Ann: ADDRESS: NZO: Annual Meeting, CEO's Address

• Release Date: 04/11/14 08:57
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					NZO
04/11/2014 08:57
ADDRESS

REL: 0857 HRS New Zealand Oil and Gas Limited

ADDRESS: NZO: Annual Meeting, CEO's Address

Andrew Knight
Chief Executive, New Zealand Oil & Gas

InterContinental Hotel, 2 Grey St, Wellington at 9.30AM Tuesday, 4 November
2014

Operational performance over the last year has been excellent.

This is reflected in the strong production and operating cash-flow results.

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.

Sales from Tui would have declined much more this year as the reserves in the
field deplete, but in fact Tui performance was a success after we increased
our share from 12.5 per cent to 27.5 per cent by buying some of Mitsui's
interest.

The cost of that extra share has already been recovered from the incremental
revenue received.

Production from Kupe was steady in the year, which lifted the result compared
to the previous year, when there was a maintenance shut-in.

In addition, gas sales have been accelerated, which also helped to grow
returns.

There was also a positive impact of just over ten million dollars from the
settlement of the Kupe overriding royalty.

We recognised around $10 million at year end from the settlement and it will
add about $1-2 million a year to the company's revenue in future.

The Kupe settlement dates back to agreements made when the permit was farmed
out in the 1980s.

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. This will be a focus for us in the coming year.

The Kupe story highlights what an uncertain business exploration can be.
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, plugged and
abandoned, and the licence was handed back.

Later, in the 80s, oil and gas reserves were estimated at about ten per cent
the size of the currently proven reserves.

So we can learn from Kupe. Kupe would not have become the valuable producing
asset it is today without a focus on commercial imperatives and investment
patience.

This is why, in the past year, we recorded a high level of investment in
exploration and appraisal - up 77 per cent from the previous year, to just
under $75 million, and up from $9 million in 2012.

We had two exploration successes.

The Pateke-4H well will by tied back to the Tui FPSO in the new year, and its
expected to begin producing before the end of the current financial year.

The size of the reservoir there is still to be determined. The joint venture
hasn't come to a shared view yet but we will report our figure when we have
the level of certainty required by the stock markets.

In Indonesia, we also had drilling success at Kisaran and a plan of
development is progressing towards a final investment decision there.

In the quarterly activities report last week we were able to disclose for the
first time that we have encountered a 1300 foot oil column, albeit one that
is in stacked sands and shales. What this means is that multiple wells would
be required into reservoirs that are disconnected and discontinuous, with
varying quality.

It would be expected with a discovery such as Kisaran to start out by
completing the three wells already drilled, and three new ones. Then there
would be an ongoing programme of development over five to ten years where new
wells would be drilled and come into production at rates of hundreds of
barrels a day for a year or two, then tapering off in later years.

Some wells will be more profitable than others, and the field would be
expected to have a life of fifteen to twenty years.

The Indonesian fiscal regime is very good for this sort of development. It
allows you to recover your costs (and a margin). Then, once costs are
recovered, the model works the other way and you recover a profit share at a
lower rate.

Another advantage of this model is that it protects the investment against a
fall in the oil price because - if the oil price falls - you get a greater
share of production until the costs and margin are recovered.

The other news we have been able to release about Indonesia has come from the
Bohorok field to the north of Sumatra, where a 2D seismic survey has been
completed this year.

This field is next to the city of Medan, where prices for gas are strong
because the city has pinched gas supplies. The infrastructure is mainly in
place because Bohorok is next to the Wampu gas field, which has produced at 6
to 9 million cubic feet of gas a day in the past.

What we can see from the Indonesia portoflio is that it complements our New
Zealand activity. The Kisaran development offers the potential to bring
through new production, then there are opportunities at each further stage of
exploration maturity: drilling at Bohorok, more seismic in South Sumatra and
our new unconventional interest.

However, we will always seek to manage any commitment in a cost effective
manner. For us that means we will set high hurdles before we make
commitments.

In New Zealand we are positive about the acreage we have.

Interest in New Zealand's deep water 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 requires considerable expertise and careful
management of our portfolio to ensure we don't get over-exposed.

So our portfolio in deepwater looks full for now, while we are moving ahead
to drill in Kaheru next year, and continuing to progress work in both
Taranaki and offshore Canterbury to work up new prospects.

In particular, there is more to do in Kupe. We expect to continue our
activities to seek additional value at Kupe during the next year.

We are continuing technical work on the understanding of the reservoir and
how we at New Zealand Oil & Gas believe it works and we expect the Joint
Venture will undertake some work to further its understanding of Kupe
opportunities.

We are always looking for opportunities to grow our production - as we did
when we bought more production at Tui.

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.

At the moment the market is undervaluing some attractive producing assets,
and as Peter mentioned, if we find further opportunities to buy assets at
appropriate value, and if they fit our portfolio, we will take them.

I believe we are well-positioned, with a strong balance sheet, and a value
set that makes communities and commercial partners want to work with us.

The next year will be about leveraging these advantages.

For further information:
John Pagani
External Relations Manager
+64 21 570 872
End CA:00257200 For:NZO    Type:ADDRESS    Time:2014-11-04 08:57:39