Statoil rushes to exit New Zealand's Reinga Basin

What now for the Reinga Basin?

Mark Blood - Wed, 26 Oct 2016

After three years of preliminary exploration Statoil is to relinquish its Reinga acreage citing the small prospects it sees for a big discovery. This will be a disappointment to many in the industry, none more so than the New Zealand government which has invested time and money into promoting the deep water frontier area for exploration.

But what does the Norwegian explorer’s withdrawal actually mean for the area’s prospectivity and New Zealand Inc as an exploration destination? Has Statoil really been able to determine that the basin lacks sufficient prospectivity on the basis of 2D seismic data alone or is the decision influenced by the challenges frontier exploration faces in the current environment?

Reinga and the adjacent Northland Basin fit the characteristics of ‘frontier' basins. While less exposed to weather risk than the Great South, the Reinga Basin and the northern part of the Northland Basin have little exploration data with which to frame a reliable exploration view point. As a minimum, both 2D and 3D seismic data plus at least one exploration well is required in order to make an informed decision as to whether the area has any chance of commercial prospectivity. Statoil have reached their decision based on 2D seismic alone, supplemented with other geotechnical studies.

Background

The two permits Statoil will surrender - PEP 55781 and PEP 57057 - were granted in 2013 and 2014 respectively. They are located approximately 100 kilometres west of Northland in water depths ranging from 1,200 to 2,000 metres and cover an area of 11,670 square-kilometres. Statoil is the operator with 100 per cent equity in both permits.

At the time of award, Statoil noted that there was a chance – albeit small - that the Reinga Basin could be more prolific than Taranaki. The first six years of the 15-year permit were to be spent on data collection and analysis with a well in 2020 if the area was deemed sufficiently prospective. It has taken just three years for Statoil to determine this is not the case.

What could be the hydrocarbon potential?

Knowledge of the petroleum system of the Reinga and Northland basins is aided by continuity with the well-known Taranaki Basin to the south-east, but is hampered by the absence (Reinga) or paucity (Northland) of petroleum wells.

The limited knowledge raises risk on all geological factors, but principally on hydrocarbon charge and the presence of an effective reservoir. The pre-Cenozoic pre-rift and syn-rift strata encountered in sparse offset exploration wells (onshore Northland and the offshore Waka Nui-1) exhibit poor reservoir qualities.

The lack of known sediment source areas capable of generating coarse-grained, quartz-rich sandstones raises the risk of reservoir degradation at present-day burial offshore, though the western margin of the Reinga Basin may be a suitable provenance area.

And Source Rocks?

Although potential source rocks in the Reinga and Northland Basins are unproven, the Late Cretaceous to Eocene petroleum system that is known in the Taranaki Basin appears to be reflected in similar depositional styles in the Reinga Basin where seismic data reveal deep localised grabens containing thick successions of potential syn-rift Cretaceous source rocks within the maturity window.

Reinga - as opposed to Northland - appears to have the elements of an active petroleum system except extended into a much greater Mid-Cretaceous syn-rift early basin-fill succession.

Reinga-Northland stratigraphy compared to Taranaki Basin (Source GNS Science). Terrestrial-dominated sediments are displayed in green, marine - blue, volcanic - pink.

Because of these indicated risks, uncertainty is high. But to assume the Reinga-Northland basins are not prospective is premature at this stage of the exploration cycle. Indeed, available geological and geophysical data, modelling and interpretation suggest that prospectivity is good, particularly in the Reinga Basin, with the potential for large hydrocarbon deposits. Although there is no evidence that the Reinga and Northland basins contain any commercial drilling targets, the possibility that such would become apparent after acquiring an appropriate 3D seismic grid should not be dismissed.   

Of the two basins, the Reinga is considered the more prospective, largely due to the greater chance of encountering better quality reservoir sandstones on the south-western margin of the basin and greater potential for mature source rock facies. These factors, when combined with better subsurface imaging on seismic data compared to the volcanic-degraded seismic quality in the Northland Basin, suggests that acquiring 3D seismic would provide greater exploration uplift in the Reinga Basin. 

Notwithstanding the potential attractiveness of the Reinga Basin for future hydrocarbon discoveries, the inability to quantify exploration potential - given the lack of 3D seismic data and the absence of key well control - results in fundamental exploration weaknesses on which to base a decision to exit from the basin.

Commercial Considerations

Presumably, Statoil will have undertaken economic analysis to determine a minimum economic pool size (MEPS) for a discovery with an assumed gas-condensate fill (oil is unlikely although some may disagree) in water depths exceeding 1,200 metres.

This is to assess if the area has the potential to be commercially viable. The development concepts for a discovery are likely to be either conventional or floating LNG – for gas export - or one based on sub-sea wells and a sub-sea manifold, with gross production evacuated to domestic-focused processing facilities onshore.

Each development scenario requires a different MEPS. While dangerous to present such numbers, below is a very rough stab at what economic volumes might be required:

• Conventional LNG: 10 Tcf or greater
• Floating LNG: 5 Tcf or greater
• Pipeline to shore: 2 Tcf or greater   

Given the imperfect picture the Norwegian explorer will have of the hydrocarbon potential of PEP 55781 and PEP 57057 - no 3D seismic and no exploration well – one must conclude its initial evaluation of the permits has fallen short of its technical and/or commercial thresholds.

Moreover, it is telling that as far as this author is aware Statoil has not attempted to farm-down its equity in either permit. Whether this is because that is too difficult in the present depressed oil price environment, or because there is insufficient prospectivity to warrant the effort a farm-out campaign takes, is something we will learn going forward.

And the future for exploration in the Reinga-Northland Basins?

While disappointing, Statoil’s withdrawal from its Reinga permits is based on limited geophysical and geological information. Rightly or wrongly, the company has concluded that the area lacks material hydrocarbon potential.

Although not stated, Statoil’s decision may have also been influenced by a recasting of its exploration strategy and the project’s inability to compete for further capital investment. Statoil’s decision to surrender is reminiscent of BP’s recent announcement to cease its exploration efforts in the Great Australian Bight. Tellingly, BP said its decision was due to a change in its upstream strategy which recognises the challenges to frontier deep-water exploration in the current price environment. Its view of the area’s prospectivity was unchanged.

Personally, I favour the Reinga as one of the more prospective of New Zealand’ frontier basins.

While acknowledging the risks associated with hydrocarbon charge and reservoir quality, the basin exhibits a variety of structural plays in strong contrast to the absence of structuring observed in the Deep-water Taranaki.

On the commercial front, the basin’s location provides an opportunity to supply the large and growing population centres of the North Island with gas in the event of an economic discovery. This development option is unlikely to be possible for discoveries made in the Great South, Canterbury and Pegasus basins.

So with Statoil’s departure from the Reinga Basin what will be the consequences for future exploration outside of Taranaki?

The last time a major oil company exited a New Zealand basin was in 2012 when Brazilian oil giant Petrobras handed back exploration licences it held in the Raukumara Basin, off East Cape.

Did this affect New Zealand as an exploration destination? No. New entrants arrived - Chevron, Woodside and Statoil. And let’s not forget, Statoil is not leaving New Zealand. It is refocusing its exploration effort - albeit as a non-operator – on the Pegasus and East Coast basins.

Although the look is negative, Statoil’s decision to withdraw is unlikely to have any long-term impact on the decision-making of other majors viewing New Zealand as a place to explore. That said, and with oil prices more subdued in the present economic environment, it may take some time to attract another player back into this frontier basin.

What should New Zealand Petroleum & Minerals (NZP&M) be doing?

There are several things NZP&M should be doing to help maintain some kind of exploration momentum in Reinga-Northland.

First it needs to review Statoil’s technical story and determine how reliable the geological models, interpretations, risk analysis and resource calculations presented are.

Second, NZP&M should undertake its own detailed evaluation of the area so that it has the knowledge and insight as to the most likely potential of the basin. Too often we see arm waving statements about how good an area’s exploration potential is with little technical depth to back up such claims. If NZP&M are not resourced to undertake such an activity then it needs to employ the appropriate personnel.

And third, there has never been a better time to undertake seismic acquisition. 3D seismic costs are as low as they will go and NZP&M should make every effort to license the area to one of the large seismic companies to enable a basin-wide 3D seismic survey to be acquired.

The present 2D seismic grid is all very well but most operators demand 3D seismic as a minimum in order to conduct a meaningful exploration programme. Its advantage over 2D seismic is that it provides a clearer, continuous image of the subsurface, thus significantly reducing exploration uncertainty.

All going well and with a bit of luck the Reinga acreage will be picked up in a future licensing round, so continuing the exploration cycle.