New Plymouth-based Diligenz director, Steve O'Connor, says a more systematic approach to risk and reward should be a prerequisite for all companies engaged in the high-risk business of upstream investment in New Zealand.

"Despite the secret hopes of some managers, 'cherry picking' to reduce risk is a flawed methodology and, if just having clever people held the key, there would presumably be some highly paid prospect generating superstars about, though I have yet to meet one.

"Cherry picking assumes you can beat the odds consistently, but the statistics speak for themselves; you have to work with the statistics, not against them. Creative accounting does not help increase the petroleum reserve base of a country, though it may help one particular company," says O'Connor.

"Mature companies and management allow for dry holes, they are not seen as failures. Rather they are part of the exploration game and supply much needed data on particular prospects. Intelligent diversification increases the overall chance of exploration successes, even if high-risk prospects are included.

With this country's largest single energy resource, the offshore Maui field, now expected to falter from mid-2007, instead of the contracted end of 2009, New Zealand desperately needed more exploration activity, particularly offshore.

"Something has to change. Present drilling activity is not sufficient to provide for reserves replacement."

Big new reserves needed to be found, not extra reserves being "found" through reclassifying former probable and possible reserves as proven and probable through appraisal drilling; nor would increasing production through in-fill drilling help.

O'Connor says he recently showed a senior Australian exploration manager a graph of the offshore Taranaki Basin historical reserves additions and that explorationist was convinced he was looking at the profile of a classic mature producing province. There were incremental increases with a blip at the end, which represented the soon-to-be developed Pohokura field. However, Taranaki is lightly explored compared with such places as the Gulf of Mexico.

New Zealand desperately needs to make several more Pohokura-sized discoveries, which contained 1tcf-plus of gas, every few years to ensure it can meet power demands from energy-hungry industries and individuals, as well as keeping this country's biggest single gas user, Methanex, operating its methanol plants into the next decade.

O'Connor applauded the current level of onshore exploration activity, particularly in Taranaki. But there was not one example of a producing stratigraphic trap in New Zealand waters and it was that type of structure which was more likely to yield the necessary big discoveries than any other, said the former Fletcher Challenge Energy exploration manager.

"Many of the world's largest stratigraphic traps have been found while explorers were drilling for more conventional targets."

There had only been 11 true wildcat wells drilled in the offshore Taranaki Basin in the years from 1990-2000 and only a single discovery, the Pohokura gas-condensate field. So the level of offshore drilling needed to increase dramatically to ensure another major commercial discovery was made during the next 10 years.

It was also unfortunate Shell had swallowed FCE, as Shell NZ was likely to focus on Pohokura as its "cash cow" and not be involved in much else. Neither the offshore Haast Basin nor Swift Energy's Rimu-Kauri fields had held sufficient interest for Shell, which had also already expressed its desire to get out of the marginal Maari oil discovery south of Maui.

"We are not diversified enough. We need the presence of another major and more aggressive independents like Swift."

Company geological estimates of risk and reward were often overly optimistic and did not acknowledge that the range of potential outcomes could be much wider than those presented. Independent peer reviews presented the opportunity to minimise any organisational bias and hidden agendas.

He said working interests were probably not optimal for many companies active in New Zealand. Whether this was by necessity (the inability to farm down or access the right equity) or by choice (trying to keep high interests in the best prospects) was unclear.