Rewards and risks in quest for oil

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The Oil Springs Tavern is waiting to live up to the promise of its name.

Northwest of Gisborne, the pub has been there for most of the 140 years fortune hunters have been trying - but failing - to make a killing from the oil that bubbles up from Waitangi Hill.

It's dubbed "Te Karaka tea" after a nearby town and preliminary data provided by the latest oil company to have a go suggests there could be 14 billion barrels of it along the east coast of the North Island.

The tavern is in the village of Whatatutu, but went the way of many struggling country pubs and was forced to close its doors last year.

Its new host, Rangi Ruru, is determined to reopen it. First he needs his bar licence, then he needs more customers.

United States exploration giant Apache is prospecting around the hill and could be a source of business. The company has a budget of $125 million to spend over the next three years on prospecting blocks around the East Coast and Hawkes Bay.

But Ruru is not betting on oilmen working nearby filling his bar. He was told last year some workers could rent rooms at the back of the pub.

"They say there's 25 fellas working up there," he says of prospecting work up the hill. "But I haven't seen any of them."

The mood at the Oil Springs is distant from those confident New Zealand can drill into its vast hydrocarbon reserves for prosperity.

Ruru says many in the area are worried about what oil exploration or production could mean for water and are dubious about the economic benefits. An iwi representative, Marise Lant, says because technical data is so complex, locals are at a disadvantage to the companies in consent hearings.

Apache sees potential in an oil system that could stretch for more than 300km and be unlocked by modern techniques, including breaking up rock by hydraulic fracturing, otherwise known as fracking.

The uncertainty at Whatatutu is a microcosm of a national debate that will intensify. A deepwater well could be sunk off the South Island by the end of the year.

Greenpeace has begun a major advertising campaign against deep sea drilling and iwi groups are becoming increasingly worried, fuelled by fears over the Rena oil spill and the Gulf of Mexico oil rig tragedy. In the other camp the Government, oil explorers and industry groups say the country can't afford not to tap into our natural riches - and quickly.

There's been no major oil discovery for nearly 10 years and gas reserves are down to around a decade's worth.

And while the number of new development wells is up and there is intensive reworking of fields that are already producing, the Ministry of Economic Development predicts declining oil and gas in the next few years because no new offshore fields will come onstream.

Industry group the Petroleum Exploration and Production Association NZ (Pepanz) has been beefed up this year, appointing a new board of local company heavyweights.

Its new chief executive, David Robinson, warns that present levels of investment are inadequate to maintain the oil and gas industry which Venture Taranaki has estimated provides 3730 full-time jobs and contributes $1.9 billion directly to the New Zealand economy.

"We cannot take the ongoing development of the petroleum sector for granted. New Zealand is a long way from the rest of the world, our oil and gas is hard to find," he said.

"You can't leave it to the last minute. You can't wait for 10 years to run out and think 'what do we do now?"'

New Zealand's isolation is working against it as countries compete for limited equipment and expertise big explorers have to deploy.

On average nine out of 10 wells are dry and it can be a decade before exploration is converted to production.

"Time is money. When people talk about risk in this business they're really talking about the financial risk - that's one thing I'm keen on is the industry talking more about. The risks are really about doing your dough," said Robinson.

Briefing papers for incoming Energy and Resources Minister Phil Heatley outline ways in which the country is trying to enhance its reputation for regulatory and political stability.

A new approach to block offers has been implemented, offering blocks on an annual basis rather than a first-come, first-served basis.

Heatley said the aim was to create certainty. If explorers passed up on tendering one year they could be confident blocks would be offered the following year.

While the new blocks system had been welcomed by the industry, the Government is under pressure over the timing of the Exclusive Economic Zone bill going through Parliament which explorers say could harm plans to sink new wells over the next two years.

The legislation aims to bring in new environmental and safety standards and could be law by July, but explorers such as Anadarko say it runs across their drilling programme.

Drilling is expected to begin in October and last through to autumn next year, Anadarko said in its submission to the local government and environment select committee.

While there is a six-month transition period the company - which had a stake in the Deepwater Horizon field in the Gulf of Mexico - wants that extended for a year. Getting a rig to New Zealand costs up to $120 million and it is concerned regulations will not be finalised and "therefore we will have unknown regulatory requirements".

New Zealand Oil & Gas argues that seismic surveys and exploration wells should be designated automatically under the new rules as "permitted activities".

Apache's man on the ground on the East Coast, Alex Ferguson, said its four test wells required approval from five different councils and local authorities during what he said was "a learning experience".

Apache last year teamed up with TAG Oil in blocks the Canadian company had in Poverty Bay and Hawkes Bay and if it does proceed with a three-phase programme it would end up with a 50/50 stake.

This could take three years and it is then that a decision will be made on whether oil is recoverable in commercial quantities. That's when the big money will be spent in the area, Ferguson said.

Kevin Rolens, petroleum director at NZ Petroleum & Minerals, the division of the MED overseeing oil and gas, said a big discovery on the East Coast could be a "game changer" for the North Island.

While oil's been bubbling to the surface in the area for centuries, Ferguson said the seeps were not necessarily a sign of commercial rewards because it was moving too slowly. There needs to be enough pressure in underground systems to force oil to the surface, which is why fracking could be an option.

Controversial in the United States, and facing opposition here, it is a two-stage process involving drilling wells and then using high-pressure blasts of water and sand-laden gel to fracture rock to release gas and oil. He rates fracking a 50 per cent possibility.

TAG believes most of a possible 14 billion barrels would have to be recovered by "unconventional" means.

Ferguson stresses the programme has a long way to go but the company has seen similar rock which bore commercial finds in California and Canada. With a satellite data hookup to Apache's headquarters in Houston from drilling rigs in the Gisborne hinterland, Apache has a much better shot at success than the early pioneers.

In 1874 the Poverty Bay Petroleum and Kerosene Company sank two wells on Waitangi Hill and despite promising signs, financial difficulties forced its closure the following year.

Ferguson says you've got to be an optimist in exploration.

"We're on the outer edges of certainty and data, for us exploration guys this is great."