Ann: ADDRESS: NZO: Auckland Investor briefing, CEO's Address

• Release Date: 26/08/14 12:20
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					NZO
26/08/2014 12:19
ADDRESS

REL: 1219 HRS New Zealand Oil and Gas Limited

ADDRESS: NZO: Auckland Investor briefing, CEO's Address

Andrew Knight
Chief Executive, New Zealand Oil & Gas
Auckland Investor Briefing
Great Northern Room, Ellerslie Auckland Racing Club, 80 Ascot Ave 12 Noon
Tuesday, 26 August 2014.

Operational performance over the last year has been excellent.
This is reflected in the strong production and operating cash-flow results.
The cash-flow from operations result, year on year, is very strong: Up by 62
per cent from about 54 million to 88 million dollars.
The primary driver of that was our success in getting more value out of our
existing assets.
Kupe production was steady throughout the year. One reason for increased
performance was that there was a maintenance shut-in at Kupe in the previous
year.
Alongside the steady production this year, gas sales contracts have been
accelerated.
Sales from Tui would have declined much more this year as the reserves in the
field deplete. But in fact Tui performance has been another part of our
success story after we increased our share of the Tui fields from 12.5 per
cent to 27.5 per cent by buying some of Mitsui's interest.
Overall, revenue for the year was up by 4.7 per cent, from $99 million to
$104 million.
The major contributors to that revenue were production from Tui and Kupe,
offset by some foreign exchange losses caused by the strength of the New
Zealand dollar.
There was also a positive impact of just over ten million dollars from the
settlement of the Kupe overriding royalty.
The history of Kupe -- and of the overriding royalty - is a diverting story
with a few lessons for us today about successful exploration, and the
timelines involved in recovering revenue. So I'd like to take a minute to
cover it.
Kupe-1 was first drilled in 1975 by Shell, BP and Todd. They had some
hydrocarbon shows, but Kupe-1 was assessed as sub-commercial and plugged and
abandoned, and the licence was handed back.
In 1981 New Zealand Oil & Gas started up, won the prospecting licence over
Kupe and listed on the stock exchange.
The company farmed out a share in the Kupe prospect to the state owned oil
company, Petrocorp. It's illuminating to see that the seismic surveys
conducted back then indicated oil and gas reserves that were about ten per
cent the size of the currently proven reserves.
Anyway, New Zealand Oil & Gas as operator drilled Kupe in 1986 and had a
discovery. Other companies bought an interest in return for promise to pay an
extra share of future production. In the midst of all this there were
corporate restructurings and reorganisations. For example, Petrocorp was sold
to Fletcher Challenge, which was also later broken up and sold.
The end result of it all was that two of the current partners in Kupe, Origin
and Genesis, had an obligation to pay an extra share to New Zealand Oil & Gas
- called an over-riding royalty. Origin's obligation relates to 10 per cent
of its 50 per cent share in Kupe; The Genesis obligation relates to 20 per
cent of its 31 per cent share.
This year we were able to agree a settlement with Genesis, and talks with
Origin are at a sufficiently advanced stage that we have included the
anticipated settlement in this year's accounts.
The settlement is worth around $10 million and it will add about a further
$1-2 million a year to the company's revenue in future.
Looking back over the Kupe story we can see some familiar patterns.
It took a long time from when they first started exploring in Kupe in the
early seventies, to first production in 2009.
It was a long time from the agreement to pay an overriding royalty to its
impact in our financial statements today.
We can also see that exploration is an uncertain business. Initial failure
was followed by persistence, and persistence produced success.
Kupe is a fantastic asset for us, and it will continue to produce for many
years. Only the gas and light oil prospects in the permit are producing, but
we are still looking in the permit for oil as well as further gas and gas
condensate.
What the founders of New Zealand Oil & Gas knew was that you can't give up at
the first set back. You have to keep investing in exploration to succeed.
Kupe would not have become the valuable producing asset it is today without
investment patience.
This is why, in the past year, we have recorded a high level of investment in
exploration and evaluation - up 77 per cent from the previous year, to just
under $75 million, and up from $9 million in 2012.
Exploration investment has had an impact on net profit, but we have been able
to sustain the dividend even while we accessed the opportunities that
exploration can bring.
Exploration is an exercise in balancing investment risk. If we don't take
risks we can't replace and grow our reserves and asset base.
There were two exploration successes during the year.
The Pateke-4H well will by tied back to the Tui FPSO and it will increase
production from the Tui fields from next year. We are still working on the
size of the reservoir there. Engineers are modelling the porosity of the rock
(that is, how fast the oil flows from it) and the pressure they are getting
(which gives them idea of the size of the resource.)
The joint venture hasn't come to a shared view yet. Our own calculations are
consistent with the operator's public, pre-drill estimates of around 2.5
million barrels of oil, or somewhere between 650,000 and 700,000 barrels net
to us.
????We also had drilling success at Kisaran, in Indonesia. The plan of
development has been drafted there and it's being worked through with the
regulator. In a production sharing contract, the joint venture gets 85 per
cent of the revenue from the field until it has been able to recover its
development costs (and a margin). After that it receives 15 per cent of the
production profits. So you can see that the regulator has a strong interest
in the cost of development, and it has to be worked through.
If a final investment decision is made later this year, production will begin
next year. It would involve a series of low cost wells each accessing a
modest resource.
We have been strengthening our position in Indonesia because it offers
opportunities that are complementary to our New Zealand portfolio.
The onshore prospects are lower cost to access, although they are often
smaller targets. They are similar in many ways to onshore Taranaki
opportunities.
The Indonesia opportunity-set compliments the extension of our New Zealand
portfolio into deepwater permits.
Peter Griffiths spoke earlier about our ability to attract Woodside as a
partner. When other global majors look at New Zealand, they are seeing an
attractive prospect in our frontier basins:
Shell and Statoil are looking off the north west of the North Island and out
towards New Caledonia.
Woodside is with us in deepwater off Taranaki.
Anadarko is in Pegasus east of Wellington. They drilled outside our permits
off South Canterbury last summer.
We are joining Woodside in the Great South Basin; and Shell is intending to
drill there too.
Interest in New Zealand's frontier basins is elevated. It's a matter of time
before someone has some success. I want us to be positioned to be part of
success when it comes.
But operating in deepwater frontier basins requires considerable expertise
and careful management of our portfolio to ensure we don't get over-exposed.
We need to invest enough to keep up.
We also need to be able to add value to our partners in these frontier
basins. We are always looking for further opportunities to grow our
production - as we did when we bought more production at Tui.If we find
further opportunities to buy assets at value, and they fit our portfolio, we
will need to take them.
So this review illustrates three key components in our strategy to grow
shareholder value:
- First, looking to optimise current assets. We have been successful this
year in getting more value out of both Kupe and Tui. There is more to do in
Kupe, in particular.
- Second, we need to keep exploring across a range of geological,
jurisdictional and investment risk-types.
Our portfolio in Taranaki is looking full, and we have exposure in frontier
basins in New Zealand. In Indonesia we have a portfolio of assets at a range
of stages in the pipeline, including appraisal, seismic underway, and early
stage evaluation.
As different prospects get churned out of the portfolio we will look to add
new exploration acreage in places where our New Zealand identity and values
can provide a strategic opportunity.
- Third, we intend to be open to new opportunities to extend the asset base
where there is value to be extracted. In the Kupe gas contracts and in our
Tui extension we have proved we can be successful at this.
I believe we are well-positioned, with a strong balance sheet, and a value
set that allows communities and commercial partners to want to work with us.
The next year will be about leveraging these advantages.
We will use our strong cash generation capability and our enduring community
partnerships to deliver growth through exploration investment.

John Pagani
External Relations Manager
+64 21 570 872
End CA:00254397 For:NZO    Type:ADDRESS    Time:2014-08-26 12:20:00