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Time right for gas: Report

Friday 21st November 2003

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A sector report from sharebrokers McDouall Stuart is suggests the time is right for the oil and gas industry to pick up its exploration work in New Zealand.

The report, penned by analyst Chris Stone, argues that the current environment favours exploration companies more than any other time in the past 30 years.

"All gas can be sold at high (and rising) prices."

While New Zealand has an attractive oil and gas regime the government can't rest on its laurels. Stone suggests it could do more to increase the level of exploration.

In the report Stone paints a picture of the energy sector which is worrying for the country.

There is a significant need for new energy sources as there has been three "electricity crises" in the past three years, the Maui gas field is running down more quickly than predicted and energy use is growing at faster than GDP growth.

He says primary energy supply has increased by 3.8% annually on a compounded basis since 1975. Over the same period real GDP growth has been 3.1%.

"While the existence of an energy problem is not now disputed, the solutions are."

He says the problem needs to be addressed quickly. "The luxury of delay has gone."

Stone argues gas exploration is the best option and requires attention. Not only because of the country's overall energy problem but also because the main Maui field is due to run out sooner than expected.

The analysis shows that gas supply will fail to meet demand in 2006 and the economics for gas are good.

For instance gas prices are rising fast. The $2.50/GJ Maui contract price is now irrelevant and the expectations of sellers are now more than $5/GJ and as high as $8/GJ.

The McDouall Stuart report says that while there are a number of options for tackling the energy problem, including renewables, coal, oil, LNG and nuclear, as well as increased conservation, gas is the most attractive.

Stone says each of these replacement options "come with hook, the largest being price."

Renewables, such as hydro, geothermal and wind have issues such as gaining Resource Management Consents.

Coal is a viable option because New Zealand has ample supply, especially in Southland, however there are problems with greenhouse gas emissions and RMA opposition.

Liquified natural gas (LNG) is one option that has recently gained much press coverage, but Stone argues that it is expensive ($10/GJ) requires major capital expenditure to establish facilities which would convert the LNG into gas.

He says that LNG would burden the economy by $1000 million a year.

"This could wipe more to 4% from New Zealand's $30 billion GDP while losing the flow-on benefits of a domestic energy industry.

Nuclear has "a small problem with New Zealand's nuclear-free legislation" and is unlikely to happen.

"The most attractive solution (economically and environmentally) is to find and develop new gas reserves. The next most attractive option is to utilize New Zealand's extensive coal reserves, although the government's resistance to this is inexplicable."

"The last resort should be the importation of energy (either oil or LNG) given this will severely affect New Zealand's current account, and deny the economy the flow-on benefits of a domestic upstream energy."

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