19 Oct 2015

Oil is not the money maker it once was

9:59 am on 19 October 2015

Falling oil prices have cost the Government about $100 million lost income from oil and gas royalties.

oil drilling rig

Photo: 123RF

The Ministry of Business Innovation and Employment's annual report shows royalties earned the government slightly over $258 million in the year to June.

This is a fall of around $100m in a year.

The Government earned $353m in the previous year.

The figure was over $500m six years ago.

Royalties in the oil and gas business are payable by oil companies on top of tax.

They are supposed to compensate for the fact that oil and gas are lost forever to New Zealand as a whole once they are pumped out of the ground.

As a result, private companies that profit from this are expected to pay some sort of compensation.

The royalties are set at 5 percent of an oil company's turnover, or 20 percent of profit.

But falling oil prices have cut into both cashflow and net profit, reducing the basis for calculating royalties.

At present, crude oil costs slightly under $US50 a barrel, way under half of what it was 16 months ago.

This is cutting into oil industry revenues, and consequently oil industry royalties.

Many oil industry observers including the International Energy Agency expect world oil prices to stay low for most of next year, foreshadowing another bad year for state royalties next year.

Taranaki-based energy journalist Neil Ritchie said several factors will keep oil prices down for some time.

He thought they would recover a bit but fall well shy of the earlier figure of $US100 a barrel.

"There is still quite a lot of volatility in the market overseas for various reasons," he said.

"I think that maybe the price will be $60 a barrel toward the end of next year or perhaps early 2017.

"You have got Iran probably coming on stream, you have got perhaps a continued slow down in the Chinese economy, you have got US oil production and maybe US oil exports, you have got continued instability in the Middle East and you have got OPEC holding onto its market share instead of cutting production."

All these trends put New Zealand in the front line, with royalty revenue that had been enough to pay for a medium-sized district health board ending up able to pay for perhaps half of it.

However, the Ministry of Business Innovation and Employment said there was more to this debate: cheaper oil meant cheaper petrol, saving motorists hundreds of dollars a year, and giving them money to spend elsewhere in the economy.

Gas and oil royalties (Source: MBIE)

2004/05 - $114,341,205

2005/06 - $125,132,961

2006/07 - $110,318,903

2007/08 - $124,150,772

2008/09 - $542,959,260

2009/10 - $431,892,264

2010/11 - $384,509,813

2011/12 - $360,612,601

2012/13 - $407,317,898

2013/14 - $353,837,000

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