KEY POINTS:
Contact Energy will develop a long-sought underground gas storage reservoir in Taranaki following the $115 million purchase of Swift Energy assets.
Contact and its 51 per cent owner Origin Energy will pick up Swift's two main producing areas in the onshore Taranaki Basin, plus additional permits and equipment.
Houston-based Swift owns around 16 per cent of New Zealand's oil and gas and announced in May it was looking to rationalise its operations here.
Contact Energy chief executive David Baldwin said the potential gas storage option had been long sought and delivered greater flexibility in managing long-term natural gas supply.
The company has been investigating natural gas storage options for more than two years, as the flexibility in natural gas supply contracts were replaced with onerous "take or pay" contracts in 2004 with OMV and Shell for Pohokura gas.
Contact found itself contractually bound to pay for high minimum daily quantities of Pohokura gas even if it did not use it.
If the Ahuroa reservoir meets expectations it is estimated Contact, the country's biggest gas user, could store around 30 per cent of its annual use underground, tapping into it when required to fire up gas power stations.
It is expected it will cost $150 million over the next two to four years to develop Ahuroa as a storage field, on top of the $54 million purchase price.
The company's share price jumped 18c following the announcement and closed up 4c at $8.10. Contact's shares have taken a hammering over the past month in the wake of downbeat profit forecasts for the next two years due to soft wholesale power prices and high gas prices.
McDouall Stuart Securities equities researcher John Kidd said escalating gas costs stemming from an unpleasant mix of higher gas prices and more onerous uplift had emerged in the past few years as Contact's most significant cost pressure.
"Storage flexibility will enable it to take considerably more management control of its shorter-term gas book, thereby enabling it to run its generation assets more efficiently.
"In effect, the reservoir will act as a working capital facility, storing purchased gas inventory to use when needed, within operational constraints," Kidd said.
Baldwin said reservoir modelling of the Ahuroa field suggested it would make an excellent gas storage option and it was expected to have the facility fully operational by mid-2010.
Such storage would be a first for New Zealand but it is common overseas, especially in the United States where depleted natural gas or oil fields close to cities or industry are used. In some areas, especially in the Midwest, natural aquifers have been converted to gas storage reservoirs.
Origin managing director Grant King said the purchase of the Swift assets would also deliver greater operational synergies with the Kupe field and increase exploration opportunities.
The Tawn and Rimu/Kauri/Manutahi assets were an attractive mix of mature producing fields with prospects for in-fill drilling and potential oil and gas upside.
In addition Origin is acquiring two gas, oil and LPG production facilities and two strategic transmission pipelines connecting the Tawn assets to New Plymouth.
Gas from the Tawn fields and all LPG is contracted to Contact.
Origin has also acquired a 50 per cent interest in two exploration permits, which lie immediately offshore from the Rimu production facility and adjacent to its Kupe gas field development.
In certain parts of one field, Swift will have an option to take up a 30 per cent working interest within 10 years. In some fields Swift will earn a 10 per cent over-riding royalty interest once a production volume threshold is exceeded.
In other fields Swift Energy will earn a 10 per cent over-riding royalty plus an option to convert this to a 30 per cent working interest within 10 years - once again, if production volume thresholds are exceeded.
* Contact yesterday confirmed the closure of its 300MW New Plymouth power station.
It has said the closure would hit its profit by $25 million.
The assets
* Contact and Origin have bought the following assets from US-based Swift Energy:
* The Tariki, Ahuroa, Waihapa and Ngaere (Tawn) fields
* Waihapa Production Station
* Rimu, Kauri and Manutahi fields
* Rimu Production Station
* Separate oil and gas pipelines from Waihapa production station to New Plymouth
* Offshore exploration permits
* Equipment and supplies
* The remaining Ahuroa gas and the field to use for underground gas storage.
