Real oil on drilling outlook

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Result of latest block offer is a crucial test of the Govt campaign to lure explorers to NZ.

Announcements due tomorrow on the take-up of oil and gas permits will show just how hungry companies are to explore around New Zealand where offshore drilling is a hard sell.

The decision by Brazilian oil giant Petrobras to surrender its permit off East Cape has sharpened the focus on the results of the "block offer" in what's being seen as a crucial test of the Government's push to attract explorers here.

Oil and gas production is an important part of its economic strategy and while there have been useful smaller onshore discoveries during the past three years, new offshore projects have been slow to come on stream since the Tui and Maari fields.

The Government and officials have put a brave face on the loss of Petrobras, but prospects of its permit being picked up by another explorer as part of a process separate to this block offer suffered a blow when deepwater drilling specialist Anadarko said it was not interested.

The Houston-based firm remains on track to start drilling off the South Island and in the Taranaki Basin next summer, but a spokesman said on Friday that Petrobras' Raukumara area was not on its radar. The Brazilian firm was the target of Maori and greens' protests but has said it was not opposition but mediocre results from surveys that persuaded it to abandon its work in New Zealand.

In the Great Southern Basin, Shell is six months away from deciding whether to drill and although an $80 million survey shows little evidence of black crude oil, the company has said there are better signs of gas and sought-after condensate which needs little refining.

Vast unexplored offshore areas are less likely to attract bidders in the current block offer than onshore areas which are even more viable using the controversial hydraulic fracturing, or fracking, technique.

Huge investment is needed to drill in the frontier basins off the coast. Getting to drilling stage can cost $100 million and an industry rule of thumb states most wildcat wells have just a 10 per cent chance of striking oil and gas, let alone being commercial.

After the Petrobras announcement both Prime Minister John Key and Finance Minister Bill English said the oil major was consolidating its exploration push closer to home for financial reasons and said the dynamics of world energy markets was changing as a result of the surge in shale gas production in the United States - largely due to fracking.

The onshore area being offered in the current block offer has shrunk by more than a third after consultation with local groups in the past 10 months. Ministry of Business, Innovation and Employment documents show two blocks in Taranaki were withdrawn because of a lack of understanding on Maori sacred sites. The size of four other blocks has been amended for other reasons including a reassessment of the likely resources.

Petroleum Exploration and Production Association chief executive David Robinson said the block offer was an important test of New Zealand's appeal to global explorers.

The country was competing for scarce capital and suffered from its isolation which added substantially to the cost of sending rigs here.

"At the end of the day we're competing with their opportunities around the world."

General manager of NZ Petroleum and Minerals David Binnie told Parliament's commerce committee last week he was "hopeful" the block offer would lead to more activity. He spoke of significant progression in Taranaki and on the East Coast.

"If you look forward, the East Coast is the most prospective on shore."

Edison Investment Research finds that nearly $7 billion has been invested in the oil and gas sector during the past five years.

- additional reporting Otago Daily Times