Whatsup? NZO price up 6 on both sides of the Tasman. Heading...

Whatsup? NZO price up 6 on both sides of the Tasman. Heading towards that $2 mark maybe?

Ah, you beat me to it, deepsearon, but I'm going to post my version anyway, I like it better :)

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.

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 barrel. 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 the 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.

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 42mmbbl 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.

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