Govt told loosen tax rules to encourage gas finds

Wednesday 18th November 2009

Improving the economics of New Zealand gas developments is "crucial" to the Government's desire for an upsurge in oil and gas developments, says a government-commissioned review of the petroleum tax regime by experts in such regimes.

The Aberdeen University Petroleum Economics Consultants (AUPEC) report identifies the prevalence of marginal gas finds in New Zealand as a key issue in the Government's drive to put energy resource exploitation at the centre of its economic agenda, and urges cancellation of an impending increase in gas royalties.

Energy Minister Gerry Brownlee this morning announced eight areas of action that the Government will pursue over the next year to allow oil and gas resources to deliver "a step change in New Zealand's economic performance", and released four pieces of independent analysis that will inform policymakers' thinking during the coming revamp.

"Consideration of special fiscal measures for non-associated gas (ie, where oil is not also present) is recommended, in order to minimise the number of marginal gas developments that are economic before tax but fail to be developed because they would uneconomic after tax," says the AUPEC report, which Brownlee has had since July.

"Special terms would also address issues of perceived risk and capital rationing" that act as deterrents to potential gasfield explorers and developers. Plans to increase the royalty rate on gas extraction were unjustified. The ad valorem royalty regime "penalises marginal developments and is a candidate to have its rate significantly reduced, at least for new gas projects. Consideration should be given to degerring the planned increase in the ad valorem royalty."

A further change might be to modify the accounting profits royalty from a cumulative cashflow basis to a rate of return approach.

However there was no need to treat oil exploration the same way. AUPEC found the New Zealand fiscal regime "highly competitive against all the comparator countries except Papua New Guinea, when tested under Great South Basin conditions."

The GSB has long been touted as a potentially massive source of untapped mineral wealth, but has so failed to garner significant exploration. Exxon Mobil announced in early spring that it had studied seismic data from the area and was looking for partners to fund exploration, an indication it did not see value in proceeding.

"Under the likely costs and base case hydrocarbon prices used in this study, petroleum explorations investments in New Zealand, as represented by the GSB, are economically marginal at a cost of capital which is moderate and may not reflect all the risks and effects of capital rationing," AUPEC concludes.

Among the studies released today are reassessments of 10 New Zealand oil and gas basins within the country's huge exclusive economic zone. To date, Taranaki is the country's only proven commercial oil and gas resource, with substantial exploration and production activity ongoing.

Exploration permits in other areas have only been intermittently explored although the Government has increased funding for seismic data acquisition, a new programme of which commenced this week.

AUPEC also proposed extending such "special fiscal terms" to the exploration and development of methane gas hydrates, an emerging hyrdocarbon source that has as yet not been commercially developed anywhere in the world.

Businesswire.co.nz

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