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Sleepy Thule Bay is as serene as it is picturesque. Thickets of native bush snuggle against each other right to the water's edge in this quiet Stewart Island inlet. There's electricity, a smattering of houses and several yachts moored off the small beach, but Thule Bay is as far from the capitals of commerce and industry as imaginable.
Here in late February, tangible signs of New Zealand's hopes of striking it seriously rich bubbled to the surface. A scientific observer digging onshore discovered seeps of oil. About a week earlier, a 4.8 magnitude earthquake 160km to the west had rattled the island, squeezing the natural crude from the Earth. The discovery was where seeps had been found before, in the early 1980s.
But the timing could not have been better - just as international companies were contemplating bids for oil and gas exploration permits in the vast Great South Basin, a 500,000sq km area extending from the bottom of the South Island to the edge of the Southern Ocean. The basin had been explored before, in the 1970s and 1980s. A moderate-sized gas field was discovered but abandoned, the tough conditions making it uneconomic to continue.
Almost 30 years later, the hunt is on again - improved technology makes explorers confident of beating the weather. And as the seeps in Thule Bay confirm, there's the lure of not just gas but of oil. With energy prices soaring, this frontier territory is becoming viable.
In July, the Government said six companies (two consortiums and one solo bidder) had won permits, having committed themselves to exploration programmes of about $1.3 billion. Late next month, the first ships will start gathering seismic data to find the most likely prospects. Studies already carried out by the Government have it predicting that the basin could yield more than two billion barrels of oil - 10 times bigger than the lucrative Maui discovery; a bonanza by anyone's measure.
Could Invercargill be transformed into the Aberdeen of the south? Associate Energy Minister Harry Duynhoven is hopeful but then he has a lot riding on the quest. He has presided over an aggressive Government policy which has seen it chase big international players, dangling tax incentives and reduced royalties in an attempt to kick-start interest.
If it comes off, Duynhoven and his colleagues will be able to claim credit for tapping a lucrative revenue stream for decades to come. But the risks are high and success is far from guaranteed.
"There's a certain amount of luck, for sure," says energy sector consultant Greg Bishop, of KPMG.
"All you have to do is drill on the wrong side of a fault and you can miss an oil trap. You can miss an oil field by 10m and when you get a permit area of 90km by 90km ... "
But Bishop, whose company helped Crown Minerals assess some bidders, points out that while it won't be easy to strike oil in the basin, the odds are good. "Really nobody knows but it's got all the history and geology that suggests it's going to be a winner."
Of the eight wells drilled in the Hunt Petroleum expeditions in the 1970s and 1980s, four showed promising signs, with two particularly good. "So there are absolutely hydrocarbons down there," Bishop says. "The difficulties are around the drilling and then commercialising."
One of the consortiums, headed by American giant ExxonMobil, will start its seismic data-gathering next month, deducing where in its 17,000sq km patch it would be worthwhile drilling. One place to start looking could be the site of the Kawau-1 well where Hunt found gas in 1977.
The Great South Basin, like seven other sedimentary basins around New Zealand, is a likely resting place for oil and gas because it is geologically quieter than the "churned-up" rock layers nearer the tectonic plate boundaries, says the Institute of Geological and Nuclear Sciences. Of New Zealand's oil-bearing regions, GNS says the Great South Basin offers "unparalleled potential". It has all the elements necessary for the creation of a petroleum-rich area, including source rocks and thick sediments. To find the likely reservoirs trapped beneath the Earth's crust, scientists trawl the sea. They send down seismic signals and measure how long it takes the sub-surface rocks to reflect them.
Bishop describes this seismic data as like an x-ray of the Earth's underbelly. It helps figure out where the best potential lies, but it's not perfect. "Depending on the programs you're using to interpret data, things on the computer which look like perfectly formed traps could be buried volcanoes. It's more of an art than a science. The acid test is a drill."
It will be several years before any of the consortiums get to that point. By that stage, they will have spent tens of millions of dollars. "And that's just figuring out where to drill," says Bishop.
Greymouth Petroleum, one of the successful bidders, has committed to a $23 million programme of gathering and studying data.
Once drilling starts, the price skyrockets. Semi-submersible rigs such as the Ocean Patriot cost about US$400,000 ($535,000) a day. But with the sea 1.2km deep in places, consortiums could be looking at drilling ships held in position by global positioning systems. "Drill ships are another order of magnitude again in terms of cost," says Bishop.
Even at that point, a discovery in itself may not be enough to excite investors. "If it's gas, how are you going to get it to market? What's the porosity and permeability and the quality of oil you find? If you find light crude, almost condensate, that's worth a lot more than waxy stuff."
All these factors can determine whether a discovery is worth recovering. "How much can be economically recovered oil? It's a matter of waiting and seeing."
For the Great South Basin, the state of the sea is a crucial factor. "It's difficult and that means more expensive," Bishop says. The basin lies in the "furious 50s" and "screaming 60s" - iceberg territory.
The National Institute of Water and Atmospheric Science (NIWA) has researched just how rough conditions are so companies know what to expect - and what downtime they will face.
The ships most likely to operate in the area can withstand waves of 4m and winds of up to 25m/second, but in the southernmost part of the basin it would be impossible to operate about 30 per cent of the time. Nearer to Stewart Island, downtime would be about 10 per cent.
Certainly, modern vessels are far sturdier than their predecessors. Dr Richard Cook, chief petroleum geologist for Crown Minerals, says the Hunt explorations were dogged by the sea and wind.
Cook experienced the conditions first-hand, spending time as a government observer on one of the Hunt rigs. He had not long returned from working in Europe's notorious North Sea, yet still found the conditions tough. "She came up pretty rough pretty quickly. We had a fairly hairy period."
The ocean churned viciously and helicopters were unable to fly.
"However this was 30 years ago and the technology and ability of rigs to withstand heavy sea conditions has developed extensively since then," Cook says. "We now regularly see rigs working in the Northern Atlantic and other difficult areas such as the hurricane-prone areas of the deep water Gulf Coast and the open ocean deep water off Brazil."
Cook has been one of the main sources of knowledge about the basin's potential, writing scientific papers and leading key studies. For the past few years he has been heavily involved in Government moves to promote exploration of the area.
Since 2004, the Government has been acquiring and making available scientific data about New Zealand's oil reserves.
Cook says the Government believed obtaining up-to-date information about the basin could entice major companies.
Drawing from a $15 million data-gathering budget, Crown Minerals commissioned a study of the northern section of the basin in April last year.
"This new data had a major effect on the understanding of the basin, particularly in the deeper parts where hydrocarbons are generated and potentially trapped," Cook says. The information was given free to potential explorers.
He says it was this refined information, together with high international prices, that made the basin an attractive prospect internationally. "The level of interest in the data and the quality of the companies that obtained permits is indicative of the potential scale of prospectivity in the Great South Basin. The proposed scale of investment in exploring the Great South Basin is in the vicinity of $1.3 billion over five years." Another incentive was the introduction of tax changes. Issues the industry considered were hindering exploration - including amortisation rates and GST treatments on the costs of site restoration - were fixed.
The Government also sweetened royalty rates for a five-year window, lowering payments on any discoveries made before the end of 2009. The gas production rate, for instance, decreased from 5 per cent to 1 per cent. Oil rates were also dropped - for the first 150pj of petroleum produced from an offshore discovery the royalty rate fell from 20 per cent to 15 per cent.
A Cabinet paper dealing with the changes calculated that, to have a material effect on the rate of exploration, the Government would have to incur a cost of up to $100 million (in terms of direct costs and lost revenue) for the suite of policies - from the new royalty and tax regimes, to the scientific programmes, to promoting New Zealand's potential in North America, Europe and Asia. But the returns could be huge.
Duynhoven heralds the changes and the revived interest as a new era in New Zealand's oil and gas exploration. But in a speech to the industry in March last year he called for calm, worried by an outbreak of legal shoot-outs between companies - and the Government.
Like a nervous sheriff in a frontier town, he made a heartfelt plea for everyone to put their guns back in their holsters: "New oil and gas resources are found in basins at the end of drill strings as a result of your intellectual and physical endeavours, and not in the courtroom. I therefore implore you to seek all other available avenues in settling legitimate business differences."
At the time of the speech, the Government was tangled in two legal rows spilling out of exploration attempts by two smaller international companies, Bounty Oil & Gas and Magellan Petroleum.
The companies arranged for Dutch technical consultants Fugro to survey part of the southern basin in early 2004. When the survey was not paid for, ExxonMobil bought the information for a figure understood to be about $5 million.
When the Government indicated it believed it was legally entitled to a copy of the data, ExxonMobil and Fugro issued legal proceedings. The case was settled out of court late last year, with ExxonMobil agreeing to provide a copy on a confidential basis.
A second case arose when Bounty fought a Government move to revoke its exploration permit on the grounds that the company had not carried out work it said it would.
Bounty's claims, including one that the Government was trying to muscle it out of the way for the sake of bigger companies, were dismissed and the permit was cancelled. Magellan surrendered its permit after trying to find investment partners, preferring to concentrate on interests elsewhere.
In an effort to cut off any more trouble at the pass, Duynhoven and fellow ministers took a softly-softly approach to the bidding for the Great South Basin. The bids were handled by high-powered officials on an evaluation team and a steering committee. Lawyer Hugh Rennie, QC, reviewed the process to ensure it was robust.
"A large number of companies obtained the open file data and engaged in field trips and discussions on technical issues. Certainly many companies spent considerable resources on their evaluations, not all of whom actually made bids," says Cook.
Five bids were received and accepted. Permits were awarded for 10 of the 15 blocks on offer, covering 18 per cent of the basin. Bishop, of KPMG, says that while there was undoubtedly a lot of international interest, it was disappointing that more bids were not received. "That said, it's frontier stuff and it's not a proven basin like Tasmania."
Dr Bruce Ainsworth, an associate professor at the Australian School of Petroleum in the University of Adelaide, says his industry contacts confirmed there was significant international interest.
The fact that only one of the mega-companies, ExxonMobil, won a bid suggests the basin is still seen as too risky, says Ainsworth. "Each company will have a view as to how much risk they are willing to take for the potential size of the reward.
"I'm sure they will all be keeping a really close eye on the exploration results of the first wells and, when the basin has been de-risked, there will most likely be a lot more activity by the bigger companies in snapping up acreage."
Australian industry consultant Dr Graeme Bethune, of EnergyQuest, says the quality of the companies involved and the exploration budgets indicate the Great South Basin is seen as an opportunity on a global scale, in which oil's increasing scarcity and price is sending companies to areas previously considered uneconomic. "People are even off the Falklands," says Bethune. "A lot of the interest in play in the world is in deep water - Mexico, Angola, Brazil."
For Bishop, the mere fact of ExxonMobil's presence is enough to suggest the Great South Basin is an internationally respectable proposition.
"The simple fact that you have got ExxonMobil re-entering New Zealand for the first time in years is significant," says Bishop.
"They don't deal with chicken shit. They will not spend money exploring something until it's potentially huge."
Quite how or why ExxonMobil came to set its lavishly resourced sights south of New Zealand is difficult to deduce. Oil companies are shy. Drawing answers is an exploration mission of its own: figure out the lay of the land, probe, probe and probe again and you may just get lucky. Most of the companies with Great South Basin interests did not even respond to requests for interviews (Todd did, but was unavailable before deadline).
At least ExxonMobil spoke - through Australian-based company spokeswoman Samantha Potts. The project is being run from Melbourne, where technical experts oversee prospects in Australasia and Asia. their specific task is finding new targets. But ask for more details about the team and the response is no comment.
The company's last exploration activity in New Zealand was in the mid-1990s when Mobil and Amoco drilled one well - Titihaoa-1, off the Wairarapa Coast - but plugged and abandoned it.
"We're looking around the world for opportunities for new oil and gas discoveries so we weren't particularly focused on New Zealand, but certainly our expert team down this way is always keeping an eye on this region," Potts says. "When Crown Minerals indicated they were going to put some blocks up for bid, we were very interested." Potts says the size of the area it's looking at is "fairly significant" on a global scale, and the conditions are certainly tough.
But she's reluctant to commit when asked how the basin ranks alongside other projects the oil giant has under way.
"It's going to be as large or as small as the gas or oil we find. We certainly were pleased to win the block.
"We wouldn't be involved if we didn't think there was a good opportunity, so we're optimistic, but until we get out there and have a look ... "
The seismic programme is on track. "It depends on the results of that seismic testing. But, assuming we find some good prospects, we expect to start drilling probably around the end of 2009.
"It's a long-term project and this is a game where, certainly at this point, there's a lot of risk and a lot of money to be spent upfront but, nonetheless, we're optimistic."
If ExxonMobil or any of the other companies do strike oil or gas, it could change New Zealand's fortunes.
Duynhoven has played down the likelihood of anyone producing gas for the domestic market, saying it is more likely that if there is a gas find it will be of such a scale it would be sold as liquefied natural gas on the world market. Greymouth Petroleum, however, has said its aim is to deliver cheap fuel to backbone energy users in the South Island. If there is a major oil strike, energy consultant Graeme Bethune points out that it may never even touch the mainland.
"You could have an offshore development where tankers come in and take the oil away," says Bethune, "but that would still all contribute to New Zealand in terms of the balance of payments and so on. It would make a real change for New Zealand." Without getting carried away, Bethune points out that Britain and Norway used to be seen as only moderately endowed with natural resources, just as New Zealand is seen now. And then along came North Sea oil and gas.
The permit holders
The race is on as the major players invest millions to unearth black gold in their Great South Basin blocks
1. ExxonMobil (90 per cent) and Todd Exploration (10 per cent)
Who: ExxonMobil New Zealand (Exploration). A subsidiary of ExxonMobil, the world's largest non-government oil company, which has a market capitalisation of about US$470 billion ($628.46 billion).
According to documents filed with the Companies Office, ExxonMobil NZ has spent about $10 million in the past two years. The Great South Basin is its first foray into New Zealand for 12 years.
Todd Exploration. Owned by Todd Energy and part of the Todd family empire, the company has extensive interests in New Zealand including involvement in the Kapuni and Maui gas fields and the Maari oil field.
Where: The consortium has a permit to explore 17,000sq km in the southernmost open block.
What: It has 27 months to carry out seismic exploration and analysis and then must decide whether to conduct exploration drilling or surrender its permit.
Another 12 months after that, it must make another decision whether to carry on or quit.
2. OMV (36 per cent), PTTEP (36 per cent) and Mitsui E&P (28 per cent)
Who: OMV New Zealand. A subsidiary of OMV Austria, which has a market capitalisation of €15 billion ($28.45 billion) and is central Europe's leading oil and gas company.
OMV NZ has been active in New Zealand since the late 1990s and is one of the country's leading exploration companies, with multiple permits including offshore Northland and Taranaki.
Companies Office documents show OMV NZ has spent more than $8 million on exploration costs in the past two years.
PTTEP Offshore Investment. A subsidiary of PTT Exploration and Production, an arm of the state-owned energy company in Thailand.
The company is Thailand's second- largest listed company and has a market capitalisation of US$10 billion ($13.37 billion).
The Great South Basin is its first New Zealand project.
Mitsui Exploration and Production Australia. A subsidiary of Mitsui & Co, one of Japan's largest conglomerates, with a market capitalisation of about US$36 billion ($48.15 billion). Holds interests in the Taranaki Basin.
Where: The consortium has permits for three blocks totalling 49,000sq km - one block to the east totalling 24,000sq km and two in the middle of the open sector: one of 8300sq km and the other 16,500sq km.
What: It has 36 months to carry out seismic exploration and analysis and then decide whether to carry on or surrender the permit.
After another 12 months, it must have conducted exploration drilling and again decide whether to continue or quit.
3. Greymouth Petroleum
Who: Greymouth Petroleum. Founded in July 2000, the privately owned company is headed by former Fay, Richwhite banker and Cultus Petroleum head Mark Dunphy.
Other directors include Peter Masfen and John Sturgess. It operates in the Taranaki region.
Where: The permit covers a 15,700sq km block to the north of the basin, taking in Invercargill, Bluff and parts of Stewart Island.
What: It has 18 months to carry out seismic exploration and analysis and to decide whether to continue.
It has another 18 months to carry out further seismic exploration and analysis and make another decision. After that, within five years of receiving the permit, it must have drilled an exploration well.
Great South Basin - an opportunity waiting
* 1965 First exploration licence awarded to Mississippi Oil (NZ).
* 1969 Hunt International Petroleum awarded exploration licence over whole Campbell Plateau.
* 1976 Toroa-1 well drilled, traces of oil discovered.
* 1978 Kawau-1A, Hoiho-1C, Tara-1 and Takapu-1 wells drilled with mixed success but no commercial finds.
* 1983 Raikura-1 well drilled, nothing found.
* 1984 Pukaki-1 well drilled, nothing found.
* 2000 Major GNS study reviewing exploration data indicates good potential.
* 2001-2003 Bounty Oil & Gas and Magellan Petroleum awarded exploration permits; no wells drilled.
* 2004 Survey of small sector of basin carried out; the first new data in more than a decade.
* 2006 Crown Minerals commissions major study, providing new insights, including depth of the basin.
* 2007 Exploration permits awarded for all five bids received in tender round promoted by the Government.
- Source: Crown Minerals
