We can extract oil from our Far South Basin - here’s how

(This article first appeared March 12, 2012. This repost follows yesterday's news that Shell NZ and partners are to drill an exploration well in the Great South Basin - Editor)

I’ve recently returned from the “Our Far South” trip to the Southern Ocean and Antarctica, a month-long journey led by Gareth Morgan and populated with 49 other opinionated people, many of them scientists and industry experts.

For me, the most pressing issues were pest removal from our sub Antarctic islands, and, more relevant to NBR readers, fair regulation of oil exploration in our 200 nautical mile Exclusive Economic Zone (EEZ)*.

The tender process for oil exploration in our economic zone has a glaring gap where the required tough environmental and safety requirements should be.

This shouldn’t surprise is, as there appears to be a systematic failure by New Zealand regulators to impose and verify industrial safety and environmental standards.

The Pike River disaster is the most visible result that shows we don’t understand safety.

It was an abominable affair where the quest for cash and slack domestic safety standards contributed to a tragedy that was entirely preventable.

The Rena spill then showed we are unable to effectively cope with oil spills near our coast line, but that we are happy to spend decent resources on saving a few visible oil-affected birds rather than saving tens of thousands or more by removing pests from our remote islands.

We need to impose tough standards to ensure we don’t end up with a disaster like Deep Horizon in the Gulf of Mexico.

More dangerous than the north
The effects of a disaster could be devastating. New Zealand’s sub Antarctic region is home to not only important fishing zones, but also to endemic species like the NZ Sealion, and the Yellow Eyed, Snares and Erect Crested Penguins.

Beyond that, New Zealand provides breeding grounds to 25% of the world’s seabirds, including many species of albatross.

It is going to be hard for the prospectors to deliver the required standards.

The Southern Ocean is a level above the once untameable North Sea, which is essentially surrounded by land. The ocean in the south has no land mass stopping the eternal progression of waves around the world, and is powered by the similarly strong Antarctic winds.

The waves are further apart and thus much larger than the ones in the North Sea, and with average wave heights of 3.4 meters are very powerful. A decent storm, and the region has many, can raise wave height to 11 metres, which we were unusually lucky not to experience ourselves on our own voyage south.

The oil industry already knows about rogue waves, which can be three times the normal storm size, with a 25.6m monster hitting and damaging the North Sea’s Draupner oil rig.

No clean-up possible
The power of the Southern Ocean almost certainly requires especially designed drilling rigs with far higher tolerances for severe conditions. Safety margins will need to be high, as we are utterly incapable of dealing with any oil spills in the region, with the ocean conditions, remoteness and expense precluding any clean-up efforts.

Realistic about costs, as well as benefits
Oil prospectors appear to increasingly believe that economic extraction of oil is possible.

However, we need to make it clear to them what New Zealand requires for safety and environmental standards so they can assess costs along with the benefits.

With no chance for clean-up, prospectors should have to demonstrate that the risk of a small or significant oil emission spill falls beneath certain remote probabilities, and that they are able to provide a bond or insurance to mitigate the financial aspects of a spill.

Pipelines?
Oil doesn’t deliver itself, and any successful find will need infrastructure to transport it back to the mainland and offshore.

Will we have storage in the sea and oil tankers braving the large seas?

Will the solution be pipelines across the pristine ocean floor and fishing grounds?

These have been solved before, but to do so in the vast and remote Southern Ocean will be a new challenge for the industry.

How it can be done
It is possible to explore and produce oil in our far south.

And while we can never eliminate the risk of a major spill, the right controls will make that event highly improbable.

The controls include not just best operating equipment, but also responsible companies that are truly committed to safety.

BP made it apparent that their public safety rhetoric wasn’t matched by internal practice and values, and players involved in any successful exploration bid need to be scrutinised carefully.

This scrutiny isn’t one-off, but requires a continuous series of audits, perhaps involving permanent observers on rigs.

The parent company and contractors will have truly embraced a Zero Harm approach for workers and the environment, and will not compromise in the name of production.

The industry calls these sorts of imposed measures a “license to operate”, but   New Zealand’s prospecting and mining license to operate terms are soft or simply unwritten.

We need to offer exploration companies known environmental and safety requirements for exploring and producing oil in the region.

Wait the industry out
If those requirements prove to be uneconomic, then let’s wait the industry out, as the price of oil continues to slowly rise, the cheaper fields begin to be exhausted and the relative benefit and safety of drilling in our EEZ becomes clearer.

More than token royalties
We also need to share the benefits, and not simply clip a token amount of royalties.

With the government owning four large energy companies, why can’t we use them to expand into partnerships with foreign operators?

Norway’s Statoil had a mandated 50% share of any business in the early years of offshore drilling there, and they grew with the success of the fields in Norway’s economic zone.

That mandate has now been dropped as the government saw benefits in a competitive market, but Statoil is now not only a successful multinational headquartered in Oslo, but also provides security for Norway’s super fund.

Twin challenge
Our twin challenge is to ensure that we have safe sustainable drilling, but also that we capture the benefits as a nation. 

It seems as if we now have great potential for oil, but before we embark in earnest let’s start addressing safety and our share. 

Lance Wiggs is an independent consultant providing management, strategy, growth and valuation consulting to industrial, media and internet based businesses. He blogs at Lancewiggs.com.

* The article refers to the Campbell Plateau and other regions still in New Zealand's 200 nautical mile economic zone. (data.gns.cri.nz/geoatlas/images/nz_cont.jpg). Antarctica mining is uneconomic as the ore is low grade (as far as anyone can tell), meeting the environmental and safety requirements would be wildly expensive and it is totally banned by the Antarctic Treaty System.