Buying foray should spur search for more natural gas

By CHRIS DANIELS energy writer

Origin Energy's biggest overseas foray, its $1.68 billion purchase of half of Contact Energy, could give a much needed boost to the search for new supplies of natural gas.

The Australian Origin's expertise in oil and gas exploration and production may help Contact secure the gas it needs for its planned power stations.

However, such a move may propel Contact deeper into riskier waters than some investors are comfortable with.

Analyst James Miller, from brokers ABN Amro, said there was "a reasonable chance Origin will deliver significant value to Contact shareholders".


Contact buys gas, puts it into its power stations to generate electricity, which it then sells through the wholesale electricity market.

Its retail arm then buys power in the wholesale market which it sends down the wires to its customers.

But without gas, Contact cannot generate this electricity. It owns South Island dams and geothermal stations, but its most valuable assets are its two, modern, efficient gas-fired power stations. More than half of all electricity it generates comes from natural-gas-fuelled stations.

Contact has full resource consent for two more such power stations, one at Otahuhu, the other in Taranaki. All that is stopping it from building the stations is a lack of any long-term gas supply.

In March, Contact said it would contribute $20 million into an $80 million fund that would try to accelerate oil and gas exploration in New Zealand.

Late last month, it said it would do more than just pay others to drill, it might do some actual prospecting itself. Crown Minerals, a division of the Ministry of Economic Development, has granted Contact a petroleum exploration permit for part of the Taranaki Basin.

If its research turns up the right results, Contact expects an exploration well to be drilled by 2007. Company chief executive Stephen Barrett (an Edison Mission man, so likely to be leaving the company now Origin has arrived) said the move into oil and gas exploration was part of its "broad strategy to identify and secure a range of future energy sources for New Zealand".

Barrett described Contact as working "across a range of fronts to stimulate greater upstream gas activity." He had been talking with others who had interests in the Taranaki basin, and said it would be interested in buying their gas.

"While those discussions have been encouraging, Contact is concerned that relying solely on existing explorers may not result in a sufficient level of activity. For this reason, Contact has decided to become more directly engaged."

In addition to its extensive oil and gas exploration and production assets in Australia, Origin owns 50 per cent of the offshore Kupe gas field. The rest of Kupe, expected to come on stream within the next few years at a cost of $400 million, is owned by Contact's rival the state-owned power company Genesis.

The Origin buy-in does not have any immediate implications for Contact's 600,000 customers. Part of their monthly power bill will now be going into an Australian, rather than a US bank account.

ABN Amro has a "buy" recommendation for Origin and the Contact deal was well received by Australian investors. Some of the brokers' research shows that New Zealand consumers may be easier to hit with price hikes than their Australian cousins.


Possible negatives for Origin identified by ABN Amro is the fact that the Contact shares were "not overly cheap" when compared with its peers.