David Coull of Bell Gully takes an in-depth look at the impact of recent regulatory reforms in New Zealand's exploration and production industry:
"Since 2009, the New Zealand government has actively focused on promoting and enabling the local oil and gas industry, undertaking a series of changes designed to help the industry grow, including by attracting new international investors into the sector."
The New Zealand energy sector is undergoing a period of significant change.
Together with a long-standing government policy of having a high proportion of domestic electricity generation coming from renewable sources, there is a significant focus on oil and gas exploration and development activity as a means to create substantial economic growth.
Despite being a small country in terms of land area, New Zealand has the fourth largest Exclusive Economic Zone in the world. Accordingly, the New Zealand government can allocate rights to explore and mine for petroleum over more than 5.7 million square kilometres of land and seabed. Much of this area remains largely, or entirely, unexplored. Of New Zealand’s 15 offshore basins, only one, the offshore Taranaki Basin, has experienced any real level of exploration and production (E&P) activity.
Recognising this potential, since 2009, the New Zealand government has actively focused on promoting and enabling the New Zealand oil and gas industry, undertaking a series of changes designed to help the industry grow, including by attracting new international investors into the New Zealand oil and gas sector.
Government’s Petroleum Action Plan
The New Zealand government delivered the Petroleum Action Plan in 2009. This plan was designed to stimulate the continued responsible development of New Zealand’s oil and gas resources.
An important part of the Petroleum Action Plan was to improve the regulatory regime governing petroleum exploration, mining and development to ensure the regulatory regime is transparent, based on international best practice and facilitates and encourages E&P activity in New Zealand. There was also a focus on ensuring best-practice health, safety and environmental legislation, including in particular in relation to offshore petroleum operations.
Other key aspects included the continued promotion of New Zealand as an internationally attractive E&P investment destination, the continuation of the government’s seismic acquisition programme and improving the resourcing and capability of New Zealand’s key regulator of the oil and gas sector.
The government’s commitment to significantly growing the oil and gas industry was reaffirmed in 2012 as part of its Business Growth Agenda. There are six key work streams involved in the Business Growth Agenda, one of which aims to make the best use of New Zealand’s natural resources. The continued implementation of the Petroleum Action Plan underpins this aspect of the Business Growth Agenda.
Implementation of the “Action Plan” and “Growth Agenda”
Regular Annual Block Offers
The New Zealand government has recently changed the way in which petroleum exploration permits are allocated. Previously, permits were typically allocated via a priority in time application method (a “first-in, first-served” reactive system), which allowed companies to apply to explore any land in New Zealand that was available for permits. Since 2012, petroleum exploration permits have been allocated in an annual tender called the “Blocks Offer”.
Under the Blocks Offer system, areas are announced for interested parties to competitively bid on (and interested parties can have input as to which areas are included in upcoming Blocks Offers). The areas vary in size, water depth and level of existing geological knowledge. This provides explorers with a variety of opportunities. Areas are selected based on commercial interest, and their prospectivity, and there is sometimes publicly available geological and geophysical data and analysis undertaken either by the Crown or previous industry participants.
Bids are assessed based on a variety of key factors, including the proposed work programme, the technical and financial capability of the bidder and the likely ability of the bidder to meet health and safety requirements. At present, the 2014 Block Offer is open for bidding and New Zealand Petroleum & Minerals is taking nominations of interest in areas for the 2015 Block Offer. Previous Blocks Offers have seen petroleum exploration permits awarded to new entrant companies such as Anadarko, Statoil and Woodside.
The Blocks Offer method of exploration permit allocation was one of a number of key changes made to the regulatory framework governing the petroleum industry. Some of the other key changes are described below.
Changes to the Crown Minerals Act 1991
The Crown Minerals Act is the key piece of legislation that regulates E&P activity in New Zealand. During 2012 and 2013, a significant and reasonably wide-ranging reform of this legislation was undertaken.
A key change included the introduction of a two-tiered system for permit management. This was intended to streamline permit management and improve the administrative efficiency of New Zealand Petroleum & Minerals. This new system distinguishes between Tier One and Tier Two operations, allowing the two to be managed differently, as appropriate. Tier One comprises complex, higher return operations (eg, petroleum and some minerals-related operations) and Tier Two comprises lower return industrial, small business and hobby mineral operations.
Other changes include increasing the maximum available permit durations for offshore exploration permits (up to 15 years), a broader description of statutory exploration work programme requirements (with the associated expectation that there will be significantly fewer changes sought to them), improved and clearer provisions relating to the approval of permit transfers and dealings, and the introduction of a specific prospecting permitting regime for speculative seismic companies wanting to do seismic shooting in New Zealand. Finally, an important related change has been the introduction of early assessment of the health, safety and environmental capability of potential permit-holders at the exploration permit application stage.
Health and Safety in Employment Act 1992 (HSE Act)
The new HSE-focused provisions in the Crown Minerals Act are part of a broader focus on health and safety in New Zealand. In particular, they are designed to complement the HSE Act and associated regulations. The HSE Act and regulations have themselves been subject to amendment, and the Act is currently in the process of being amended by the Health and Safety Reform Bill.
As part of the health and safety reform, a High Hazards Unit (now part of WorkSafe NZ) was formed to focus on process safety risks in the upstream petroleum, mining and geothermal sectors. Further, the Health and Safety in Employment (Petroleum Exploration and Extraction) Regulations were amended in June 2013 to incorporate a number of new requirements. These include a requirement for operators to prepare and have approved a safety case for installations (both offshore and onshore). This would address aspects such as the safety management system, key features of the installation, management of major accident hazards and performance monitoring. Ultimately, these regulations seek to strengthen HSE safeguards associated with E&P activity in New Zealand.
While some of the finer details of the Health and Safety Reform Bill are yet to be ironed out during the legislative process, broadly speaking the Health and Safety Reform Bill seeks to move away from the focus of placing duties primarily on employers and employees. Instead, it places the principal duty on the person conducting a business or undertaking (PCBU). Broad duties on the PCBU will be reinforced with industry specific regulation. This reflects the fact that modern working arrangements are diverse.
Exclusive Economic Zone Act and Continental Shelf (Environmental Effects) Act 2012 (EEZ Act)
As well as focusing on health and safety regulation, the government has also turned its attention to the environmental regulation of offshore petroleum E&P activity. The EEZ Act, which recently came into effect, establishes an environmental management regime for New Zealand’s EEZ and continental shelf (ie, more than 12 nautical miles offshore).
In broad terms, the EEZ Act classifies activities to be undertaken in the EEZ as either permitted, discretionary, non-notified discretionary or prohibited. Companies seeking to undertake discretionary activities must be granted a marine consent by the Environmental Protection Agency (EPA). This requires the operator to submit a marine consent application and detailed environmental impact assessment to the EPA for the discretionary activity. The application will then be assessed by the EPA and generally a public hearing will be held before the consent is granted or rejected. Exploration drilling is a discretionary activity (although the EPA hearing for exploration drilling is not publicly notified).
Until recently, exploration drilling in the EEZ has had the benefit of specified transitional provisions under the EEZ Act. The wells drilled as part of the upcoming 2014–2015 summer drilling season will be the first to require a marine consent under the full marine consent application and hearing process.
Specific challenges and government responses
As has been evident in several jurisdictions in recent years, there has been a gradually increasing level of opposition to some E&P activity. In the New Zealand context, this has been particularly evident in relation to fracking and the extraction of unconventional resources such as shale gas and coal seam gas.
Social licence to operate
A common discussion in New Zealand in recent years has been about E&P companies needing a “social licence to operate”. While this has no precise meaning in a New Zealand context, it generally refers to the need for communities and other stakeholders to be supportive of E&P activity. This need manifests itself in several different ways.
In the context of onshore operations, operators have to enter into agreements with landowners for the construction and operation of well sites and production facilities on their land. Although the Crown Minerals Act provides a mechanism for arbitrated land access, the New Zealand experience has been that the better course is for operators to reach appropriate land access arrangements through negotiation.
In addition, onshore environmental consenting requirements provide a basis for affected or neighbouring landowners and other persons to object to and be heard at the relevant consent hearings. Most operators seek to engage with such persons up front and seek agreement from them, rather than waiting until the consent hearings.
Each of these approaches requires a reasonable level of community support for E&P operations.
Offshore non-interference zones
In the context of offshore operations, the prospect of direct protest action interfering with offshore seismic and drilling operations led the government to amend the Crown Minerals Act to make it an offence for unauthorised persons to interfere with offshore prospecting, exploration and mining activity.
There is now the ability for the Crown, on application by a petroleum operator, to impose a 500-metre non-interference zone in respect of both offshore drilling rigs and seismic vessels while they are undertaking acquisition activities. These non-interference zones may be granted for up to three months and are supported by broad powers of enforcement conferred on the police and navy. Several non-interference zones were put in place over the 2013/2014 drilling and seismic season.
New Zealand has been no exception to the concerns that have been expressed by certain groups in relation to fracking. In response to these issues, the Parliamentary Commissioner for the Environment undertook an investigation into the practice and released her interim report on fracking in 2012.
This report reached a similar conclusion to the Royal Society of London’s findings five months earlier – essentially that fracking could be done safely, as long as it was well managed. The Commissioner’s final report, released in June 2014, again raised the issue of whether there should be specific regulations for fracking.
In the meantime, the government has issued best-practice guidelines for undertaking fracking in New Zealand. These guidelines also clarify the responsibilities of local councils in relation to the investigation, planning and consent of well drilling and fracking activity.
The New Zealand E&P sector has been experiencing a significant upsurge in activity levels. With this have come some challenges, but the recent changes to the regulatory and operating environment, together with the government’s annual acreage reports, means operators should be well positioned to respond to the opportunities the New Zealand sector has to offer.