EXPLORATION LICENSING New Zealand' s terms result in higher contractor take

New era of licensing improves risk for government and contractors

Daniel Johnston
Consultant

New Zealand has been recognized as having one of the best fiscal regimes in the world, yet the country has reevaluated the existing terms and developed a new minerals program. The program became effective at the beginning of this year.

The main feature of the new system is a hybrid royalty scheme which consists of a 5% ad valorem royalty (AVE) or a 20% accounting profits royalty (APR). Companies producing under the new regime will pay either the AVR or the APR, whichever is higher.

The AVE, as the name implies, is similar to the common industry understanding of a royalty based upon the wellhead value of production. The APR is not a true royalty. It is not levied on gross revenues or wellhead value. The APR is based on a liberal definition of profits, which is accounting profits. It behaves more like a profits tax with one large exception - all costs are expensed.

There is no depreciation for the purposes of calculating the APR. The APR is based upon gross revenues less: production costs, indirect costs, abandonment allowance, operating overhead allowance, operating losses carried forward and accumulated capital costs.

Under the hybrid royalty scheme, producers would typically pay only the 5% royalty in the early years of production and again perhaps toward the final years of production when operating costs do not drop off as fast as production rates. This fiscal design is tailored to accommodate otherwise marginal production and give the government a share of highly profitable fields through the APR.

Allocation scheme

Exploration and mining permits are granted pursuant to the Crown Minerals Act 1991 and in accordance with the Minerals Programme for Petroleum issued in December, 1994.

There are a number of options for companies wishing to explore in New Zealand. Exploration acreage can be obtained either through regular block offers, an acceptable frontier offer (AFO) application, a prospecting permit or by farming-in to an existing permit.

Regular offers

The primary allocation mechanism is the regular block offerings that are initiated by the Ministry or by industry through a Notification of interest (NOI). Permits are awarded on the basis of staged work program bidding or, in rare cases, with highly prospective areas with cash bonus bidding.

The NOI approach allows a company to approach the Ministry and recommend a particular area to be included in an upcoming regular blocks offer. This allows companies with an interest in a particular area some control over the timing of the offer. The party making the NOI is confidential as is the area nominated. The NOI area is included in the next regular block offering. Regular block offers are:

January 1995

Onshore Taranaki Basin
Offshore Taranaki Basin
Onshore westland Basin
Offshore Canterbury Basin

August 1995

Onshore Eastcoast Basin
Offshore Eastcoast Basin

January 1995

Onshore Taranaki Basin
Offshore Taranaki Basin

The primary term for an exploration permit is five years with the option to renew after five years. With renewal, 50% of the license area must be surrendered. If a discovery is made, a petroleum mining permit is granted for the purpose of extracting and producing petroleum.

The term granted is a maximum of 40 years, but depends upon the nature and size of the discovery. The objective is to allow sufficient time for the operator to fully exploit the discovery.

A notification of interest can be submitted at any time. The identity of the company making the notification remains confidential. The NOI option allows the notifying company input into the location and size of the area to be included in the upcoming blocks offer.

Acceptable offers

Most of New Zealand's offshore acreage is available out-of-round and not subject to competitive bids. A frontier offer can be made on any offshore area with the exception of the areas included in the regular blocks offer program. These include offshore Taranaki and the offshore Eastcoast Basin.

AFO permits are awarded on the basis of an acceptable work program which may or may not include drilling. Furthermore, the work programs do not require a minimum expenditure.

This is primarily due to the sparseness of data in some areas. The primary consideration of the ministry is the adequacy of the work program and whether or not the company has the ability to complete it.

The objective of the AFO is for the company to identify a drilling site within 12-18 months. Then, either the area is surrendered or the company commits to drilling a well within two to three years of the commencement date of the permit.

Prospecting permits

A prospecting permit is a non~exclusive permit available over large areas to perform reconnaissance work. The information remains proprietary for a period of five years. These permits can then lead to a NOI, leading to a regular blocks offer or to an AFO.

Table 1illustrates the key attributes of the competition in the Southeast Asian region.

Contractor take in New Zealand is just under 50%, compared to Indonesia where government take is over 85% in most areas, but 65% in the eastern archipelago.

As far as limits on cost recovery, New Zealand is one of the best. Contractors have access to 95% of gross revenues during the cost recovery stage of field development in New Zealand.

AUTHOR

Daniel Johnston is a Dallas-Singapore based petroleum consultant. For over 15 years he has worked in the international sector of the oil industry conducting field development feasibility studies or evaluating exploration potential of licenses and concessions. He holds a BS Degree in Geology from Northern Arizona University (US) and an MBA (Finance) from the University of Texas (US). He is the author of the book entitled "International Petroleum Fiscal Systems and Production Sharing Contracts".