Shell hopes drilling in the Great South Basin will produce Maui-size reserves of gas which would be processed and exported in what could be a multi-billion-dollar industry.
In a big boost to the exploration sector here, Shell yesterday announced it would sink a test well within two years in the area which lured hopefuls for decades but has been only lightly drilled.
Any commercial quantities of gas would probably be converted to liquified natural gas and exported to energy-hungry parts of Asia.
Shell's country chairman for New Zealand, Rob Jager, said the chances of finding oil had been calculated at about 1 per cent so gas was the target.
"I think you need to be thinking a Maui size or bigger before moving forward in the Great South Basin."
The giant Maui field off the Taranaki coast helped transform New Zealand's energy economy from the 1970s but there was not sufficient demand or infrastructure in the South Island to use a similar-sized discovery, Jager said.
"The prize is finding enough gas to be able to convert it into LNG and develop an export opportunity."
This could mean building an onshore processing plant or using a floating facility - like Shell is building to use off northwest Australia - to convert natural gas into a frozen form to export to other countries.
Shell is the operator of the permit area, which stretches down the Otago and Southland coast about 100km offshore. Its joint venture partners are OMV NZ and Mitsui E&P Australia.
Jager said the decision to commit came after analysis of seismic data but it had yet to determine a precise drill site for the exploratory well, which could cost up to $200 million and would be drilled from a semi-submersible rig or possibly a drill ship.
"I'm excited about the fact that we've been able to convince our shareholders to commit not insufficient funding in an environment where there are many [other] opportunities and limited funds."
If an exploratory well proved successful, a network of appraisal wells would be sunk before any commercial production - and that could be a decade away.
Anadarko has faced protests and Shell's announcement yesterday sparked a warning from the Greens, who said the harsh conditions "between the roaring forties and the furious fifties" made drilling environmentally risky.
Labour MP Grant Robertson said that while his party was not opposed in principle to oil exploration, it did not believe that there was an adequate regulatory regime or response capability in place.
Jager said drilling would be in more than 1300m of water and it was impossible to eliminate all risks. However, the company would work over the next two years to minimise them.
Explorers have targeted the Great South Basin in the past with eight wells drilled between 1976 and 1984, and hydrocarbons recorded in four. However, water depth and the isolation made gas reserves in one well non-commercial and mechanical problems meant strong oil shows in another were not properly tested.
- additional reporting Adam Bennett