by Gareth Hughes
Oil and gas royalties have been in the media a bit lately and the Government are throwing around all sorts of figures.
Energy and Resources Minister Phil Heatley has been a cheer-leading expanding the oil and gas industry in New Zealand but the economic benefits aren’t all they are stacked up to be. New Zealand has the forth lowest ‘take’ of producer nations (royalties plus taxes) so we sell ourselves pretty cheaply. The Government is reviewing this at the moment but raising royalties on oil and gas is off the agenda. We know there are few jobs for New Zealanders with deep-sea drilling, low royalties, numerous tax exemptions and given they will be foreign investors, the profits will flow offshore. The taxpayer could also be left with the environmental consequences, a big carbon credit and oil spill clean-up bills.
Why would we risk our environment and valuable clean green brand for the fourth lowest Government take in the world?
Graph International Petroleum Taxation report, prepared for the Independent Petroleum Association of America, by D Johnston et al.
Published in Environment & Resource Management by Gareth Hughes on Wed, April 18th, 2012
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on the trolls and those who are unable to keep on topic
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What an ignorant crudity. Given the govt sets the royalty rate, just like it sets other taxes and fees, you’d be much better using a fellating metaphor. “we” are doing this to ‘ourselves’ – no-one is forcing these rates on us, despite the inference in your hyperbole.
The rates have been in place for years. There is no right or wrong number, they are a marketing tactic. Judge their appropriateness by the activity that takes place as a result. Given the UK is a major oil producer and its rates are only marginally higer than ours, and we are not and our rate is not much lower, I’d suggest our rates are a bit on the high side.
Why not just come out and admit that you want the rates at 100% so that no-one does any exploration or production anywhere.
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See the yellow and pink boxes that dominate the “high” returns? That is where the governments actually fund the development of the oil and gas infrastructure and in return take a share of the profits. Are you advocating Public/Private partnerships in developing New Zealand’s oil and gas industry?
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WikiPedia would beg to differ.
Gareth (unusually) does raise a very good question: Why would we risk our environment and valuable clean green brand for the fourth lowest Government take in the world?
There seems to be no obvious reason why would not raise our ticket clippage to be comparable with the middle order of countries that use the same system of risk and reward.
And it does go back to a repeting meme of mine, the balance of desparation. Who is more desperate to get that oil out of the ground? If its us, then now is the wrong time to extract. If its the buyer who are more desparate then fine, but we should be rewarded for that.
The UK did very well out of the North Sea revenues, looked at at the time, but looking back in hindsight, they screwed themselves royally as they sold cheap to all comers, and are now a net importer of both oil and gas. They are paying dearly for their 80s behaviour.
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http://www.doingbusiness.org/rankings
The fact that we have one of the lowest royalty rates means that overseas companies find accessing our resources very easy, there are few demands made on them in terms of environmental assurances and they can take most of their profits away with them. Are we gullible or what?
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insider @ 11:35 AM
Countries that have nationalized their oil still have exploration and production. The main problem with nationalization is that the oil companies get the governments they control to wage war on those countries.
BTW The $3 billion income from oil and gas that National like to promote is the TOTAL profit since exploration began in New Zealand. It includes all the profit that goes offshore.
If oil production is really socially beneficial, why is Africa’s leading oil producer Nigeria so poor? More oil exploitation is not the answer, but a better royalty system is.
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sprout,
Rubbish, only in setting up a busisness.
If you look at the nuts and bolts where the problem areas are we find
Ranked 31 in gettting electricity. Would that be more important than in how easy it is to register a company?
Ranked 36 in ease of paying taxes. How many extra unproductive accountants does a buseiness need? How efficient are the tax laws and the IRD?
Ranked 27 for trading across the borders. How good for export led business to start here?
Ranked 10 for enforcing contracts. How good cashflow?
If we look at what are high ranks, we find getting credit is easy. Notice the public debt problem? Any corolation?
Thank goodness we are ranked number 1 in protecting investors. Those finance companies are a sure bet?
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If you don’t think 1.5mbd qualifies the UK as a ‘major’ producer you have no place in this discussion. On a global scale that is still major.
The royalty regime on oil was brought in by Labour because it actually wanted exploration to take place. They dropped the rates because NZ permits were completely ignored by the companies we want here- ones that are capable technically and financially. Instead we had brass plate companies locking up large chunks of territory for years, pretending to do work but really just trying to suck in investors to fund the company.
Like I said it is a marketing gambit. If you have a proven oil province you can basically name your price. NZ is a marginal exploration prospect at the best of times. Our rates were lowered to try and encourage good companies to invest in real exploration. And lo, what happened – Exxonmobil, Shell, OMV all have done work here. Apache and Anadarko are here/coming. All credible oil companies, from a business POV.
Not everything has revealed prospects but that’s the risk. At least we’ve learnt and it has not cost the govt anything.
@ todd
Nigeria is poor I suspect because it is hopelessly corrupt. That was there before oil was discovered and will probably be there long after. Note that Nigeria has some of the highest royalties on the table, so maybe changing that is not the solution either.
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1.5mb/day – 1.78% – isn’t big percentage in the scheme of world oil production. Thats like saying that New Zealand with about 1% of the world’s film production is a “major player” in the movie business. We’re a bit player, and so is the UK in terms of oil production.
And of course the UK production is down to half what it was in the glory days; she’s now an oil importer rather than an exporter.
The rest of your post illustates exactly what I said. At the moment the government are desperate to get oil companies involved, and to attract them the price is low. But we know that oil is becoming more valuable as the years go by. Eventually, the oil companies will be the desparate ones, looking to explore here at almost any price. If we just do nothing for a couple of decades, then we’ll get a much better return on the asset.
As most countries that used to be big oil producers but aren’t any more have found out the hard way, and this isn’t unique to oil: Once you’ve sold an asset it has gone, you get a one time return and thats it.
Contrast this with our good businesses which are sucessful because of brain power, they keep on delivering the goods year after year. Thats close to the very definition of sustainable. We could do with more of those businesses. Sadly, its easier for a government (of any colour) to flog oil drilling rights at bargain basement prices than to actually create the appropriate conditions that leads to the bringing together people, capital, and capability to deliver great innovation and things.
(And in the event that the moderators think that I “have no place in this discussion” then I’m sure the axe will fall on my postings)
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The reaction of oil markets to the possible loss of Libya’s slightly higher production for any period of time, shows that 1.5mbpd is not to be sniffed at. Given the largest oil producer ‘only’ accounts for 12% of the total market, I suspect it too would not be considered a major producer on your scale.
But your hold back approach has a couple of problems: first, we don’t actually know if there is a decent resource there so it would make sense to encourage people to look now so that we are sure there is something there and can prepare the infrastructure so we are ready for that rainy day you want to save for; second, domestic gas supplies are limited and could do with supplementing, so again it would make sense to do that sooner rather than later; third, if prices rise it could reduce demand which could mean no-one needs our oil, so this guaranteed return you assume may never arrive and we will have missed the economic boat. Canada tried that in the 70s. It held back production of gas for fear about being unable to supply the domestic market and lost a significant opportunity when prices were high. Sometimes it is better to have bird in hand not in the bush as the future can be very tricky to guess. Oil and gas prices have confounded experts for years.
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So even with relatively low royalties, we still have very little drilling going on in NZ.
Not even enough to supply the small amount for our own needs, so we rely on other countries taking the risk (and profit) for the oil we use.
But we know the Greens are all for shirking the responsibility for OUR environmental risks for oil drilling and passing them on to some OTHER country.
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Yes, because the time isn’t right – yet.
Throughout history, oil has always been extracted where it is cheapest (and thus most cost effective) to do so.
Back in the forties, fifties and sixties there were lots of people who thought that the world was imminently running out of oil. What they had failed to notice was the oil companies only went looking for oil at the rate they needed to, they didn’t need to find all the oil on the planet in 1940. It had been there for millenia, and so would still be there when it needed to be discovered years later. So for decades the known oil reserves stayed about the same, as the companies went looking for oil as they needed to.
And that is what is still happening today. When the oil companies have done all the easy places, they’ll start on the hard ones, and when they’re done, the harder still. They’ll still be looking for (and discovering) oil a century from now, and perhaps much further out, despite the fact that by then we will be into Peak Oil.
So eventually the risks of oil development will land on our shores.
And we’ve certainly been in the small scale oil production business a long time; when I was a kid in New Plymouth in the sixties we had a nodding neddy on the beach just by our house, churning out a few barrels a day. And one of the tanks at the refinery went bang one night, most impressively.
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I think we can assume that as consumption is still rising and the age of peak oil is already here, that prices will rise with post GFC economic recovery.
Thus importing oil (and maybe gas) and sitting on reserves is a sound enough strategy. This allows us to set terms for exploration that protect the environment.
Maybe we should develop a flexible royalty system where the level can rise to 100% to meet any environment clean up costs resulting from any accident. That would motivate any oil/mining company to actually operate to best safety practice.
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Insider
God you talk load of rubbish insider. There are so many instances of corruption that I could link to that shows the companies you’ve listed are anything but credible.
You’re also lying! The government pays for pretty much all of the initial seismic testing. For instance, they spent $26.4 million on seismic surveys of frontier offshore basins between 2004 and 2010. That’s our taxes paying for a private companies business.
So if we lower our royalty rate to one of the lowest in the world, pay for most of the initial exploration ourselves and give huge tax exemptions so they are effectively paying no taxes at all, is it really worthwhile for New Zealand? It certainly isn’t the huge windfall National is trying to make it out to be.
Much of the corruption is because of the oil and gas industry. The amount of pollution there is absolutely terrible! The Niger Delta is almost irreparable and anybody who stands up to the oil and gas barons gets killed. Oh! And by the way… these corrupt companies in Nigeria are some of the same companies operating in New Zealand.
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How poor would Nigeria be if it lost the 98% of it’s export earnings that come from oil?
Or if it lost the 83% of government income that comes from oil?
Here’s a challenge. Have a look at the annual GDP (in billions) of Nigeria and it’s neigbours, and see if you can guess which country produces oil.
$9b Chad
$7b Benin
$3b Togo
$9b Bukina Faso
$238b Nigeria
$6b Niger
Nigeria does have more people, so here’s a measurement of how many people per 1000 can afford cars
Chad 6
Togo 2
Nigeria 32
Niger 4
Central African Republic 4
Mali 9
Cameroun 8
Burkina Faso 11
And GPD per capita in Nigeria is 50% higher than Benin and Chad, 100% more than Mali and Burkina Faso, and 200% higher than Togo and Niger
While corruption in Nigeria is endemic from the very top, down to pretty much every official, public servant, police officer, border guard etc, and revenue are not shared fairly, there is no doubt that many millions of people are better off because of oil revenues.
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Ha! You have no frigging idea how much seismic costs. Mobilisation costs for a seismic boat would be a few million, and the day rate is $250k per day. And that one in the Great South Basis has been there for months.
Secondly, seismic aquisition is only part of exploration. You then have to process and interpret the seismic (think super computers), and then have to drill an exploration well. Total cost for an offshore well would probably be $80 Million, with a high risk of finding exactly nothing produceable. And if you do find something and want to produce is, then field development costs are billions.
Like I said above – does Gareth really want the government to get involved in production sharing contracts, directly funding the full development?
Much of the corruption is because of the oil and gas industry. And by the way… these corrupt companies in Nigeria are some of the same companies operating in New Zealand.
Most of the corruption! Bollocks. Most of the corruption is because what the western world describes as ‘corruption’ is part of the cultural norms there. No different from many other parts of the world. Fact is that multinational companies are highly incentivised to stamp out corruption, because of the US under the Foreign Corrupt Practises Act (via the SEC or DoJ), who will apply punitive damages for corruption on companies working in the US regardless of where that corruption actually occurred.
Eg:
http://www.sec.gov/news/press/2010/2010-214.htm
or:
http://www.time.com/time/business/article/0,8599,1977526,00.html
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you are ignorant. The Govt does not pay for “pretty much all of the initial seismic testing”. It has been commissioning some in some areas and buying data from private operators in others – for example the recent Reinga block was done by a private surveyor and the Crown bought part of it, the rest of the info is privately owned.
Again it is marketing and knowledge building, and it’s a choice they have made. GNS and Minerals NZ will use this to try and assess an area’s prospects, to cut up blocks into sensible segments and then promote the blocks offers to explorers – it is as much being done for the govt’s benefit as anyone. If you look at the size of the blocks offered and the seismic done, it is very basic and broad based in terms of the level of detail acquired.
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Plus also under the crown minerals act, Section 90 deals with records that must be kept, and Section 40 shows that these have to be provided to the government if the permit is relinquished.
Therefore, if a private company spends millions on seismic, that data needs to be provided to the government, for an admin charge (and then given to anyone who asks). So the government doesn’t do too badly, really.
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insider writes:
Then writes:
Schizo!
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Gareth notes that in addition to the taxpayer being left with environmental consequences of private oil and gas exploitation, we would also be left with carbon consequences. The greenhouse gas emissions, both documented and undocumented of oil and gas production (i.e. pre-combustion emissions) are significant and are growing as the fossil fuel producers have to use ever more complex and difficult technologies to feed the insatiable demand for energy. Deep ocean drilling, hydraulic fracturing, accessing small and remote resources are more energy intensive and methane emitting than the easy stuff that was commonly done in the last century. Royalties and taxes need to reflect accurately the impact of oil and gas production these activities on our international carbon obligations.
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At least Gareth now acknowledges that the Crown gets 45% of the profit from oil and gas ventures – instead of the 5% that he has been claiming in the media for months. That’s a pretty good return – petroleum is very hard to find in NZ, we are a long way away from anywhere, and we have to have our royalty rates at a level that attracts investment. Right now Shell and its partners are spending a few hundred million dollars investigating whether there might be large gas fields off the coast of the South Island. The Crown has to pay nothing, but if there does turn out to be gas, NZ will benefit by tens of Billions (not mere millions) of dollars. Shell and its partners will also benefit if successful, and so they should – they are putting up their capital with only a slim hope of a return.
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