NZEC believes that open communication is integral to the Company’s success. The Company’s senior management and investor relations team speaks regularly with both investor and community stakeholders. We have compiled a list of frequently asked questions below, but encourage you to ask your own question by sending an email to Ask the CEO. We will continue to build on this Q&A as the Company and its projects evolve.
What are you doing on the new petroleum licenses. Are they producing yet?
The acquisition of assets from Origin Energy closed on October 28, and on October 29 NZEC's team was working on the well reactivations. We are installing well meters and reactivating oil production from the Tikorangi formation in six wells, using an existing gas lift system. We will issue a press release summarizing the results of these efforts as soon as all six wells are online. The next step will be installation of high volume lift in at least two wells, and also uphole completions in a number of existing wells to determine production potential from the shallower Mt. Messenger formation. We are focusing our efforts on existing wells in the near-term in an effort to increase oil production while minimizing expenditures. These wells have already been drilled and have oil and gas gathering pipelines in place, which means we eliminate the cost associated with drilling a new well, and we can immediately deliver oil and gas production to the Waihapa Production Station. In 2014 we will start drilling new wells to the Tikorangi and Mt. Messenger formation.
On June 17 you announced that you'd revised the terms for the acquisition of assets from Origin Energy. What's changed?
A summary of the changes is outlined below. The key things are the reduced purchase price and a simplified sale.
- $33.5 million
- No additional adjustments to purchase price
- $42 million
- Additional ~$9 million in adjustments at closing (NZEC internal estimate)
- Ultimate ownership of three Petroleum Licenses: Tariki, Waihapa and Ngaere ("TWN Licenses"). The Ahuroa License will be transferred to Contact Energy. Total acreage: 23,049 acres (93.3 km2)
- NZEC purchasing four Petroleum Licenses (Tariki, Ahuroa, Waihapa and Ngaere). Total acreage: 26,907 acres (108.9 km2)
|Royalty payable to Origin
- 9% net revenue royalty payable to Origin on all future hydrocarbon production on the Licenses
- NZEC retains the right to buy back up to 4% of hte royalty at any time for C$4.25 million per point
|Royalty payable to Origin
- 5% net revenue royalty payable to Origin on all future hydrocarbon production on the Petroleum Licenses
|Commitments to Origin
- Simplified sale agreement
- NZEC retains 100% of production from all existing and new wells on the TWN Licenses in all formations, subject to the Origin Royalty (and a 10% royalty payable to the NZ Government)
- Origin relinquishes all other rights and encumbranes on the TWN Licenses
|Commitments to Origin
- NZEC responsible for 100% of costs associated with drilling a well to the crestal interval of the Tikorangi formation, with profits to be shared 50/50 with Origin
- Origin retained rights to eight "option wells" for gas storage, which would have hindered NZEC's exploration efforts
What do you need to do to close the acquisition?
Closing of the acquisition is subject to NZEC meeting the financing condition precedent by August 14 and the government approval condition precedent by September 13, in order to close the acquisition by September 20, 2013. NZEC paid a $5 million deposit to Origin in June 2012, which leaves $28.5 million remaining to close the deal (final purchase price was $33.5 million). At May 22, 2013 NZEC had estimated net working capital of $12 million, so the company definitely needs to bridge this financial gap to close the acquisition. We’re considering a number of strategic options with regards to funding that will impact how much money we need to raise in the end, not only for the acquisition but also to fund planned ongoing development on our other permits.
What reserves and resources have been attributed to the TWN Licenses?
In conjunction with the acquisition, NZEC commissioned Deloitte LLP (“Deloitte”) to prepare an independent assessment of reserves and resources attributable to the TWN Licences. Proved and Probable Reserves are estimated at 1,852,700 barrels of oil, 1.45 billion cubic feet of natural gas and 50,700 barrels of natural gas liquids, collectively 2,144,700 barrels of oil equivalent (“boe”), estimated by Deloitte to have a before tax net present value (“NPV”) of $62.9 million (assuming a 10% discount rate). Contingent Resources are estimated at 1,162,000 boe, with Prospective Resources estimated at 23,541,000 boe. The reserves were restricted to the Tikorangi formation. For the resources, oil resources were calculated for the Miocene sands (Urenui, Mt. Messenger and Moki formations) and gas and natural gas liquid resources were calculated for the Eocene sands (Kapuni group). Barrels of oil equivalent (boe) were calculated using a conversion rate of 6 Mcf : 1 bbl but may be misleading, particularly if used in isolation, because the boe conversion ratio is based on an energy equivalency converstion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Please look at the detailed reserve and resource tables to see the breakdown and to read the cautionary notes. These reserves and resources will not be attributed to the Company until the acquisition is complete and NZEC files an updated NI 51-101 reserve report.
How do you plan to add value for NZEC shareholders once you close the acquisition?
Upon closing of the Acquisition and after transferring the Ahuroa Permit to Contact, NZEC will own the Tariki, Waihapa and Ngaere Licences (“TWN Licences”) in the main production fairway of the Taranaki Basin, contiguous with the northern border of NZEC’s existing Eltham and Alton permits. Totalling 23,049 acres, the TWN Licences offer multi-zone potential from the Urenui, Mt. Messenger, Moki, Kapuni and Tikorangi formations and will bring NZEC’s Taranaki Basin acreage to 210,153 acres. The TWN Licences are permitted and renewable without relinquishment, subject to government approval. Included are 16 established drill pads with gathering systems in place, which will allow for timely tie-in to the Waihapa Production Station upon exploration and completion success. The Acquisition includes 3D seismic data covering approximately 50% of the TWN Licences as well as 585 km of 2D seismic data. NZEC has access to extensive information from 27 previously drilled wells, offering the necessary well control to expedite exploration cycle time and reduce drilling risk. NZEC’s review to date of the 3D seismic and well log data has identified exploration leads in all of the formations, significantly expanding NZEC’s drilling inventory in the Taranaki Basin.
Upon closing of the Acquisition, NZEC plans to reactivate an established gas lift system for six existing wells on the TWN Licences to recommence oil and gas production from the Tikorangi formation, which is estimated to have remaining Proved and Probable Reserves of 2,144,700 boe. NZEC has also determined that six wells that previously produced from the Tikorangi formation have uphole completion potential in the shallower Moki, Mt. Messenger and Urenui formations. Reactivation and uphole completion of these wells would be significantly less expensive and faster than drilling new wells, and economic discoveries could be quickly tied in to the Waihapa Production Station using existing oil and gas gathering pipelines. Both the reactivations and uphole completions could bring near-term, low-cost production and cash flow to the Company. NZEC’s technical team has also identified five high-priority Mt. Messenger targets on the Waihapa and Ngaere permits of the TWN Licences. NZEC has completed permitting for a new site to access these targets, called the Waipapa site.
Owning the Waihapa Production Station will give NZEC strategic control over gathering, processing and sales infrastructure in the Taranaki Basin and provide NZEC with the ability to quickly bring on near-term production additions, reduce full-cycle development lead times and execute on longer-term growth plans. In addition, as the only open-access midstream facility in the Taranaki Basin, the Waihapa Production Station offers business opportunities for processing third-party gas, liquids, oil and water. The Waihapa Production Station is central to NZEC’s producing wells and inventory of exploration prospects, thereby reducing transportation and processing costs for NZEC’s oil and gas production.
What are the company's current reserve and resource estimates, before the acquisition is complete?
NZEC updated its reserve estimate at the end of December 2012 to include production and reservoir data from four wells: Copper Moki-1, Copper Moki-2, Copper Moki-3 and Waitapu-2. Reserves are ascribed to oil discoveries that have demonstrated commercial production rates. The reserves were broken down into three categories: Proved (1P), Proved + Probable (2P), and Proved + Probable + Possible (3P). The different classifications reflect the degree of certainty associated with the estimates. It is expected that we are likely to recover more than the estimated Proved reserves, there’s a 50% chance that we’ll meet or exceed the Probable estimate, and there’s a 10% chance that we’ll exceed the Possible estimate.
Resource estimates are separate from reserves. Resource estimates for the Company's properties have been calculated using a 9% recovery rate for conventional resources and a 2% recovery rate for unconventional resources. As we advance through our exploration program and start drilling new exploration wells and hopefully making new commercial discoveries, we would expect to convert some of these resources to reserves. Resource estimates for both our Taranaki Basin and East Coast Basin properties are outlined in the Operations section of the website and in the Corporate Presentation.
What is the next step in your exploration strategy in the Taranaki Basin?
The next well that we plan to drill is the Horoi target, located on the Alton Permit that we own in a 65/35 JV with L&M Energy. We'll likely drill this in August or September 2013. On February 25, 2013, we announced the decision to delay the remaining two wells in our Eltham drill program to focus on commercial opportunities in the pending acquisition of assets from Origin. Our objective is to increase near-term production and cash flow while reducing exploration expenses, and the Company believes that opportunities exist on the TWN Licenses to achieve this objective. While this decision in no way diminishes our view of the prospectivity of the Eltham and Alton permits, NZEC intends to focus in the near-term on lower-cost opportunities that are close to infrastructure. Both the reactivations and uphole completions on the TWN Licenses could bring near-term, low-cost production and cash flow to the Company.
What is the next step in your exploration strategy in the East Coast Basin?
For 2012 our exploration focus in the East Coast Basin was technical in nature. We drilled three stratigraphic wells to collect core from the shale packages and completed a 70km 2D seismic survey across the Castlepoint and Ranui permits, all with the objective of advancing our understanding of the Whangai and Waipawa oil shale formations. In 2013 we've so far completed 50km of 2D seismic on the Wairoa permit and have commenced permitting for two exploration holes, one each on Castlepoint and Ranui. These are commitment wells that need to be drilled by year-end. And of course we are always focused on community engagement and dialogue and continue to communicate regularly with local communities and iwi groups to discuss our exploration strategy.
How much does it cost to drill a well?
For conventional wells to the Mt. Messenger formation, from 1,800 to 2,500 metres deep, we budget $2 million to drill the well, $500,000 to case and $1 million to complete. A successful Mt. Messenger well, advanced all the way to production, generally costs between $3.5 to $4 million, in Canadian dollars. Deeper wells are more expensive.
When will you have to go back to the markets to raise money?
At May 22, 2013 NZEC had estimated net working capital of $12 million. We need $28.5 million to close the acquisition of assets from Origin ($33.5 million purchase price less a $5 million deposit paid in June 2012), so the company definitely needs to bridge this financial gap to close the acquisition. We’re considering a number of strategic options with regards to funding that will impact how much money we need to raise in the end, not only for the acquisition but also to fund planned ongoing development on our other permits.
Why did you do the deal with Origin?
NZEC will acquire the Waihapa Production Station and associated gathering and sales infrastructure as well as 23,409 acres of Petroleum Licenses in the heart of the production fairway. We believe this acquisition is strategic from both an exploration and infrastructure standpoint and will really set the stage for growth in all aspects of our business. Controlling a central oil and gas production facility in the Taranaki Basin provides NZEC with the strategic opportunity and capacity to independently process production, at reduced operating costs, as well as generate cash flow through third-party processing agreements. The Waihapa Production Station is central to our exploration permits in the Taranaki Basin and the existing gathering and sales pipelines will allow us to quickly bring successful discoveries onstream, at reduced costs. From an exploration perspective, NZEC will control a significant portion of the exploration fairway in the Taranaki Basin and significantly increase our drilling inventory. The Deloitte reserve and resource report uncerscored the prospectivy of the TWN Licenses across multiple formations, and with 16 established drill pads with gathering systems already in place, we can rapidly drill new wells and bring new production to market. In addition, well log data from 27 existing wells demonstrates that a number of wells offer uphole completion opportunities. The existing wells were drilled to the Tikorangi formation but many wells passed through our target formations: Mt. Messenger, Urenui and Moki. We believe the potential exists in six wells to plug the Tikorangi, move up the well bore and perforate in our target formations, offering production potential without the cost or time associated with drilling a new well. And of course the reactivation wells are the "low hanging fruit." Deloitte has estimated remaining reserves with a net present value (before tax, 10% discount) of $62.9 million. The gas lift system is in place and the wells are already tied in to the Waihapa Production Station - we just need to secure the gas supply and turn the system on. We believe the acquisition will add great value for our shareholders, and we look forward to closing the deal and integrating both the exploration and business opportunities into our strategic plan.
Why have you chosen to focus your exploration and development efforts in New Zealand?
We recognized an opportunity to be one of the first companies to actively explore and develop oil and natural gas prospects in a region that has tremendous potential but is surprisingly underexplored. The geology is highly prospective, we were able to move quickly to secure a number of very promising land packages and permits, and the permitting process is very transparent. It’s also very easy to do business in New Zealand. As an English-speaking country with a supportive fiscal and political regime, it was an easy transition from Canada to New Zealand. It’s also got fantastic infrastructure, and a captive market since New Zealand is currently importing oil and natural gas to fill its domestic energy needs and has a stated objective of being energy self sufficient by 2030.
What gives NZEC a competitive advantage over its peers?
We’ve brought extensive North American experience and success, and North American technology, to a highly prospective and underexplored region. We’ve got a highly experienced in-country technical team with 25 years of data at their fingertips, and have recruited industry professionals with decades of experience exploring and producing oil and gas assets and operating a production facility. We've got an exceptionally strong team, we’re nimble and entrepreneurial, and we’re working hard to achieve our objectives and continue to grow the company.
What major properties has your team worked on before?
Our technical team came from Ian R Brown & Associates, the premier oil and gas consulting firm in New Zealand and they’ve worked on virtually every oil and gas property in New Zealand. Ian’s team has been compiling a database for 26 years that covers all of the publicly available exploration data in New Zealand. They’ve reprocessed it, interpreted it, and many of his people have been with him since the start. They’ve got an incredible depth of knowledge and experience. Bruce McIntyre has been involved with a number of successful oil and gas companies, right from the first drill hole and exploration success through to eventual acquisition by larger companies. He took BXL Energy from a start-up company to 2700 boe per day, all with exploration success. BXL Energy started out private, was listed on the TSX and eventually sold for $80 million. Bruce’s second company was Triquest, which he grew from 300 boe to 2500 boe, and another successful acquisition.
What’s the typical development timeline of an oil and gas property?
Six months to a year is a fairly realistic timeline, from initial exploration targeting and starting the drilling process, to finding a resource and achieving production.
New Zealand often has seismic activity. Is this a risk to your properties and development plans?
The Taranaki Basin is relatively stable and away from major faults. The East Coast Basin is tectonically active, but most of the earthquakes have been relatively small, and all of our wells and infrastructure are designed to withstand earthquakes.
There has been significant public debate in New Zealand, and worldwide, about fracking. Will public concern prevent you from exploring?
We are not using fracking technology for any of the wells in our current exploration program. We are certainly watching the fracking debate closely. It's really about education. Fracking has been used around the world for decades with very few problems. We were pleased to see the New Zealand government commission an independent report about the risks and opportunities that fracking presents. It really comes down to responsible development and a commitment to meeting all environmental and safety standards. As long as the dialogue continues and people have access to accurate, unbiased information, we are confident that a balance can be achieved to allow oil and gas exploration and development to proceed in a manner that is sustainable and brings long-term net benefits to all stakeholders.
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