New Zealand's Oil Exploration Sector Facing Trouble: Companies Retract As Oil Prices Are Falling

The plunging oil price is taking its toll on oil exploration in New Zealand with companies scaling back their forward plans. This is going to reflect in a sharp decline of capital spending in the sector, which is a priority area for the Government. The trend is global now. Explorers are pulling back on drilling programmes and rigs are going idle with companies using supertankers to stockpile oil, as prices are hovering at six-year lows. The oil prices dipped on Jan. 15 after hitting another low with Brent crude closing at US$47.57 and West Texas Intermediate at US$45.90 a barrel.

Downturn in Exploration

Woodward Partners analyst John Kidd said even before the price crash, there had been a downturn in exploration. "In New Zealand, the ebb in activity for some time is at risk because of a much sharper decline than might otherwise have been the case," Kidd said. Curtailments, deferrals and reviews are underway by NZOG, Kea Petroleum, TAG Oil and NZ Energy Corp, reported New Zealand Herald.

But the analyst said companies with strong balance sheets such as AWE, NZOG and TAG may withstand the downturn and can also prosper. "As the realities of deteriorating free cash flows and constrained capital market start biting, we expect companies in comfortable positions to focus increasingly on acquisition opportunities to take advantage of the market downturn," added Kidd.

Though the 2014 block offers attracted big players such as Chevron and ONGC Videsh with a minimum of $110 million in spending, the hype had been muted by the oil price "reality." However, New Zealand's 15 permits were awarded for a long duration drilling, with the average span being 12.2 years.

Oil is New Zealand's fourth-largest commodity export after dairy, meat and wood. At present, oil and gas contribute close to $3 billion, annually to the country's GDP. Meanwhile, listed company New Zealand Oil & Gas said it is cutting back its exploration and the price plunge is making the industry reassess many work programmes. "We're very conscious of it when part of our revenue went down by 40 percent and are actively managing our portfolio against a range of factors," said NZOG chief executive Andrew Knight.

Paradigm Shift

Meanwhile, Green Peace blogger Nathan Argent argued that the limbo in oil exploration sector can be used as a positive opportunity. It must be construed as a paradigm shift. He said the paradox of falling oil price and rising cost of exploration must be seen in the backdrop of the falling costs of cleaner and safer energies like wind and solar. It makes climate action easier and throws up a cheaper choice for consumers in powering homes and businesses.

(The writer can be reached with feedback at kalyanaussie@gmail.com)