New SOE based on Kupe gasfield would boost NZ oil sector, says McDouall Stuart

Friday 20th November 2009

A partially privatised, government-backed oil and gas exploration business emerges as a practical option for kick-starting a higher level of activity in the New Zealand oil and gas sector, says a report prepared for Energy Minister Gerry Brownlee by broking firm McDouall Stuart.

The report was released with a speech from Brownlee this week showing the government is intent on making a bigger oil and gas sector part of its efforts to achieve a "step change" in New Zealand's economic performance

It canvasses options rather than making firm recommendations, but dwells in detail on how a part-privatised exploration and production business would have relatively lower risk than other "significant stretch" options, while building on a range of other actions the government is already taking to boost oil and gas activity.

McDouall Stuart proposes taking Genesis Energy's 31% stake in the Kupe gas field, which will start commercial production in the next few weeks, and putting its estimated value of $600 million to work to underpin an increased exploration and development programme.

"The opportunity involves leveraging Genesis Energy's existing ownership stake of upstream fuel assets, particularly its Kupe stake, to catalyse the attraction of new, private sector investment capital to establish a new and publicly listed E&P company," says the report, whose lead author was John Kidd, head of research at McDouall Stuart.

Such an initiative "could serve to address a number of the factors identified as weighing on activity and participation levels in the oil, gas and mining sector" including:

Lifting upstream participation, competition and liquidity with the addition of a new player with sufficient scale and focus to make a difference to current levels of activity, which are currently at historically high levels thanks to a spate of commercial finds in the Taranaki Basin;
Gaining extra value from the Kupe asset "by using underlying asset value and operation cash flows to attract further development capital intended towards finding 'the next Kupe', supporting security of supply";
Capital market participation, by offering institutional and retail investors an access opportunity to a "large and high quality investment". This would be consistent with a major problem identified by the Capital Markets Development Taskforce, which found the preponderance of government and cooperative ownership of key industries is starving New Zealand investors of local opportunities;
Maintaining SOE focus on core operations. Under some scenarios, McDouall Stuart envisages that an existing SOE could be tweaked to become an oil E&P sector player, but that this would be at a risk to its core business.

A flow-chart describing the so-called "newCo" oil company envisages three classes of shareholders: Genesis, institutional and retail investors.

"Kupe's gas base will provide a very stable cash flow base, while allowing more speculative exposure through oil and LPG production to oil price," says McDouall Stuart, which knows the Kupe resource well because of its analyst coverage of New Zealand Oil & Gas, which owns 15% of Kupe.

While there would inevitably be "privatisation by stealth" issues to deal with, the sale of individual assets by SOEs has been commonplace in the last decade, and "the option outlined is at the less politically-sensitive end of the spectrum and could prove a useful example of partnership in action."

The report all but recommends against the creation of a state-owned National Oil Company, saying these are almost unused among OECD countries and are typically found in developing economies.

What makes the McDouall Stuart report particularly interesting is the fact that it identifies nine "minimal stretch option" actions that the government could take to encourage oil and gas discoveries, all of which the government is either undertaking or will do in coming months, in the eight point plan of action outlined this week by Brownlee.

Of the seven "significant stretch options" listed, establishment of a standalone E&P vehicle is the least risky option, having moderate risks of "unintended consequences" and "difficulty of implementation," but minimal risk of an indirect financial impact or direct cost to the government.

The other options, including establishing a national oil company, using Crown entities more directly, directing government funds such as the Cullen superannuation fund to invest in the sector, or underwriting various activities, all have higher or more risk factors, according to McDouall Stuart's analysis.

On top of this, Brownlee also released this week a report from Aberdeen University Petroleum Economics Consultants suggesting that preferential tax treatment under the royalties regime for gas-only reservoirs could be used to make such finds commercially viable. At present, gas is only mined as a by-product of an oil find.

Businesswire.co.nz

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