Address to the Energy Law Association and New Zealand Membership of the American Association of Petroleum Geologists

Speech notes for Minister's address to the Energy Law Association and New Zealand Membership of the American Association of Petroleum Geologists Forum on the disclosure of oil and gas reserves in New Zealand, Buddle Findlay, Wellington

Good afternoon Ladies and Gentlemen. Thank you for the opportunity to provide you with an overview of the rationale behind the proposed regulations governing the disclosure of oil and gas reserves in New Zealand.

I welcome Dr Peter Rose to New Zealand and I look forward to hearing his views on reserve estimate and risk assessment in the petroleum sector. It is exciting to have such an authority as you here in New Zealand.

Over the next few minutes I will give you an overview of the government’s perspectives on reserves, and information disclosure; and the planned changes to the petroleum regulations in terms of information relating to reserves, forecasts, and disclosure of this information.

Robust and reliable information on estimates of resources and reserves and production forecasts are a lifeblood of this industry.

The government’s stated objective is to reduce energy-related greenhouse gas emissions, but oil and gas will likely remain a key energy input for some time yet.

To meet an increased demand – in particular for electricity generation – reliable gas supplies are required to deliver an energy supply that is secure, reliable and resilient, and that is priced fairly and efficiently. In addition transport fuels, whether from below or above the ground, will be critical for the economy and our way of life.

As most of you will no doubt be aware the Crown owns all naturally occurring in-ground petroleum assets. Upon extraction and sale a royalty is payable to the Crown.

As owner of the in-ground assets the government has a key role in setting the regulatory framework for these assets.

To release the value of these in-ground assets in terms of delivering a secure supply of oil and gas, the government allocates permits for exploration and development to the private sector. It is the upstream and downstream sectors, and not the government, which have the expertise, technical capability, risk management skills and capital to explore and develop these assets.

To achieve development there needs to be a balanced relationship between the asset owner – the Crown – and the investor seeking a return on capital. If this relationship is not properly balanced then little progress is likely to be made to liberate the wider value of such assets over time. By ‘balanced relationship’ I mean the minerals management framework in its wider sense.

Accordingly, robust and reliable information on hydrocarbons for all parties involved in the management, exploration, development, extraction and transport of Crown owned petroleum assets is critical.

Most of you will be aware that as part of exploration and mining operations there is an obligation to supply geo-technical data such as geological studies, seismic surveys, well data, production, reserves etc to the Crown Minerals Group of the Ministry of Economic Development, which is the responsible government agency for administering the functions of the Crown Minerals Act. This technical data is captured, stored and made available under the terms of the current legislation. Currently, the Act requires that technical information is made publicly available after 5 years from the date the permit was awarded, or on relinquishment of the acreage.

Some reserves and production data are currently provided by the operators of mining permits and licences. This information is a key but insufficient data set for developing effective future supply and demand scenarios.

I would now like to look at what has triggered the changes.

In mid 2003, subsequent to the Maui reserves re-determination, there were widespread concerns over future gas supplies and asymmetry of information between upstream and downstream players.

As a consequence, extensive representations were made – particularly by the downstream sector – for enhanced information on reserves and field deliverability.

Government recognised that robust and reliable information, particularly concerning gas reserves and future production, needed to be made available to the market and government. Such information would enable better-informed decisions from all stakeholders, including:

• Potential exploration and production companies, including new entrants evaluating New Zealand as an investment opportunity.
• The downstream sector, in particular for current industrial users and electricity generators, for their long term planning requirements.
• Investors in new infrastructure, and finally,
• The government in terms of ensuring that the correct policy settings for exploration and production are in place.

Furthermore, uncertainty around when gas demand would exceed available supply; and meeting the International Energy Agency's 90 day oil stockholding obligation were also seen as justifying the need for more robust and reliable information.

The decision to require more robust and timely data saw the Crown Minerals Act amended in 2004 to expand the functions of the Minister of Energy. These expanded functions went to additional categories of information collection and the disclosure of that information - the purpose being to promote informed investment decisions and to improve the security of supply in the petroleum and electricity market.

The additional categories of information to be regularly collected and disclosed include:

• Estimates of petroleum field in-place and recoverable reserves P90 and P50 (1P, 2P)
• Material changes in reserves information
• Field deliverability information, and
• New field reserves information.

So where are we at with these changes?

As many of you are aware, in June 2006 the Crown Minerals Group prepared a discussion document for comment on updating the reporting regulations for petroleum, minerals and coal. Included in the discussion paper were the proposed amendments to give effect to government decisions on information disclosure.

All submissions were carefully considered and a number of amendments have been made to the original proposal. I thank you for your submissions which have assisted my officials in preparing the regulations.

One over-riding issue raised in response to the discussion document, regarding the information disclosure sections, was that the commercial significance that field reserves estimates carry for individual companies in a competitive market, should not be disclosed. Countering this however, is a strong view that the collection and disclosure of this data should underpin the proposed regulatory changes. Put another way, the desirability of good quality reserve information is considered greater than the assertion that producers may make over commercial confidentiality. I note that some of you suggested a need to go even further and require independent audit and verification of the reserve reports. Let me say that government has carefully weighed up all your views in determining its policy settings.

I will now briefly outline the key areas relating to the collection and disclosure of information:

• As part of activity reporting on any mining activity: P90 and P50 (1P and 2P) reserve estimates, when updated; and production data, including any revised production profiles and indicative maximum production
• As part of activity reporting on exploration activity: reserve data and estimates with relevant probabilities if obtained
• All or any part of the production and reserve data obtained may be published by the Secretary of MED biannually or some other timely manner depending on the availability and timing of the information.

I am pleased to advise that the replacement regulations are now with the Parliamentary Counsel Office for drafting.

I note that for gas reserves, recent significant upwards revisions to known producing fields, as a result of the improved commercial environment and new discoveries, have improved the gas supply demand equation. Recent estimates push the so-called gas gap out to 2015 and possibly beyond depending on future demand and further discoveries. This shows the importance of separating data on the physical resources present from the producible resources under varying commercial scenarios, which can then be taken into consideration for long-term evaluations.

In closing, Dr Rose’s visit is a valuable opportunity for us all to focus on the importance of understanding our petroleum reserve and resource figures and the regulatory regime that governs them.

Thank you Dr Rose for taking time from your busy schedule to visit New Zealand to provide such a timely environment for today's discussion, and to allow us to hear your thoughts.