this year plans to change that to a competitive tender process. It has already proposed 25 blocks for tender this year, covering 40,000sq km of offshore seabed and 5700sq km of land in Waikato, Taranaki, Tasman, the West Coast and Southland. Iwi and local government are being consulted about the proposed blocks before they are finalised.
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