Why is it that oil and gas companies such as TAG Oil and Apache are so aggressively pursuing exploration of gas fields in New Zealand when US gas prices are at a 10 year record low of US$2.176 per mBtu? In January both Chesapeake Energy and ConocoPhillips announced plans to reduce gas natural gas output and shift towards more oil drilling. Futures as far forward as December 2017 were last week trading at below the US$5 per mBtu level that most companies require to make an adequate return on capital.
One of the reasons that natural gas production has still remained high even with these companies signalling changing tactics is that many of the wells currently producing are condensate wells. This means they not only produce natural gas but also natural gas liquids and oil. With Brent crude currently sitting at $123 a barrel and even higher prices for natural gas liquids this is more than enough to offset the low natural gas prices.
This brings us to New Zealand, the so called “Texas of the south” . A document from TAG Oil that was presented to investors in December 2012 threw around phrases such as the East Coast “literally leaking oil and gas” and announced the potential of “billions of barrels of oil.” TAG has said it has identified almost 700,000ha of conventional and unconventional targets. These unconventional targets are both deep sea resources such as Deepwater Horizon as well as land-based rigs using the controversial technique of hydraulic fracturing or “fracking.”
It would appear that with gas prices so low both now and for the at least the next five years TAG Oil is hoping to strike oil and strike it big. How much to trust the “billions of barrels of oil” line is however highly debatable. It is not uncommon for any extractive resource company to inflate the economic benefits in order to garner support. Oil companies are no different. Big numbers are the proverbial carrot dangled in front of those that inhabit both local and central government. With traditionally high unemployment in the East Coast any promise of jobs is bound to make the public more accepting of controversial practices such as fracking.
However, there is also concern about the ability for wells using fracking to provide long term economic benefits. A new well with multiple fractures costs between NZ$2.4 million and NZ$12.2 million to drill. After one year a well using fracking can have production fall by between 63 to 85 per cent compared to 25 to 40 per cent for a conventional well.
It is clear that these foreign oil companies such as TAG and Apache are here to make a quick buck. What will be left when the wells dry up is anyone’s guess but it certainly won’t be jobs.