Jun 13 - New Zealand Energy Amends Deal Terms, Finalizes Sale and Purchase Agreement Related to the Acquisition of Assets from Origin Energy

Source Press Release
Company New Zealand Energy Corp.L&M Energy LtdOrigin Energy Limited 
Tags Pipelines/ tankers/ distribution, Asset Deals, Deals, Upstream Activities
Date June 17, 2013

New Zealand Energy Corp. (TSX VENTURE:NZ)(OTCQX:NZERF) ("NZEC" or the "Company") is pleased to announce that it has finalized the Sale and Purchase Agreement ("SPA") to acquire strategic upstream and midstream assets (the "Acquisition") from Origin Energy Resources NZ (TAWN) Limited, a wholly-owned subsidiary of Origin Energy Limited (ASX:ORG) (collectively "Origin"), subject to 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. The assets being acquired include three net Petroleum Mining Licences totaling 23,049 acres in the main Taranaki Basin production fairway (the "TWN Licences") as well as the Waihapa Production Station and associated gathering and sales infrastructure. All amounts are stated in Canadian dollars unless otherwise noted. More information regarding the Acquisition is available in the Company's Annual Information Form for the year ended December 31, 2012, which was filed today on SEDAR at  www.sedar.com.

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(1) 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(2) ("boe"), estimated by Deloitte to have a before tax net present value ("NPV") of $62.9 million (assuming a 10% discount rate). Contingent Resources1 are estimated at 1,162,000 boe, with Prospective Resources1estimated at 23,541,000 boe. 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.

Highlights

  • Revised purchase price to $33.5 million with no additional adjustments (from original purchase price in May 2012 of $42 million plus adjustments, estimated by NZEC to be $9 million)
  • Purchase price comprises $30 million in cash plus a 9% royalty on net revenues, both payable to Origin, and a $3.5 million cash payment to Contact Energy Limited (NZX:CEN) ("Contact")
  • NZEC purchases the Tariki, Waihapa and Ngaere petroleum licences totaling 23,049 acres (93.3 km2)
  • NZEC retains 100% of production from all existing and new wells on the TWN Licences in all formations, subject to the 9% royalty payable to Origin
  • Origin relinquishes all other rights and encumbrances on the TWN Licences, other than the royalty
  • Reserve and resource estimate attributable to the TWN Licences, prepared by Deloitte LLP 
    • Proved and Probable Reserves1 of 2,144,700 boe
    • Before tax NPV (10% discount) for 2P Reserves of $62.9 million1
    • Contingent Resources1 (best estimate) of 1,162,000 boe
    • Prospective Resources1 (best estimate) of 23,541,000 boe
  • Waihapa Production Station 
    • Facility ready for gas processing, oil handling and water disposal
    • 10 TJ/day(3) gas supply identified to operate the gas plant and reactivate gas lift system on Tikorangi wells
  •  "

Negotiations over the past year have resulted in a revised purchase price and a simplified sale agreement," said John Proust, Chief Executive Officer and Director of NZEC. "The additional time for review has ultimately proved beneficial to NZEC and its shareholders. The extended technical review of the TWN Licences has identified reserves that will more than quadruple NZEC's reserve base, plus significant oil and gas resources, that together underscore the prospectivity of the petroleum licences.

"We have developed a business plan to deliver our liquid-rich gas production to market, activate the gas lift to recommence oil and gas production from existing Tikorangi wells located on the TWN Licences, and establish new business opportunities for the Waihapa Production Station."

We appreciate the patience of our shareholders. With these negotiations behind us, we are focused entirely on closing the acquisition and executing our exploration and business plans to demonstrate the value of this acquisition for NZEC's shareholders."

(1) Reserve and resource estimates for the TWN Licences prepared by Deloitte LLP, with an effective date of April 30, 2013. See detailed reserve and resource tables and Cautionary Note Regarding Reserve and Resource Estimates.

(2) Barrels of oil equivalent (boe) calculated using a conversion rate of 6 Mcf : 1 bbl. May be misleading, particularly if used in isolation. The boe conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead

(3) A TerraJoule (TJ) is a measure of energy and is equivalent to approximately 1 MMcf of natural gas.

Waihapa Reserves and Resources

During this period of review and renegotiation, NZEC commissioned Deloitte LLP (formerly AJM Deloitte) to prepare a reserve estimate and economic evaluation for the Tikorangi formation on the TWN Licences, along with a resource evaluation for the Urenui, Mt. Messenger, Moki and Kapuni formations. The estimates and evaluations were prepared in accordance with National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities with an effective date of April 30, 2013. 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. Upon closing of the Acquisition, the Waihapa reserves and resources will increase NZEC's 2P Reserves (Proved + Probable) by 303% and increase the net present value (10% discount, before tax) of NZEC's 2P reserves to $85.5 million.

Marketable Oil and Gas Reserves Attributable to the TWN Licences 
As at April 30, 2013 
Forecast Prices and Costs 
 

   Reserves Category 
Light & Medium
   Oil (Mbbl) 
Natural Gas
   (MMcf) 
Natural Gas
   Liquids (Mbbl) 
Barrels Oil
   Equivalent
   (Mboe) 
Proved Developed  983.7  762.0  26.7  1,137.4 
Proved Undeveloped  258.1  206.5  7.2  299.8 
Total Proved  1,241.8  968.5  33.9  1,437.1 
Probable  610.9  479.3  16.8  707.6 
Proved + Probable  1,852.7  1,447.8  50.7  2,144.7 

Notes:

  1. Estimated by Deloitte LLP. These reserves will not be attributed to the Company until the Acquisition is complete.
  2. Reserves are presented before the deduction of royalty obligations payable to Origin and to the New Zealand government.
  3. Mbbl - thousand barrels. MMcf - million cubic feet. Mboe - thousand barrels of oil equivalent using a conversion ratio of 6 Mcf : 1 bbl. Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. The boe conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
  4. Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. See Cautionary Note Regarding Reserve and Resource Estimates.
Net Present Value of Future Net Revenue Attributable to TWN Licences Reserves
   Before Tax 
As at April 30, 2013 
Forecast Prices and Costs 
 
Net Present Value of Future Net Revenues
   Before Tax, Discounted at % per year 
Reserves Category  0%
   ($'000) 
5%
   ($'000) 
8%
   ($'000) 
10%
   ($'000) 
15%
   ($'000) 
20%
   ($'000) 
Unit Value
   10%
   ($/boe) 
Proved Developed  54,432  43,656  38,848  36,142  30,677  26,554  31.65 
Proved Undeveloped  11,874  9,168  7,990  7,340  6,058  5,115  24.34 
Total Proved  66,306  52,824  46,838  43,482  36,735  31,669  30.12 
Probable  44,522  27,897  22,201  19,393  14,496  11,400  27.32 
Proved + Probable  110,828  80,721  69,039  62,875  51,231  43,069  29.20 
 
Oil and Gas Resources Attributable to TWN Licences 
As at April 30, 2013 
 
  Mboe 
Resource Category  Low  Best  High 
Contingent Resources  567  1,162  2,426 
Prospective Resources  10,825  23,541  54,368 
Discovered Petroleum Initially in Place (PIIP)  1,529  2,976  5,889 
Undiscovered Petroleum Initially in Place (PIIP)  31,145  63,955  138,781 

Notes:

  1. Estimated by Deloitte LLP. These resources will not be attributed to the Company until the Acquisition is complete. Estimates assume 9 to 14% recovery for oil resources and 50% for gas resources. See Cautionary Note Regarding Reserve and Resource Estimates.
  2. Mboe - thousand barrels of oil equivalent using a conversion ratio of 6 Mcf : 1 bbl. Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. The boe conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Terms of the Acquisition

The final purchase price for the Acquisition comprises $33.5 million in cash ($30 million payable to Origin and $3.5 million payable to Contact). NZEC paid a $5 million deposit to Origin for the Acquisition in June 2012. The remaining $28.5 million will be payable upon closing of the Acquisition. The Company is considering a number of options to increase its financial capacity to carry out the Acquisition and other anticipated activities. In addition, NZEC will pay Origin a 9% net revenue royalty. The Company can reduce the Origin Royalty at any time by as much as 4% by paying Origin $4.25 million per percentage point. The TWN Licences are also subject to a "grandfathered" New Zealand Petroleum & Minerals 10% net revenue royalty. The royalty regime allows for the deduction of specified portions of operating costs when calculating royalties payable.

Other than the 9% royalty, Origin has relinquished all rights to the TWN Licences and the Waihapa Production Station, and to production from existing and future wells in all formations.

As one of the conditions of the transaction, NZEC has entered into an agreement with Contact regarding Contact's Ahuroa Gas Storage Facility ("AGS") located in the Contact-owned permit adjacent to the TWN Licences and the Waihapa Production Station. Contact, owned 53.1% by Origin, is one of New Zealand's leading energy generators and retailers, providing electricity, natural gas and LPG to customers in New Zealand. NZEC will transfer ownership of the Ahuroa Licence (3,857 acres, 15.6 km2) to Contact upon closing of the transaction. NZEC's technical review of the Ahuroa Licence did not identify significant accessible prospectivity. In exchange for transfer of the Ahuroa Licence to Contact, NZEC will receive a compressor capable of handling 10 MMcf/d of natural gas. NZEC will act as operator of AGS, for which Contact will pay NZEC a monthly operating fee of NZ$200,000.

Two final conditions are required to close the Acquisition: deposit of the remaining $28.5 million of the purchase price into an escrow account, and government approval. The New Zealand Government has voiced its approval for the transaction. NZEC will proceed to lodge the SPA and other agreements with the New Zealand Government for final approval. The TSX Venture Exchange has provided conditional approval for the transaction.

TWN Mining Licences

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 (Figure 1). Totalling 23,049 acres (93.3 km2), 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 (850.5 km2). 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.'

NZECs 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.

Longer-term exploration plans on the TWN Licences include accessing Mt. Messenger targets from 16 existing drill pads with gathering systems in place, which offer lower-cost exploration potential and can be tied-in to the Waihapa Production Station on an expedited basis. The resource evaluation also confirmed the prospectivity of the deeper Moki and Kapuni formations on the TWN Licences. Discoveries by other companies on offsetting permits have demonstrated significant flow rates and long-term production from reservoirs in these deeper formations.

Production and Infrastructure Assets

Owning the Waihapa Production Station (Figure 2) 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.

The Waihapa Production Station and associated infrastructure includes:

  • 45 MMcf/d gas processing, gas compression and LPG extraction facility;
  • 51 km 8-inch gas sales pipeline from the Waihapa Production Station to the Stratford Gas Power Generation Plant then terminating in New Plymouth;
  • 59 km of oil/gas mixed product pipelines including gas lift lines;
  • 25,000 bbl/d oil processing facility;
  • 49 km oil sales pipeline from the Waihapa Production Station to the Omata Tank Farm, capable of transporting up to 15,500 bbl/d; and
  • 18,000 bbl/d water disposal processing system.

Since initiating the Acquisition in 2012, NZEC has recruited industry professionals with expertise in operating a full-cycle production facility. When the Acquisition closes, Mike Oakes, NZEC's General Manager Upstream Operations, will assume responsibility for the Waihapa Production Station.

Contact Agreement

As part of the Acquisition, Contact and NZEC have agreed to undertake a joint study that is expected to lead to the commencement of a six-month gas looping trial in Q4-2013. NZEC intends to loop a minimum of 10 TJ/day3 through the Waihapa Production Station, shipped from the existing gas network through the Contact pipeline. A volume of 10 TJ/day will be adequate to commence operations at the Waihapa Production Station, allowing NZEC to process gas produced from its own wells. During the trial, gas will be used to reactivate the existing gas lift system on the TWN Licences to lift oil and gas from reserves in the Tikorangi formation. The trial will also determine the economics of stripping natural gas liquids ("NGLs") from the liquids-rich gas. Any NGLs that are recovered during the trial will be the property of NZEC and can be sold at market prices. NZEC will sell any additional gas produced through this process to Contact at an estimated price of NZ$4.75/mcf.

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