On getting a fair deal for our oil and mining resources

As the deadline approaches for public submissions on the government’s plans to open up sensitive conservation areas to mining, the likely economic returns to New Zealand remain a complete mystery. We don’t know the economic worth of these deposits – Energy Minister Gerry Brownlee has suggested that we have to drill first, and answer that question later. Beyond the gross economic value, the net return likely to New Zealand once the foreign companies have taken out their profits is anyone’s guess. Policy is being pursued on the basis of wishful thinking, and a prayer.

The problem is not restricted to mining. Our oil and gas resources are also being put up for grabs again. As the NZ Herald reported recently, a new regime for oil and gas royalties is now being worked out by officials.

The Government was consulting the industry over a new regime which could do more to encourage explorers by setting up special low tax rates and greater provision for write-offs for exploration….The royalty regime in New Zealand requires companies to pay the Government 5 per cent of the value of the oil or 20 per cent of accounting profits, whichever is higher….

“Once you’ve found something [says Petroleum Exploration and Production Association chief executive John Pfahlert] you don’t mind paying a percentage to the Crown, You know you’re going to make money on it.”

Indeed you do. It is not as if that current 5 % royalty regime is onerous. The US Congressional watchdog, the General Accountability Office (GAO) produced in 2007 a terrific study of Oil Leases, that includes a table of royalty regimes showing how relatively generous New Zealand is being to foreign companies that come here to extract our oil. That data was fed into an exchange in the New Zealand Parliament between Jeanette Fitzsimons and the Energy Minister of the day, Harry Duynhoeven :

Fitzsimons : Was [ the Minister] aware that even war-ravaged Angola has been able to negotiate a 60 percent Government take from its deep-water drilling contracts with international oil companies, which include Exxon Mobil, and that Brazil also has a 60 percent Government take from the revenues of production; and why is New Zealand proposing to settle for less than that in a royalty regime described by him in the Otago Daily Times as one of the cheapest in the world?

If you thought the response by Duynhoeven in 2007 was bad, the subsequent situation has not improved when it comes to oil company compliance with royalty regimes. One legacy of the Bush administration is that even the US government has failed dismally to ensure that oil companies live up to their commitments. In March, the GAO completed a fresh and damning report on the failure of US authorities to monitor oil company extraction activities, and to ensure their proper compliance with the negotiated royalty regimes. The GAO findings have just been picked up by the mainstream US media in this New York Times report.

The problem goes back at least to 2006, as another New York Times story called “Report Says Oil Royalties Go Unpaid” indicates.

The interesting thing about the recent GAO report is that it pinpoints problems that are bound to recur in any New Zealand attempt to ensure compliance with royalty regimes, whether that be in mining, or in oil and gas exploration. The NYT summarized the problems:

Limited oversight, gaps in staff skills, failure to update measurement regulations, inconsistent policies, lack of coordination and a failure to determine its authority over key oil and gas infrastructure have hindered Interior’s ability to accurately verify production levels, the Government Accountability Office found….

The 130-page report found that onshore measurement regulations have not been updated in 20 years and do not address current measurement technologies. For both onshore and offshore leases, Interior has ineffective and inefficient methods of developing and revising its measurement regulations, it said.

The problem therefore, is not merely that New Zealand already has a low royalty regime for oil that the current government seems intent on dropping even further. Or that it is doing so before it has put in place even the glimmerings of an enforceable compensation scheme if major oil spillages should result in lasting damage to say, our coastal fishing industries. An even wider problem is the capacity to monitor and enforce compliance with the agreed royalty deal once it is struck. Will we be reliant on what the company tells us it has found and extracted?

In essence, why does Gerry Brownlee think it necessary to lower the royalty regime for oil exploration in New Zealand – at a time when international oil prices are climbing again? And how does he propose to adequately monitor and enforce compliance with the royalty regime deals relating to the extraction of our natural resources – given that not even the mighty US government can get the companies concerned to live up to their commitments ? Clearly, far more information is needed before Brownlee sends mining companies off on their search and destroy missions within our national parks.


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