The NZ oil rush

By Chris Daniels

Tucked behind a small green ridge just north of New Plymouth, the men of rig 19 are fitting a device to stop an explosion of natural gas from racing up the hole and destroying their machinery.

It's tough, dangerous and expensive work and they hope to get drilling again quickly, making it to the target depth of 1450 metres in the hope of finding an underground trap filled with natural gas.

Run by locally listed explorer Austral Pacific, this is the Heaphy-1 exploration well, and it costs about $75,000 a day to operate.

Inside a nearby collection of portable cabins, some of the men take a break, kicking off their boots, making cups of coffee and watching a television blaring in the corner.

Raiders of the Lost Ark is playing - and Harrison Ford is scrambling around in an underground temple looking for his lost treasure.

Just out the window of this cabin - the "galley" - a similar underground treasure hunt is under way. Its success or failure means more than just riches for Austral Pacific shareholders, because the window of opportunity for explorers to find oil and gas in New Zealand is closing quickly.

Heaphy-1, a relatively shallow well, is likely to have cost Austral Pacific between $1 million and $2 million.

It is more common for onshore wells to go deeper, which takes drilling costs up to between $5 million and $6 million.

Heading offshore puts the cost of drilling up even further, with prices starting around $25 million.

Where just two years ago there was optimism and confidence about the prospects for finding new oil and gas fields, the large number of dry wells drilled last year means time is running out.

Maui gas has run down and needs to be replaced from new fields.

The biggest gas users - power generators Genesis Energy and Contact Energy - must soon decide whether to import gas for their power stations. This will mean a new load imposed on the already creaking balance of payments deficit.

Last year, New Zealand brought in $1.21 of imports for every $1 of exports. Unsuccessful oil and gas exploration also means the amount of oil required will rise - adding even more of a burden to the national import bill.

Poor results from last year's drilling season have come at a time when the world's energy exploration sector is in a state of huge expansion, with the cost of equipment and manpower going through the roof.

Offshore wells cost up to $10 million each and onshore drilling is in the millions and so the Government, through its Crown Minerals division, is working to lure more explorers here.

Some 34 wells were drilled in New Zealand last year - 19 were classified as exploration wells and the remainder appraisal and production wells. All were in Taranaki and, by any measure, it was not a successful year. Even more wells are expected to be drilled this year.

About 88,000 metres was drilled, up from 78,000 the year before.

Bruce Phillips, managing director of Australian Worldwide Exploration, is one of several overseas explorers enthusiastic about oil prospects here. He says commercial objectives of his company and the national good have come closely into line during the past few years.

The nation urgently needs gas, but it is oil hunters such as Phillips who will be the ones finding it. When the Maui field dominated the industry through the 1980s and 1990s, it was not worth finding any gas since there was no customer available. But Maui's depletion means natural gas has ceased to be dud second prize, becoming instead a valuable fallback option.

"AWE is pursuing oil as the first prize in New Zealand, gas would be a second prize for us - a very nice second prize and it's not often you can say that around the world," he says.

AWE has contracted an offshore drilling rig, the Ocean Patriot, to come to New Zealand later this year to drill four wildcat exploration wells and four development wells - a multi-million-dollar gamble that is becoming more expensive every day.

The Ocean Patriot was booked to come a year ago at a cost of just under US$80,000 ($117,000) a day. This same rig is now being marketed by its owners to new customers with a daily price tag of US$375,000.

Such skyrocketing costs have come about through high oil prices and the loss of drilling rigs damaged by last year's destructive hurricane season in the Gulf of Mexico.

Local geophysicist Mac Beggs says it is in "positive chaos", awash with money. The sector has also become increasingly cut-throat as big companies lure rigs away from smaller explorers with promises of bigger money.

Phillips says no project is being delivered on budget. Contractors are making outrageous financial demands, the surplus of big dollar work available giving them the bravado to give companies 24 hours to take it or leave it.

Beggs said exploration results for wells drilled between 1999 and 2004 were "actually pretty good" and the offshore Pohokura gas field discovery in 2000 was a notable success.

"Come into 2005 - my impression is that the investment surge was sustained and may have continued to strengthen, but the results ... we really don't have a great deal to show for it."

This lack of success in onshore Taranaki has prompted a feeling in the industry that the region may no longer be able to deliver, says Beggs, who feels it is important there is success elsewhere soon.

A successful discovery in another basin - whether it be Northland, the North Island's east coast or Canterbury, would be "the best thing that could happen for the national good. We just keep our fingers crossed that some of these other basins come through."

His assessment of the industry as nearing a crunch point is endorsed by Mike Patrick, executive officer of the Petroleum Exploration and Production Association.

He says this drilling season - ending this winter - and the next are crucial, otherwise big gas customers will already be well down the path of planning LNG imports.

"The industry is behoven really on finding that new gas that's needed - before say 2010. Well that means we've got two drilling seasons - this and next year," says Patrick.

"We've got to be discovering sufficient gas I would suggest before the end of next year in order to preclude the immediate development of LNG or CNG imports."

Todd Energy has raised the possibility of importing natural gas in its compressed, rather than liquefied state. While not as much can be transported in a ship, there is no need for a regasification terminal, which could cost up to $1 billion.

"We are running out of time. If you had asked me this time last year, I would have felt a bit optimistic about discovering. I'm not pessimistic - but I'm a bit further back towards pessimistic right now."

Patrick said he had expected to have seen more success from the recent big jump in drilling activity, focused particularly in Taranaki.

"I would have expected a few more successes - there was a lot of onshore work in Taranaki." He believes the "'big litmus test" for the sector will be the results of the recent offer by Crown Minerals of exploration blocks off the North Island's east coast.

Last year, the Government paid for a seismic survey vessel to study the area's geology, then make the information available for exploration companies.

Explorers have until Friday to put in bids for this offshore acreage. Crown Minerals will award the right to explore across 43,267 sq km of ocean. It is an area containing an "active petroleum system", which has only been very lightly explored.

Companies bid for the rights to explore in certain areas offered up by Crown Minerals. The one that promises to do the most amount of work usually wins the right - but they must be financially strong enough to actually see it through.

Patrick says the industry needs to convince the Government that in today's climate, New Zealand has to be "outstanding as a destination".

"The next two drilling seasons are very, very important," says Patrick.

Crown Minerals does point out the success stories - oil will soon be flowing from good-sized fields discovered in the past few years. There is the Tui field, with recoverable oil reserves of 26.8 million barrels of oil, that was discovered in 2003. And the Maari field with recoverable oil reserves of 49 million barrels.

Pohokura, which is largely gas, is estimated to contain 42 million barrels of oil.

This field was discovered in 2000 and bought into production quickly, by industry standards.

Crown Minerals says last year's drilling programme - 34 wells, 19 of which were exploration - means a 10 per cent success rate. Results from four exploration wells were still unknown.

But it is still a tough and expensive gamble looking for oil and gas.

Last Wednesday, just a month after those men of Rig 19 starting drilling the Heaphy-1 exploration well, a terse announcement was made to the stock exchange by Austral Pacific, well operator and 66.7 per cent owner.

It said Heaphy-1 was being "plugged and abandoned".

"The well was drilled to a depth of 1450m and encountered good reservoir quality sandstones at the predicted target levels. Given the absence of any significant hydrocarbon indications, the decision was made to plug and abandon the well."

Thousands of hours of analysis and study. Millions of dollars spent, yet nothing found. The search goes on.

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