Soaring oil prices make NZ attractive risk

Photo / Supplied

With oil heading for US$100 a barrel, a London analyst for Bank of America Merrill Lynch says petroleum explorers are more likely to be attracted to New Zealand waters.

"More frontier basins are sought after once the price goes higher. People are more willing to throw down darts when the incentive is there," said research analyst James Schofield.

New Zealand's supportive political environment meant the country was in a "sweet spot" for exploration.

"There's no political risk whatsoever, they see it as a very benign environment. Most of these other places have security risks, New Zealand's untested in terms of large oil finds so geologically it's got a lot of risk but the political environment helps you overcome that."

Schofield, a New Zealander who has worked for Merrill Lynch for four years, said the royalty regime in this country was attractive.

"People believe that if you find stuff the Government won't try and screw them over with an unfriendly tax arrangement."

Houston deepwater drilling specialist Anadarko and Origin Energy are due to start work off the Canterbury coast next year and Brazilian state-owned company Petrobras has rights to explore off the East Cape-Bay of Plenty area.

The oil and gas industry is estimated to contribute nearly $3 billion to gross domestic product and the Government is formulating a petroleum action plan to encourage more drilling. In the year to June it collected nearly $400 million in royalties.

Schofield said oil prices came into sharp focus as they passed US$80 a barrel. Oil traded above US$90 for three straight days last week.

In a note issued in the past week, Schofield and other BoA Merrill Lynch researchers said the growing tightness in global oil markets was pushing prices towards US$100 and there was a fundamental demand shift emerging.

"Soaring demand from emerging markets, in contrast to the financial crisis in developed economies, has accelerated the shift in oil demand from West to East."

Non-OECD demand is expected to grow from 46 per cent of global demand last year to 52 per cent in 2015, and may even surpass OECD by 2012.

But on the supply side, the world was becoming increasingly dependent on Opec - the Organisation of Petroleum Exporting Countries - they said.

"Opec might need to come off the sidelines in 2011 to avert too much pressure from higher oil prices on the fragile economic recovery."

Since the first quarter of this year, global oil demand has continuously run against negligible capacity additions by Opec. Demand is now set to hit a record high this year, surpassing the previous high in 2007.

This means demand has exceeded supply by 900,000 barrels a day on average since early April. Asia's voracious appetite for light and middle distillate petroleum products has helped spark a rally in petroleum product prices.

China has started running out of diesel in the past few months

"This shows the challenge of supplying enough petroleum products in emerging markets; the demand has been phenomenal, with one country [China] making up around 40 per cent of the growth in diesel demand over the last couple of years."

The analysts say that as demand continues to grow, they expect crude oil stocks to draw at a rising pace through next year. Opec will be forced to raise production or quotas or both in the first half of 2011 as crude oil prices cross the US$100 a barrel target.

The cartel is playing a dangerous game, they say.

In 2008, crude traded above US$100 for only about six months before the world economy collapsed into the worst crisis since the 1930s.

"Simply, the world economy bulged under the weight of such high oil prices."

Allowing oil prices to continue to rise unchecked from the current levels was dangerous.

"We believe it imperils the fragile recovery in the OECD, particularly as the cartel has the ability to bring more production on stream."