Chief Executive David Salisbury
NZOG AGM, Intercontinental, Wellington
10.30am Wednesday 28 October 2009
The past year was a busy, challenging and rewarding period for NZOG.
As the Chairman has outlined, we achieved a solid financial performance against a backdrop of unprecedented international turmoil. A dividend was paid and the NZOG share price significantly outperformed the market indices in the past 12 months.
NZOG has a current market capitalisation of NZ$660 million - more than 40% higher than when we gathered together for last year's AGM.
There were two principal areas of focus for NZOG in the past year: optimising the value of our existing business and securing new investments.
It is the careful management of our existing portfolio that gives us the solid base that provides the platform for growth.
Tui area oil fields
At the centre of our existing business are, of course, the Tui area oil fields. Tui was our sole source of operating revenue in the 2009 financial year, earning NZ$139 million.
Tui has to date produced more oil and less water than expected. However, as was always anticipated, Tui's daily oil production is slowly reducing. 9.1 million barrels of oil were produced in the second year of operation, slightly above forecast. In the current year, the forecast is for production of 5.1 million barrels, and we are currently on track to achieve that.
Tui oil has become a very well regarded product. We are very pleased with the outcome of a competitive process which has seen Shell in Australia take a forward sale contract for a large portion of Tui production in the 2010 calendar year. The terms are favourable, with a premium being paid above the regional Tapis crude benchmark.
The Tui area oil fields have already been a spectacular success and there is considerable upside potential. There are a number of attractive near-field prospects and at least two of them will be drilled this summer.
If the drilling is successful, any new discoveries could potentially be quickly developed through the existing facilities.
I will talk more about our exploration programme shortly.
Kupe
The Kupe field was discovered by NZOG way back in 1986 but for a long period was uneconomic to develop. 23 years on, and NZOG and its shareholders are about to be rewarded for their perseverance.
An important milestone was achieved a couple of weeks ago, with mechanical completion of the production station near Hawera. At that point, the plant was officially handed over from the projects team to the operations team.
What remains now is a commissioning period. Pipeline gas is scheduled to be introduced to the plant next week and a few weeks later the first raw gas should be brought ashore from the Kupe field, effectively signalling the start of production.
At the completion of the commissioning period, Kupe will go into permanent production.
As the project approaches completion the operator has advised that the final cost will be higher than previously estimated. NZOG has contributed NZ$180m to date and our final bill appears likely to be in the range of NZ$195-$200m.
Offsetting this, expected revenues have also increased since the project was approved and the development cost needs to be seen in the context of a field with revenues of several billion dollars. Kupe will provide a solid income stream for the next 15 years - reinforcing the solid base that I referred to earlier.
Pike River Coal
It was a year of both achievements and setbacks for Pike River Coal, the former NZOG subsidiary in which we still retain a shareholding of just under 30%.
In October 2008 Pike became an operating coal mine. It then suffered a setback when a ventilation shaft partially collapsed, delaying production. There have been further production issues since then.
A graben has been encountered immediately to the west and north of the pit bottom and Pike is having to drill and blast through non-productive rock to get to the coal seam.
It is unfortunate - if the graben had been further away from the pit bottom, the mine development could have gone around it. Having to drill and blast has delayed production - but it is not expected to be material in terms of the total coal resource or the life-of-mine performance.
The first coal shipment is now scheduled for the first quarter of 2010. Of course Pike has capital requirements to be met which need funding until Pike is cashflow positive. In April of this year, NZOG and other shareholders supported a successful rights issue. Last week, Pike announced it has further short-term funding requirements and is exploring several options to meet that need.
As a major shareholder, NZOG would have liked by now to have seen sustained production from Pike. It is in the nature of the mining business that there are surprises and obstacles to overcome.
Pike has proven itself to be competent at addressing the obstacles and we remain confident in the mine's future.
Exploration Portfolio
It has been very pleasing that we have been able to significantly expand our exploration portfolio.
Two years ago, NZOG was by necessity focussed on three major development projects - Tui, Kupe and Pike River. As a result, the exploration portfolio - which may provide the next Tui or Kupe - had become a little thin.
Over the past 12 months that portfolio has been significantly expanded. NZOG is now involved in eight permits and will participate in the drilling of at least four wells this summer.
New exploration opportunities secured in the past year include four permits in the Taranaki Basin: Albacore, Hoki, Kahurangi and Gamma.
An application has also been made for a permit area immediately to the north of Albacore.
Summer Drilling Programme
NZOG is a prominent participant this summer in what will be one of the most active offshore exploration programmes seen in New Zealand.
Albacore
First up is the Albacore-1 well, which will be drilled by the ENSCO-107 jack-up rig. The ENSCO-107 is due to be released from the Maari oil field in the southern Taranaki Basin in early November and will require a 36 hour window of calm weather to relocate to the Albacore well site, which lies approximately 60km north of New Plymouth.
NZOG acquired a 40% interest in the Albacore permit in August this year. The permit contains three separate play fairways and a number of prospects and leads, with Albacore the first to be drilled.
The first of the three separate play fairways is a Pliocene Fan, at a depth of approximately 1400m below sea level. Similar fan complexes have been found to be productive in the North Sea, the San Joaquin Basin in the USA, and in the Gulf of Mexico.
Below the Pliocene fan are two sequences of a broader and flatter fan system containing the Mangaa sands.
Although this will be the first well drilled within the area covered by this permit, Todd Energy's Karewa gas discovery (200 BCF estimated) is also within the Mangaa sand interval and is located 60 km to the north-east of Albacore. And 16 km to the west, the Kora wells discovered non-commercial oil deposits in the late 1980s.
NZOG believes the northern Taranaki basin is highly prospective and is keenly awaiting the outcome of the Albacore well. The well is expected to take around 20 days to drill through all three target zones. It will then be plugged and abandoned and the results analysed.
Hoki
The arrival in New Zealand waters of the semi-submersible drilling rig Kan Tan IV has been pushed back to early 2010. The Kan Tan IV is currently in Bass Strait where it is drilling two, possibly three, wells before coming to New Zealand.
The first well to be drilled in New Zealand is Hoki-1, in which NZOG has acquired a 10% stake. Hoki is currently expected to spud in January 2010 and will test a large potentially oil-bearing prospect on the western margin of the Taranaki basin - a structure that lies in the North Cape (Cretaceous) formation.
Tui
Following Hoki, the Kan Tan IV will move on to drill at least two appraisal wells in the Tui permit area. The Tui area oil fields are three separate oil accumulations: Tui, Pateke and Amokura. Around the largest of these - Tui - there appears good possibilities of further discoveries.
Current planning is for the Tui North East prospect to be tested, followed by either Tui South East or Tui South West, depending upon the results of the first well. Other near field prospects remain under review and may be tested by further wells.
Any commercial discovery could potentially be brought into production within 18 months. This would involve drilling a production well, installing a sub-sea completion and tying it back to the existing floating processing facility, the Umuroa.
Offshore drilling does not come cheaply. NZOG expects to spend at least NZ$30m this summer. Exploration drilling is a high risk activity with no guarantee of success, but as shown by Tui, the potential rewards can be great.
Romania
As our commitment to this summer's drilling programme shows, New Zealand remains our primary investment destination. However, the available opportunities do not provide sufficient depth and breadth for a company of our size to be confident we can meet our growth objectives from New Zealand alone.
During the year NZOG demonstrated that it is prepared to look further afield by making a low cost investment in a consortium that is reviewing opportunities in Romania. The consortium partners are AuDAX and Nexus, both publicly listed Australian E&P companies.
Romania is a significant oil and gas producing region but remains underexplored using modern techniques. In September 2009, the Romanian Government released over 25,000 sq km for new permit applications. The consortium is assessing the most attractive areas to determine whether any bids for acreage should be made. Bids are expected to be due around the middle of 2010.
The study group should be seen as a scoping activity. It is at a relatively low cost and small level of attention, that may or may not lead to a country entry within the next year.
Investment Criteria
Romania is not some sort of random stab in the dark - we are taking a look there because it fits within our carefully considered criteria for new investment.
As I have already mentioned, we are managing and maximising value extraction from the existing asset portfolio. But we are also keen to secure new business opportunities that strengthen our portfolio.
These need to be value creating opportunities, with near term pay-back as opposed to long term horizons. We are not keen on stranded gas assets, for example.
We are looking for oil, condensate and gas in proven basins, with existing open access infrastructure, ready access to product markets at transparent prices, with scope to grow, healthy financial returns, manageable risks, and fiscal and political stability.
NZOG also intends to be actively involved in managing and optimising the value from new oil and gas interests, as opposed to being a passive financial partner in a joint venture.
We are looking at a range of opportunities both in New Zealand and overseas via the "Twin Engines of Growth": exploration and acquisition; with acquisition being both asset purchase, and corporate dealing.
Growth outside New Zealand is focused on creating one or two new core areas, as opposed to a wide geographic spread of interests.
Within these definitions we are continually identifying a range of potential investments and we are working hard to secure the best of them.
Investment Opportunities
So how have we done to date?
Over the past year NZOG invested around NZ$120m in new and existing ventures. We would have liked to have done more.
We have actively and systematically looked for sensible value-adding investments across the spectrum from exploration, to development assets, producing fields and corporate acquisitions.
We pursued and were very pleased to secure involvement in the ready-to-drill prospects at Hoki and Albacore.
In December, we stood in the market and acquired a 15% stake in Pan Pacific Petroleum. We saw an opportunity because the value of PPP's stake in Tui was being overlooked by the market. We have received a $3.3m dividend payment from PPP and the market value of our shareholding has increased significantly.
Several large asset investments have also been contemplated but were found after detailed evaluation to be technically deficient or financially unattractive.
Earlier this year there were some opportunities thrown up by the global financial crisis - but most did not stack up on close inspection.
Companies fought hard to retain quality assets and the assets that were available were generally the higher risk and more marginal projects.
Contrary to our expectations, not many opportunities of sufficient quality came to the market.
By mid-year oil prices had rallied and the financial markets had revived. Ironically, the global financial crisis had proved to be too short to force many ‘fire sales' in the oil and gas sector.
That is not to say that there are not still opportunities out there. There remain deals to be done, and we continue to review them with a number, of various sizes, under consideration right now.
NZOG has taken a careful, prudent approach to spending shareholders money, and will continue to do so.
Capabilities
It is only possible to pursue this strategy of sensible growth, thorough evaluation of new opportunities and active involvement in our business interests, because we have put together a strong, accomplished and experienced staff.
At the core of the company is our ‘G&G' team - our geologists, geophysicists and engineers. Between them they have over 200 years of worldwide industry experience.
We do our own independent evaluations of every potential new project. We also make our own assessments of our existing assets - Tui, Kupe and exploration blocks - and actively engage with the operators to promote our ideas.
NZOG also has very capable legal, commercial and accounting professionals, who are successfully managing the very complex legal and commercial arrangements that are required in our industry.
In the past year we have developed a significant capability to screen and rank new opportunities. Unlike some other companies, NZOG is able to do most due diligence work in-house, rather than relying heavily on consultants. As a result, we capture and retain knowledge in-house are we are constantly building more effective and efficient capabilities.
NZOG has also put particular care and thought into how we present the company and communicate with shareholders and other stakeholders.
We have committed to a philosophy of openness and transparency. We know from the feedback received that we have a very ‘information hungry' investor community, which appreciates what we are providing.
Another sign that we are on the right track was having our website named as the Best Investor Website among the Top 50 New Zealand companies.
Financial Strength
Financially, NZOG remains in a strong position to conduct our business. As at 30 September 2009, our cash balance was NZ$178 million, with most of this held in US denomination accounts with NZ based banks.
In September, we finalised and drew down NZ$50m from a revised NZ$75m funding facility with Westpac, secured against the Kupe project.
This is an excellent outcome for the company. The facility is available on very favourable terms and can be used to meet New Zealand dollar expenses, such as dividends, royalties and taxes.
This preserves our US dollar holdings. The US dollar is the primary currency of the international oil industry. A large proportion of exploration and investment costs are either in US dollars or set by reference to US dollars, providing a natural hedge against currency fluctuations.
This means that we earn US dollars when we sell oil, and we spend US dollars when we invest further. By holding US dollars we protect our cash reserves and avoid engaging in speculative buying and selling of currencies.
NZOG keeps its currency mix under review and considers its present position to be appropriate. We will be using a portion of our US dollar funds to pay for this summer's drilling campaign.
Emissions Trading Scheme
I want to briefly touch on the New Zealand Emissions Trading Scheme. The Government has amended legislation which it is seeking to pass, and there are a set of issued regulations that allow for the implementation of that legislation.
NZOG has engaged with officials and is closely monitoring progress on the ETS to ensure we can comply with the minimum cost impact for the company.
Conclusion
In our existing portfolio, we will soon have three new revenue streams from Kupe - gas, LPG and light oil - to supplement the oil revenue from Tui. In our expanded exploration portfolio, the summer drilling programme offers several exciting possibilities.
Pike River Coal and Pan Pacific Petroleum are investments that have proven value creating to date, which we continue to monitor and review, and which we expect to continue to perform well.
NZOG is pursuing growth from a solid base - optimising our existing assets and pursuing new opportunities. We are building on the successes of the past few years as we continue to strive to enhance shareholder value. Thank you for your ongoing support.
David Salisbury
Chief Executive
2009 AGM CEO's Address [699kB]
