John Pfahlert: Oil and gas make significant contribution to NZ economy

The Kupe gas field off the Taranaki coast is an example of an exploration project having a major benefit to local service providers. Photo / APN

Opinion

The sinking of the Rena has contributed to the ongoing debate about whether New Zealand should seek to capitalise on its untapped petroleum reserves. There is a perception that foreign exploration companies provide little or no benefit to the economy while threatening our environment.

The truth is that the contribution of the oil and gas to our economy is more significant than most people realise. While it is broadly understood that a discovery will result in petroleum miners paying royalties to the Crown, there is confusion over the true level of royalties payable.

Royalties are only one portion of the industry's economic contribution to the economy. We also make a substantial contribution to the corporate and employee tax base, as well as to the wider economy in terms of employment and infrastructure development.

The Ministry of Economic Development estimates that the Government receives around 42 per cent of an oil company's profits in corporate taxes and royalties. Petroleum miners pay a royalty in respect of producing wells. This is the higher of an ad valorem royalty, based on 5 per cent of gross sales value, or a royalty based on 20 per cent of "accounting profits". For virtually all of New Zealand's producing offshore O&G fields, the 20 per cent accounting profits royalty far exceeds the 5 per cent ad valorem royalty.

In addition, the accounting profits royalty is often much higher than 20 per cent of the true reported accounting profit. This is because "accounting profits" is a defined term for royalty purposes but the definition bears little resemblance to "profit" as that term is generally understood.

In fact, based on the reported results of oil and gas companies operating in New Zealand, the 42 per cent combined royalty and tax rate estimated by the Ministry of Economic Development is too low. The 2010 financial results of one oil and gas company that holds an interest in a New Zealand oil field with no exploration outside the permit area reports an effective combined rate of around 45 per cent.

However, a company with an interest in the same permit area, but which has invested in exploration outside the permit area, has a much higher effective combined rate of around 65 per cent - a direct result of the difference in "profit" for financial reporting and royalty purposes.

In the year to June 30, 2010, the Government received $432 million from petroleum royalties. The Ministry of Economic Development has recently released a report valuing the Crowns' royalty stream from existing producing fields in New Zealand at between $3.2 billion and $5.5 billion over the remaining field life.

Like other industries, the oil and gas sector is required to pay corporate tax on all profits. Between 2004 and 2009, the industry paid around $1.4 billion in taxes.

In addition to corporate taxes, the oil and gas sector also contributes in the form of employee taxes such as pay as you earn tax and fringe benefit tax. This source of revenue is often overlooked, but it is a valuable and significant contribution to the economy.

Given the highly technical area of expertise, the industry attracts some of the top engineers and physicists from around the world for long-term projects - many of them remunerated at levels well above the average salary.

Although a number of the participants involved in oil and gas exploration are foreign-owned, it does not necessarily follow that all of the associated economic benefits are repatriated.

Oil and gas exploration and development companies require a number of support services - many of these contracts being captured by local providers.

These include professional and consulting services, environmental planning, design, transportation and seismic testing.

The industry also requires significant supporting infrastructure such as roads, transmission pipelines and port facilities. The Taranaki region illustrates the importance of the oil and gas industry to these local providers.

While these "indirect" contributions are harder to quantify, their value must not be overlooked.

What this means for New Zealand's future:

Oil and gas exploration presents an invaluable opportunity that should be grasped with both hands. A significant discovery would boost Government revenue through direct contributions to the tax base, and provide employment prospects and opportunities for local businesses to provide supporting services. With an ounce of luck we may follow in Norway's footsteps, which became the second wealthiest nation in the OECD in terms of GDP per capita after oil was discovered on the Norwegian continental shelf in 1969 (an increase from 19th). New Zealand, on the other hand, over the same period has fallen from eighth to 21st, a position we share with Greece.

John Pfahlert is executive officer of the Petroleum Exploration and Production Association.