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Oil and gas exploration: New Zealand's future

Will the deep-sea oil and gas exploration boom herald an economic bonanza or an environmental disaster?

Top-of-the-line ultra-deep-water drilling ship the Noble Bob Douglas will soon be on its way to New Zealand to take up its maiden assignment. It looks like a massive child’s toy, an oil rig plonked on a monster ship, with the drilling derrick rising high above the deck.

The genius of the ship is how in even rough seas it can stay still enough to send down a drill pipe as far as 3km to the ocean floor, then drive the drill bit through sediment and rock for up to another 9km without the drill pipe snapping. A sophisticated system of computers constantly measures wind and waves, activating a bank of thrusters to steady the ship. Operating a vessel like this costs up to $1 million a day.

Texas oil company Anadarko is bringing the Noble Bob Douglas here late this year as part of a new wave of exploration to probe New Zealand’s deep waters for oil and gas. Anadarko’s targets are the Romney prospect, 160km off Raglan in waters up to 1.6km deep, and the Carrack-Caravel prospect, 60km off Canterbury in waters 1.1km deep. In New Zealand’s hazardous deep waters, there is a short window over summer for drilling to take place.

The Kan Tan IV, a floating rig, is also moving into position for a summer of drilling in shallower waters off Taranaki. And an Ensco jackup – or self-elevating – rig will also be here for a summer of exploratory drilling off Taranaki. Like the Kan Tan IV, it will be looking to extend existing oilfields.

Typically, we see just one rig here every three years, not three in a single season drilling 13 wells. Their success rate will be an early indication of whether the Government’s strategy of opening the gates to a new wave of deep-sea exploration is likely to hit pay dirt. The industry is planning to spend $2.5 billion on drilling to the end of 2014.

“It’s going to be a fascinating year. The opportunity for New Zealand is very exciting,” says David Robinson, chief executive of the Petroleum Exploration and Production Association (Pepanz). Taranaki, whose oil and gas are the country’s fourth biggest merchandise export earner, is only one of 18 basins with petroleum potential. The others are only lightly explored. Find another basin like Taranaki and the economy could grow by an extra $2.1 billion, or 1.7%, a year over 30 years, with an extra 5500 jobs.

“On the law of averages, you would have to say there would be some very, very large hydrocarbon deposits within our EEZ [exclusive economic zone]. The question is where exactly, and can we find them?” says Robinson.

By year’s end, the Government will award permits for another 189,000sq km of fresh ocean territory for exploration – so-called frontier basins. Onshore, Tag Oil is sinking a series of test wells near Gisborne and Dannevirke, igniting local opposition. There, the most plentiful deposits are thought to be trapped in shale rock, which will require fracking to release them.

Oil company concessions grate

But critics say too much has been done to grease the wheels for industry and not enough to draw up tight rules to protect the environment. Not only are operators in the 200-nautical-mile EEZ to be subject to a lighter regime than those covered by the Resource Management Act on land, but after changes rushed through Parliament earlier this year, protesters have been banned from getting too close to oil rigs in the EEZ.

And further concessions to oil companies are around the corner. Environment Minister Amy Adams has announced plans to change the EEZ legislation, only in force since June, so that oil companies can apply to drill exploratory wells under a veil of secrecy.

Exploratory drilling for oil and gas is publicly notifiable and therefore open to public submissions and hearings. Adams is to introduce a supplementary order paper to legislation already before the House, with the changes due to go through by October.

And yet exploratory wells carry risks – the catastrophic 2010 Gulf of Mexico blowout at BP’s Deepwater Horizon rig was at an exploratory well in 1.6km of water. The well gushed out of control for 87 days, causing horrific environmental damage and spilling an estimated 4.9 million barrels of oil before being brought under control. Anadarko, which had a 25% stake in the well, paid BP US$4 billion to settle its part in the disaster.

Public shut out

Parliamentary Commissioner for the Environment Jan Wright is unhappy the public will be shut out of commenting on test-well applications in EEZ waters. “It’s really quite a problem. Given the level of public concern, I think there should be the opportunity for the public to be expressing those concerns and for those to be considered,” she says.

Environmental Defence Society chairman Gary Taylor says his organisation is not opposed to deep-water drilling, but with the change to the EEZ legislation, that could change. “There needs to be a proper transparent public process just like there is for any major potentially damaging project on land. ‘Trust us, we know what we’re doing’ won’t cut the mustard.

“The problem is there’s no opportunity for public submissions, no hearing before an independent board of inquiry, no right to cross-examine the applicant on its environmental management regime or on its risk-management strategies.”

But Adams says test-drilling applications shouldn’t have to go through a full public hearing process. “When you are looking at an activity that is intended to take between four and six weeks, and in the main has actually, according to Niwa, moderate to low impacts on the environment, to put it through a six-month, potentially $2 million process did seem like overkill.”

Why does she regard test drilling as having lower impacts, when the worst well blowout in oil industry history was for an exploratory well? “When I talk about lower impact, I’m talking about the impact of a well operating as it’s designed to operate.”

Anadarko is conducting its summer of drilling under transitional provisions that don’t require a marine consent. It has submitted an environmental impact assessment to the Environmental Protection Authority. If the EPA accepts it as complete, Anadarko can proceed.

The loss of the public’s right to comment comes despite a promise by then Energy Minister Phil Heatley to Kaikoura locals a year ago that they would get a say on any future test wells in their area. Kaikoura’s prosperity as a tourist town is built on its whale-watching tours and its pristine marine environment; Anadarko has been awarded a prospecting permit for the Pegasus prospect, which stretches in the sea south of Wellington and east of Kaikoura. Heatley’s office told the Marlborough Express last June that any application for exploratory drilling would need to go through a “full consenting process with local input”.

Te Runanga o Kaikoura chairman Mark Solomon is unimpressed by the Government’s U-turn. “Amazing, isn’t it? The Government puts up the barriers so that you can’t have a say as a nation. As a country, we’ve pushed the pure New Zealand theme, but here we have a Government weakening those processes to have a clean green environment.

“We do not have the environmental protection measures, nor do we have the capacity as a nation to deal with a major oil spill off our coastline. And until we’re assured that they do have those capacities, we will not support drilling off our coastline.”

Seismic surveying is a particular risk for whales. Coincidence or not, in February, a rare pygmy whale beached and died on Ngarunui Beach, near Raglan, when marine seismic surveying was going on in the area. The government surveying was being done to provide information to potential prospectors.

New research has suggested seismic surveys may cause whales to die from decompression sickness, because they may have to surface too rapidly when taking evasive action to escape noise. Deep-diving species, such as pygmy whales and the sperm whales found at Kaikoura, are particularly vulnerable. Other potential impacts of seismic surveys on whales include social disruption, stress, permanent auditory damage that reduces the ability to find prey or avoid ships, and reductions in calving rates. However, in Kaikoura, whale watching may be causing some transient whales to avoid the area, according to an expert report for the Department of Conservation.

New Zealand marginal for exploration

The oil industry has significant leverage with the Government because New Zealand is a marginal destination for frontier exploration. Earlier this year, Brazilian petrol giant Petrobras suddenly pulled out of exploration off the East Cape because it had changed its global work programme. This country’s remoteness adds costs, because oil rigs run up high rental charges before they start work. Bringing a ship like the Noble Bob Douglas from Singapore takes 25 days, and at $1 million a day that’s $25 million before the ship starts work. As a rule of thumb, only one test well in 10 is worth putting into production.

Another factor weighing against New Zealand as an exploration destination is the lack of a big domestic market for oil and gas. Any resources discovered have to be exported.

Pepanz’s Robinson says major operators are attracted to New Zealand by the large unexplored areas with plenty of signs of potential. Other attractions are the stable political climate, low royalties of 5% of net revenues and favourable tax treatment. Royalties are paid to the Government on revenue after costs have been deducted and amounted to $330 million last financial year.

New Zealand treats the oil and gas industry more generously than Australia, India, China or Thailand, but less so than Papua New Guinea, according to a 2009 report for the now Ministry of Business, Innovation and Employment. A 2011 global survey found New Zealand was in the top 6% of countries for oil-friendly tax treatment and in the top 20% for its oil-friendly royalty regime.

The oil and gas industry says the public support the push to explore the ocean deeps. “I think the deal is you can go ahead and develop our natural resources, create the economic benefits for us, the security and so on, but don’t make a mess,” says Robinson.

Public polls have certainly found significant backing for exploration. A New Zealand Herald Digipoll last year found 27% supported the Government’s aim to increase oil and gas exploration and another 40% cautiously supported it. Thirty per cent of the 750 respondents were strongly opposed or leaned towards opposition to increased exploration. Another NZ Herald poll this year found 70% of respondents backed the law change restricting protests near deep-sea drilling rigs or ships exploring for oil or gas.

In fact, New Zealanders want it both ways, supporting both more extraction and strong environmental protection. According to polling by Pepanz last year, New Zealanders rank the environment as the No 2 issue of major concern after the cost of living. Of the 1200 surveyed, 65% thought the country should do more to take advantage of its mineral resources, but 77% also thought the country should do more to protect the environment. Half thought the country’s mineral resources could be exploited without endangering the environment.

A wave of regulation tightening

So what is the likelihood that drilling in New Zealand’s frontier deep-water basins could leave us open to a Deepwater Horizon-type disaster? Parliamentary Commissioner Wright says the risk is low, but the impact would be high. As such, making the right decisions on regulation is particularly hard. She points out that Anadarko’s test drilling off Taranaki will be in water nearly 14 times as deep as the water below the Maui platform, and that creates the potential for “significant environmental impacts of a kind or on a scale new to New Zealand”.

In the wake of the Gulf of Mexico oil spill, a wave of regulation tightening around the world has made a similar extreme incident less likely. The oil and gas industry has a strong safety culture and appears to be taking the lessons of Deepwater Horizon seriously.

In New Zealand, operators must meet new tougher standards for well casement and construction. Until recently there was only one government inspector for all the country’s oil and gas operations, but now there are four to cover oil, gas and geothermal. However, the country’s capacity to deal with spills has not stepped up markedly. Although Maritime New Zealand is building up its reserves in the event of a spill, there are no plans to increase the organisation’s capacity or to have dedicated vessels to deal with spills.

And outside the 12-nautical-mile limit, it remains unclear how closely oil companies’ drilling activities will be monitored under the new EEZ regime. On land, the Taranaki Regional Council visits rigs at least weekly, says director of resource management Fred McLay. “We’re really looking for that active monitoring to be extended to the EEZ. [In] some of the earlier documents, we didn’t quite see that happening and we think it’s important it does happen.”

The Environmental Protection Agency, which oversees marine consents for activities in the EEZ zone, was unable to tell the Listener whether it will have a policy of carrying out regular inspections at drilling rigs for either exploratory or production wells. “It depends on the nature and potential impacts of the activity,” a spokesman said.

The Environmental Defence Society’s Taylor thinks the agency is unlikely to be doing much checking. “The EPA isn’t going to be taking a boat out there checking on performance. They’re going to rely on the applicant to report any transgressions or any problems or any incidents.

“It would be naive to rely entirely on a self-monitoring regime. There has to be some independent scrutiny. Common sense would dictate that. It would be equivalent to saying that regional councils should stop monitoring dairy farm effluent sheds because farmers can be relied on to report any transgressions.”

The worst-case scenario

And what if the worst happens – how long would it take to bring an out-of-control deep-water well under control? Since the Deepwater Horizon event, massive capping stacks have been invented that can plug an uncontrolled well. Operators here must lodge a well contingency-control plan specifying what they would do in a worst-case scenario, including where a capping stack is stored, where a relief rig is and whether it has been booked. Singapore is likely to be the closest port with such a capping stack.

We asked Anadarko corporate affairs spokesman Alan Saey how long it would take to bring in a capping stack and other control measures in the unlikely event one of Anadarko’s test wells blows this summer.

“Everybody always goes straight to that,” he says, sighing. “A lot of planning gets done way before you start doing any drilling – it’s in the prevention, conducting things in such a way that the problem never arises in the first place. We have always sought to operate to the highest of standards.” He says Anadarko could fly in a capping stack, in pieces, if necessary to urgently plug a blowout.

According to the Ministry of Business, Innovation and Employment, it would take six or seven days to fly in a capping stack, then three weeks to get a vessel that would be able to manoeuvre the cap into place.

In the Gulf of Mexico, exercises this year have found a Deepwater Horizon blowout could now be plugged in two weeks. Is it good enough that in New Zealand it would take three weeks just to get the equipment in place and more time to plug the leak? Energy Minister Simon Bridges: “An oil spill is not good enough and will never be good enough. But when I look at the regime and analysis of the risks involved, I feel strongly that in terms of preventative measures there are myriad processes that really put the screws on industry up front so that the statistical probability of a worst-case scenario is not impossible but exceptionally small. In that small likelihood scenario, I’m satisfied that in total we’ve got a good regime here.”

He says that since the Gulf of Mexico event, the big operators are better placed to respond to a disaster. “Companies like Shell, Anadarko, OMV – I’m very satisfied that in New Zealand’s interests but also in their own commercial interests they are as good as anyone in the world. And they will respond here as well as best practice anywhere.”

Where the action is

East Cape and Wairarapa

Seven test wells have been scheduled since Christmas in locations near Wairoa, west of Napier and in central Wairarapa, with more to come near Gisborne. If there are commercial-scale finds, it is most likely to be gas or oil trapped in shale rock, which would require a permit for fracking. There is strong local opposition to that option.

Deep-water Taranaki
Anadarko’s Noble Bob Douglas drill ship is to drill the Romney prospect late this year, with hopes it may contain 1.1-2.8 billion barrels of oil, or 1.7 trillion cubic feet of gas.

Deep-water Canterbury
Anadarko’s Noble Bob Douglas drill ship is to drill the Carrack-Caravel prospect, an area off the Timaru-Oamaru area. There are hopes it could hold trillions of cubic feet of natural gas.

Offshore Taranaki
Basin Oil companies OMV, AWE and others are to test-drill in a number of locations this summer in the hopes of prolonging the life of existing fields.

Deep-water Great South Basin
There are promising signs of gas deposits off Southland for permit-holder Shell. The company must decide by early next year whether to drill an exploratory well or relinquish its permit.

Deep-water Pegasus Basin
Anadarko has permits to prospect in 7000sq km of sea in an arc northeast of Kaikoura, south of Wellington and up to the east of the Wairarapa. Seismic studies and sea-floor surveys are being done this year, with drilling scheduled by the end of 2015 if the results are promising.

Up next:
Bidding is open until the end of the month on permits for 189,000sq km of offshore territory and more than 1500sq km onshore, including more blocks in Taranaki and the East Coast, as well as offshore in the Reinga-Northland basins, Taranaki Basin and Great South and Canterbury basins. A decision by the Government on awarding permits is due in December.

The nous of the Norse

Norway is a good example of how deep-sea oil production can be combined with a pristine environment, stringent standards and strong economic benefits, says Energy Minister Simon Bridges. “That would be the model in terms of the regulatory regime.”

Unlike in New Zealand, however, the largest operator in the Norwegian North Sea territories with 60% of production, Statoil, is majority owned (67%) by the Norwegian Government, which listed it on the stock exchange in 2001.

Natural gas pipelines to continental Europe and Britain are operated by state-owned company Gassco but owned by a partnership of companies, including Statoil.

The Government’s share of Statoil’s dividends goes into a long-term pension fund, now worth over $700 billion. The fund amounts to 160% of GDP and holds 1% of the world’s listed stock market.

The majority of Norway’s natural gas exports, about 110 billion cubic metres last year, went to Germany and the UK. More than 90% of its natural gas is exported, with only a few per cent being used locally.

The fields peaked in 2004 but are still large and more pipelines are planned. Statoil, one of the world’s largest providers of crude oil, operates 2000 service stations across a number of countries.One of Statoil’s Oseberg gas platforms in the North Sea.

This article was first published in the September 5, 2013 issue of the New Zealand Listener.

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