an interesting read

Picked this up on OGW
Over flight of Tui facilities.
Fourth production well
planned for Tui.
New Zealand Oil and Gas Field Trip
On Wednesday 12th December our New Zealand correspondent attended an
analysts’ visit to the NZOG Taranaki operations. Here is his report.
“Leaving Auckland airport by chartered plane, we flew past and around the
Tui facilities offshore Taranaki. We then flew over the Ensco-107 rig which
had just completed installing the production platform for the Kupe Gas and
Condensate Project. (Since the visit, the Ensco-107 has begun drilling the
three Kupe development wells).
From there, the plane landed at Hawera (south of New Plymouth) along with
a similar plane from Wellington and we proceeded from the airport to view
the onshore Kupe processing facilities currently under construction.
All told there were about 20 or so analysts and fund managers and high net
worth investors. Our hosts from NZO were David Salisbury (CEO) and Chris
Roberts (Public Affairs Manager).
On the bus trip to the Kupe processing station, Salisbury commented on the
Tui Project.
Production there was going extremely well, and another production well, Tui
#4, is planned to be drilled (most likely in 2009).
This additional well will access some of the increased reserves that were
announced in November ‘07.
Asked to comment on the October oil spill Salisbury said the JV was very
disappointed that this happened.
4
Cost of oil discharge was in
negative publicity.
Tui JV confident of 42 mmbls
in reserves.
Origin learned from BassGas
debacle. Managing Kupe
development differently.
Tui operating costs A$10 a
barrels. Transport costs $3 a
barrel.
While it was a minor one-off discharge that has been cleaned up and the
potential penalties were not that great, the negative publicity the project
received showed the true impact a moment’s carelessness could have.
Asked whether there was further potential to increase the Tui reserves, David
said the reservoir engineers and technical people at AWE would continue to
monitor and study the data. But he was confident that 42 mmbbls was
achievable based on current information.
Once on site at the Kupe onshore facilities, we were given a 45 minute
presentation by the project manager from Origin, Peter Ashford (ex Shell).
All of the Kupe production is being piped 30km from the offshore facility to
the onshore processing centre, where the gas/LPG/condensate from the field
is separated (unlike at Tui, where it is handled offshore).
The natural gas is under contract to electricity generator Genesis Energy and
the LPG is also likely to be sold locally. The condensate will be stored at
New Plymouth and offloaded into tankers for export.
One very pertinent question put to Peter was how Origin was managing this
project differently after the debacle with the BassGas project. He replied that
the mistakes from that project were recognised, the main issue being most of
the work was contracted out and the chain of command and lines of
communication became blurred.
The situation at Kupe is different. Origin has taken direct operational control
of project (on behalf of the Kupe JV) and has either employed the appropriate
personnel on site or contracted in the required services whilst keeping control
of those services itself. At this stage the project is on time to be completed in
June 2009 and also on (the revised) budget.
However, the project is only about half way completed and such is the
pressures on the supply and construction of oil infrastructure there is always
the potential for cost increases. David Salisbury pointed out that the recent
increase in energy prices would substantially exceed any potential cost
increases were they to arise.
NZO’s share of the current stated reserves of the Kupe project is:
38 Petajoules of Gas
2.2MB of condensate
165 kilotonnes of LPG
Following the site visit, David Salisbury agreed to answer a number of further
questions for OGW.
OGW:There is a lot of conjecture about the running costs of Tui. Can you
clarify how much the operating costs are to run the Tui facility?
DS: The costs are less than US$10 a barrel. This includes the cost of the
lease payments for the FPSO.
OGW:There is another development well to be drilled at Tui. Is there
potential for a further upgrade to reserves if this well is successful?
DS: The well is to bring into production the northern part of the Tui field,
to access some of the recently announced additional reserves. But the really
good news is that the majority of the reserves increase will come from the
existing wells – basically, the reservoir is bigger than we expected.
5
Tui water cut less than
expected.
NZO’s Tui project debt to be
repaid this year.
Additional prospects to drill
close to Tui.
As with any oil field, we will have further reserve assessments as we go
along, but the 42mb figure is a good P50 number – as likely as not.
OGW:Will the new well allow the field to produce for a longer period at
50,000 barrels a day, given that you have more productions wells to balance
your output with?
DS: Not really. The ability to produce at 50,000bpd is dependent on the
water cut from the field. The facility can process up to 120,000 bpd of
liquids. To date the water cut has been less than expected, but water cut levels
can change quickly.
It looks like we will be going along at 50,000 bopd for a while yet, but we
certainly expect that level of daily production to fall before the fifth well
comes into production. We would expect overall production to then increase
again, but it’s too soon to predict what level might be reached.
OGW:When is the JV due to start paying royalties? And at the current rate of
production, the company must be on track to use up the substantial tax losses
it has available by 30 June 2008?
DS: Royalties are accruing but NZO hasn’t had to make any payments yet.
Regarding our tax position, given that the water cut is lower than we expected
and production is going so well, it is likely that we will use up most if not all
of the tax losses that are available to be used in the current financial year. We
also have other offsets against tax that have to be carried forward into future
years.
OGW:So right now NZO is receiving the entire cash flow from Tui sales,
less only the operating costs? With at least 6,000 bopd net to NZO that must
be over A$600,000 a day?
DS: Yes, but those royalties and company tax still have to be paid when
due.
OGW:Can you explain what the schedule is for the Tui project debt to be
repaid? Is this something the company has direct control over or is it
something managed by the JV?
DS: NZO has its own debt arrangements for the Tui development – a
US$27.5m loan. Most of that loan will be repaid in the current financial year.
OGW:When will the Tui JV have additional targets ready to drill close to the
Tui field? Is there any rush to drill these targets?
DS: The prospects close to Tui are interesting, given the likely economics
of the nearby location of the facilities. Once our exploration team – and our
JV partners - have fully evaluated the targets, these will be built into the next
drilling schedule.
OGW:Turning to Kupe, we know roughly what benchmark crudes the oil
from the Kupe project will sell against, but can you give us an indication of
what will the LPG and natural gas sell for?
DS: Our natural gas deal is confidential with our contracted buyer, but
most observers suggest that the market price in New Zealand sits between
NZ$6-7 a GJ at present. LPG sales we would expect to be close to the
international LPG spot rate (called ‘Saudi CP’) and this can fluctuate a lot,
but recently it has been around US$800-900 per tonne.
6
Gross proceeds for NZO from
Kupe approx A $570 million.
Our modelling values NZO at
A$2.00 a share.
Oil will sell at the prevailing rates with the usual adjustments for quality.
[Ed: at those prices, the gross revenue applicable to NZO from the project
will be approx A$570M]
OGW: So it looks like the Kupe project will ultimately be bigger for NZO
than Tui in terms of revenue.
DS: Possibly, using current oil prices - although there is still 18 months
until Kupe will start generating revenue, so we will have to see what happens
with oil prices.
OGW:Our internal modelling shows the company’s value to be in the
vicinity of A$2 per share, although this valuation is contingent upon the high
oil prices that are prevailing at present. What do you think the true value of
the company is?
DS: We have our own internal modelling and from that we can form a
view on what we consider to be the company’s value. I don’t intend to reveal
our conclusions from that modelling, other than to say that to even come
close to the current share price we would have to seriously reduce our
estimates for future oil prices, perhaps to as low as US$40.
Clearly, at the current oil price we do consider the company to be somewhat
undervalued by the market. The company has come a long way in the last 12
months and this has not been recognised in the company’s share price.
There has been a significant de-risking in all of the three projects the
company is involved in. Pike River Coal has gone from being a subsidiary to
now being a fully listed company with its own board and its development (of
a coking coal mine on the West Coast of the South Island) is moving ahead.
Tui has gone right through the development and production drilling stage
without too many problems and is now delivering considerable cash flow for
the company.
The Kupe project is now well on its way to being ready to provide significant
revenues from mid 2009 and we have the resources in place to ensure our
Kupe commitments are met in full without the need to raise any further debt.
This level of de-risking is very significant and has not really been recognised
by the market in the company’s share price.
OGW:What does the company plan to do with its Pike River Coal holding?
DS: At our AGM in October, Tony Radford (NZO Chairman) pointed out
that Pike is not an oil and gas activity, and that in due course he would expect
it to become less relevant to NZO’s future.
However, we appreciate that Pike is also proceeding through the derisking
process and as this process proceeds it should unlock a great deal more value
than is currently reflected