$1.5b oil shock for NZ

By ELLEN READ AND AGENCIES

Soaring world prices are likely to add $1.5 billion to New Zealand's annual oil bill and set off a wave of cost increases.

Crude oil prices climbed back over US$40 a barrel yesterday, dashing hopes that a meeting of the Opec oil producers' group to discuss lifting production by up to 11 per cent would dampen record prices.

Prices hit new highs after a terror attack in Saudi Arabia.

Opec members say security fears, rather than short supplies, are to blame.

Some members, including Saudi Arabia and the United Arab Emirates, are already acting to increase output.

High world prices are good news for the New Zealand oil exploration industry. But they are not so kind to the country's imports bill.

Chris Stone, of investment banker McDouall Stuart, said the US$40 a barrel price tag could add $1.5 billion to the country's oil bill, bringing it up to $5 billion a year.

"Demand is going up too, but in the equation it's a smaller factor than the global price," he said.

Meat, dairy and seafood exporters are facing 4-to-8 per cent increases in plastic packaging costs this week, in part because of high oil prices.

Businesses and consumers spend about $2 billion a year on plastics.

The plastics industry is warning that the "issue is not going away", even if oil prices fall.

New Zealand Oil and Gas's exploration manager, Eric Matthews, said higher prices meant there was more money in the industry for companies which were producing.


But Matthews said that perhaps more important was that the prices changed the economics of development, making it more viable to bring smaller fields into development and to keep fields producing for longer than might otherwise have been practical.

The record prices have not prompted any changes at NZOG, as the company bases its plans around future prices, now expected to be about US$30 a barrel in three years.

But any exploration is likely to be good for New Zealand, as even if oil is not struck, gas may be found to boost dwindling supplies.

New Zealand produces sweet, light crude oil, but imports a heavy, sour crude for production at Marsden Point.

The Government is expected to announce measures designed to encourage more oil and gas exploration this month.

NZOG's Matthews said he would like to see tax breaks and a change in the length of time equipment was allowed to be in New Zealand before it incurred a tax charge.

"It costs us millions to haul a big piece of machinery across the ocean to New Zealand, and the day it's here longer than six months, we have to start paying tax," he said.

Oil prices have been on a rollercoaster this week, surging about $2.50 after a weekend attack by Islamic militants in the Saudi oil city of Khobar.

US crude reached a 21-year peak at US$42.45 a barrel.

But they fell on Wednesday when Saudi Arabia and the United Arab Emirates promised to pump 1.1 million barrels a day of new supply.

The Organisation of Petroleum Exporting Countries is already producing more than two million barrels a day above its official supply limit of 23.5 million barrels a day.

Saudi Oil Minister Ali al-Naimi warned on Wednesday that Opec could not control prices in a market worried by violence and potential supply disruptions in producing countries.

He was confident the kingdom's heavily guarded oil facilities were secure despite the weekend attack, which heightened concerns over the ability of the royal family to control a wave of Islamic violence sweeping the country.

"Opec cannot always control the price," Naimi said.

"The Opec role is confined to ensuring a balance between supply and demand on the oil market."

Opec would be willing, if necessary, to go above the 26 million barrels a day ceiling that a 2.5 million barrel increase would imply, but he did not think it would bring prices down in the short term.

Kuwait said on Thursday it supported an increase of up to 2.5 million barrels a day, and Algeria has proposed to suspend quota limits altogether to tame prices that could stunt world economic growth.

One London broker expects oil prices to keep going up.

"I don't think prices are going to come off significantly when Opec agrees on a quota hike," he said.

"They're already overproducing. There's potential for a shortage of gasoline in the US. On that, I think prices will creep higher."

American petrol supplies are about 5 million barrels below year-ago levels as the world's biggest consumer gears up for the peak-demand summer holiday months.