The New Zealand Oil and Gas Sector Report

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1 The Value of Petroleum and Mineral Development The mineral and petroleum industries are an important part of New Zealand s economy and our abundant reserves of oil, gas and minerals are valuable national assets offering unique opportunities for economic growth and securing our supply of affordable energy. Safe and environmentally responsible development of our oil, gas and mineral resources will create new jobs, bring in substantial royalty and tax revenue, and contribute to a prosperous future that will encourage people to stay in New Zealand.

2 HIGH SKILL, HIGH WAGE, HIGH VALUE, LONG TERM According to the Ministry of Business, Innovation and Employment s Petroleum and Minerals Sector Report 2013, the petroleum and minerals industry directly employed 6,410 people throughout New Zealand in If indirect jobs and support services created by industry activity are also factored in, this increases to over 15,000 people. These jobs are based predominantly in producing regions and are highly-skilled, well-paid, high-value and long term. HIGH SKILLS The significant demand for highly skilled labour, especially in larger operations, for engineering professionals, geologists, mechanics and machine and stationary plant operators often sees explorers and producers recruiting and investing in the local market. This creates opportunities for local people to enter the industry and get training opportunities they otherwise would not have access. HIGH WAGES The skills required for resource development means that jobs in the industry pay well above the national average. The Petroleum and Minerals Sector Report 2013, produced be the Ministry of Business, Innovation and Employment (MBIE), states that the average salary in the petroleum and minerals sector is $105,645, over twice the New Zealand average of $50,262. The 2013 Regional Economic Activity Report, also produced by MBIE, credits mineral and petroleum development with contributing to the comparatively higher per capita incomes of regions like Taranaki and the West Coast. Even modest sized oil, gas or mineral developments result in increased household income, as money flows into the local economy. Local engineers, heavy machinery operators, geologists and mechanics also benefit, often having steady work for the life of the operation. A report by Business and Economic Research Ltd (BERL) put mineral extraction and mining as directly and indirectly supporting one-third of household incomes on the West Coast (total population 32,000). HIGH VALUE The petroleum and minerals sector is the most productive in New Zealand s economy, generating $333 per hour worked compared to the national average of $48 per hour worked (Petroleum and Minerals Sector Report 2013). LONG TERM The mining sector is frequently described as a boom and bust industry that follows the highs and lows of commodity price cycles. However the statistics tell a different story. According to Statistics New Zealand, businesses in the petroleum and mineral sectors are the longest lived of any industry in the country. Many of the major mining operations throughout New Zealand today have been operating for decades. This reflects the lifecycle of resource development. It usually takes decades to develop resources: assessment, prospecting and exploration can take 10 to 15 years alone. For larger prospects, extraction can take more than 40 years. Once mining is complete, rehabilitation and monitoring of sites continues for several years. HIGH TECH In addition to skill, wage and longevity, the petroleum and minerals sectors are extremely innovative and technology-focused. Globally the industry spends billions on the development of software and machinery to better explore for and extract resources. This investment has benefits beyond the industry: the advances in technology and science are applied in areas including geological hazard assessment, forestry, agriculture and horticulture. Modern mining utilises software that allows operators better understanding of complex geology without the need for invasive exploration. Large scale mining is commonly computerised with automated systems that can operate heavy equipment remotely. Technologies including hydraulic fracturing and horizontal drilling make it possible to reach resources that would otherwise be impossible to access or too costly to develop. This type of innovation is becoming increasingly important as the supply of easily accessible resources diminishes.

3 The benefits for New Zealanders Oil, gas and mineral producers in New Zealand are subject to company taxes on their earnings and royalties on the product that is extracted and sold. This income is invested by the Government in infrastructure and services such as schools, hospitals, roads and ultra-fast broadband. NEW ZEALAND S ROYALTY SCHEME New Zealand always gets a return because our royalty scheme requires producers to pay annual fees regardless of whether or not they make a profit. MINERALS The Crown Minerals (Royalties for Minerals Other than Petroleum) Regulations 2013 set out rates and provisions for the payment of royalties for permits awarded from 24 May The royalty framework for minerals consists of a specific rate for low value minerals, and a tiered ad valorem royalty (AVR) for gold, silver and platinum group elements. The AVR is one percent of annual net sales revenues for net sales revenues $1.5 million or less, increasing to two percent of annual net sales for net sales revenues that exceed $1.5 million. The specific royalty rates for specified minerals are defined in Part 9 of the Minerals Programme for Minerals (excluding Petroleum) 2008: the royalty rate for coal ranges from $ $1.40 per tonne sold depending on the type of coal. Coal and lignite produced from opencast mines is also subject to an Energy Resource Levy at the rate of $2.00 per tonne for coal and $1.50 per tonne for lignite. the royalty rate for aggregates, limestone and decorative stone ranges from $ $1.50 depending on the mineral type. the royalty for non-specified minerals (such as ironsand and phosphate) is at the discretion of the Minister. On top of royalties, operators are also required to pay corporate, goods and services, and PAYE taxes. PETROLEUM The regime stipulates the payment of either an ad valorem royalty (AVR) or an accounting profits royalty (APR), whichever is the greater in any given year. The royalty rates are either: 5% AVR, that is 5% of the net revenues obtained from the sale of petroleum; or 20% APR, that is 20% of the accounting profit of petroleum production. On top of royalties, operators are also required to pay corporate, goods and services, and PAYE taxes. HOW WE COMPARE WITH INTERNATIONAL ROYALTY SCHEMES When compared with other OECD countries, New Zealand s royalty scheme for petroleum and minerals seems relatively low. To compete on the world stage we must overcome barriers including New Zealand s remoteness, our distance to markets and our frontier status. The lower royalty scheme is an incentive for explorers and operators to invest in New Zealand. WANT TO KNOW MORE ABOUT THE VALUE OF PETROLEUM AND MINERAL DEVELOPMENT?

4 RESOURCE DEVELOPMENT AND NEW ZEALAND S GDP Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced over a specific period. It s one of the primary indicators used to gauge the health of a country s economy. Statistics New Zealand puts New Zealand s GDP at nearly $150 billion in Our oil, gas and mineral industries contribute about $4 billion to this each year. The Petroleum and Minerals Sector Report 2013 found that a total of $89.5 million in royalties and energy resource levies from mineral production was paid to the Crown in the five years to The sector contributed a further $400 million to New Zealand s export earnings in each year. The Government collects around 42% of the operating profit for oil and gas development over its life-span. This is made up of a combination of royalties, levies and taxes and equates to about $355 million per annum in royalties and another $400 million in taxes based on the current rate of exploration and production. Petroleum production contributed a total of $1.8 billion in royalties and energy resource levies in the five years to INCREASING VALUE FROM OUR RESOURCES All of New Zealand s current and historic petroleum production has come from just one of the country s 18 basins; Taranaki. Investing in the responsible and safe exploration of the other 17 underexplored basins offers significant opportunities for growth. EAST COAST OIL AND GAS DEVELOPMENT Currently there is interest in petroleum development in the onshore East Coast Basin in the North Island. The geology of the region has two extensive formations, Waipawa and Whangai, known to hold petroleum. Currently our knowledge of these formations is limited and until exploratory wells are drilled it is uncertain if development will be economically viable. Business Hawkes Bay and the Ministry of Business, Innovation and Employment commissioned independent experts to investigate the benefits, impact and risks for petroleum development of the region. The aim of the study was to inform debate on development, rather than deliver any recommendations. The report presents five scenarios based on current information. These illustrate a variety of possible outcomes, ranging from the discovery of dry or uneconomic wells through to very economic and significant petroleum development. The report identified that many of the benefits associated with development would remain within the region. In the more optimistic scenarios, development would have economic, social, cultural and environmental impacts. A significant development could mean between 200 and 2,300 new jobs for the region including highly paid jobs and potential growth for supporting sectors such as mining and engineering services. Training opportunities, community investment and infrastructure development were also identified as to be expected should development occur.

5 BALANCING OUR LOCAL ECONOMIES A strong economy is a diverse economy. A local economy with multiple income streams, especially in areas that rely heavily on industries like agriculture, diary, forestry or fishing, is less vulnerable to external elements and pressures. Where these industries face challenges from weather and disease, oil, gas and mineral production is not susceptible and can carry on unabated. Because production is not seasonal the sector provides steady work throughout the year. Regions currently developing petroleum or minerals alongside other economic streams, for example the West Coast, have a lower unemployment rate than national averages. In the Household Labour Force Survey: June 2013 quarter, Statistics New Zealand put the national unemployment rate at 7.3%, while the unemployment rate for the West Coast/Nelson region was 4.2%. Taranaki, the only region in New Zealand currently producing petroleum had an unemployment rate of 5.5%. INFRASTRUCTURE DEVELOPMENT AND COMMUNITY INVESTMENT Depending on what is found (and where it is found) exploration and development of natural resources often results in investment by the operator in local infrastructure, commercial property and facilities. For example, mining companies operating in the West Coast help sustain railway lines and other valued community infrastructure. Many companies demonstrate their commitment to the communities they work in by investing in and sponsoring local sports teams, education programmes and cultural events. END PRODUCTS OF OIL, GAS AND MINERALS Most people have some idea of how prevalent the products of the oil and gas industry are in their day to day life. From the tools we use, to the clothes and jewellery we wear and the appliances and vehicles we use - modern life would be very different without them. What people might not know is just how much the industry contributes to the New Zealand economy now and how much potential it has to contribute more. Crude oil was New Zealand s largest export to Australia in 2012 and New Zealand s fourth largest export overall (behind dairy, meat products and wood). New Zealand crude oil is very high quality and fetches a premium price on the international market which is why almost all domestically produced crude is exported. Despite the strong growth in exports of crude over the last 10 years, New Zealand still has a substantial trade deficit in the sector. We import and use nearly three time what we currently produce. It s important to remember that petroleum goes into much more than our petrol tanks. Over 6000 items are made from petroleum by-products, including: antiseptics, carpet, clothing, dentures, plastics, shampoo and sports equipment. The contribution of natural gas to domestic industries and our electricity supply is similarly important. New Zealand has 17 active gas-fields, supplying around 246,000 residential homes with natural gas used for cooking, hot water and heating. Natural gas is used by around 10,000 hospitals, restaurants, schools and light commercial businesses in New Zealand. The industrial sector relies on natural gas for energyintensive operations like dairy processing. Electricity generation accounts for almost half of New Zealand s natural gas consumption. Natural gas is crucial to the electricity system to provide base load, backup and peak load supply coverage for New Zealand s diversifying renewable electricity generation portfolio. The responsible and strategic development of natural gas is an important part of securing New Zealand s energy supply. Natural Gas Consumption by Sector for 2012 Electricity generation Industrial Commercial Non-energy use Residential Agriculture, forestry & fishing New Zealand s crude oil and coking coal have unique and sought-after properties that command top prices in international markets. The high quality, bituminous coal found on the West Coast is favoured in steel-making for its low ash and phosphorus content and its high heating value. Coal is currently used in about 70% of all steel production around the world and without steel we wouldn t have modern infrastructure like high-rise buildings or bridges. There would be no bicycles, cars or cellphones. Without steel for ships or planes, international travel as we know it would be impossible.

6 NEW ZEALAND S STORY The first mining activity in New Zealand took place prior to European colonisation when Maori quarried mudstone to use in weapon making. Early European settlers began mining coal and building materials in the 1830s, but it was the discovery of gold in the 1850s and 1860s that brought a mining boom to New Zealand. Large numbers of settlers came to remote locations including Otago, the West Coast, and Coromandel. Coal, mined in Southland, quickly became New Zealand s main energy source. Mining became so significant that miner s hammers are incorporated in the New Zealand Coat of Arms. New Zealand s first railways were built by provincial governments and private companies, including mining companies. The very first railway in New Zealand was a private mining line at Dun Mountain near Nelson. It opened in The Mining industry contributed to the early development of infrastructure including Otago University. The interest in gold and other minerals meant geology was one of the first subjects taught in New Zealand universities. In 1878 the newly formed Otago School of Mines offered a university-level education for mining engineers. Natural gas and petroleum are an equally significant part of New Zealand s history. Oil drillers first investigated seepage areas in New Plymouth, the West Coast, and Waitangi in the mid-1860s. In 1904 the first steel drilling rig was brought to New Zealand. Two years later oil and gas was struck in New Plymouth. In the late 1920s, locals built a refinery enabling some pumps to sell locally produced Peak Petrol (named after Mt Taranaki), and the local council used Taranaki diesel in its vehicles. The modern era of petroleum exploration and production started in Taranaki in the late 1950s with the discovery of natural gas at Kāpuni in 1959 followed by the offshore Māui gas field in WANT TO KNOW MORE ABOUT THE VALUE OF PETROLEUM AND MINERAL DEVELOPMENT? nzpam@mbie.govt.nz PO Box 1473, Wellington 6140, New Zealand freephone (within new zealand): international calls: fax: NZP&M is a branch of the New Zealand Ministry of Business, Innovation and Employment. We manage New Zealand s Crown Mineral Estate. Our aim is to maximise the gains to New Zealand s economy from development of these resources, a key component to the government s Business Growth Agenda. To support this aim we endeavour to educate and inform New Zealanders, including consultation with indigenous stakeholders and local government. MB Aug 2014 (updated Nov 2014)