Cost benchmarks for Kupe are the highest - at over $US11 per P50 barrel of oil equivalent - of any similar New Zealand field development, McDouall Stuart says in a report on Kupe partner New Zealand Oil & Gas.
In September, operator Origin Energy advised the joint venture of a projected 10% capital expenditure increase, to about $NZ1.1 billion ($A963 million).
"With at least a year left to run on construction, further increases to Kupe's development cost are a distinct possibility," McDouall Stuart says.
"However, there is also scope for some clawback, as we understand that Kupe's US dollar costs (a significant portion of which will be incurred over the next 6-12 months) have been provided for at a conservative exchange rate."
In addition, rising energy prices were making the project increasingly profitable.
Almost two-thirds of revenue will come from condensate and liquefied petroleum gas sales and McDouall Stuart estimates that Kupe will remain profitable at any oil price of more than US$30 per barrel.
All of the gas has been contracted to project partner Genesis Energy. While the price is confidential, long-term gas sales agreements negotiated at the time the Kupe gas deals were done fell in the $6.00-$6.50/GJ range.
McDouall Stuart also says that with the price of West Texas Intermediate (WTI) crude now more than 30% higher than at the time of project sanction in June 2006, "our modelling indicates that Kupe's economics are probably stronger today than they would have presented at FID".
Under the base case, McDouall Stuart estimates nominal payback for the project to occur in about the fourth year of commercial production. Kupe is due to come onstream in mid-2009.
Despite the surge in costs, Kupe's critical path remains largely on track with offshore work progressing particularly well, McDouall Stuart says. The greatest potential for forward time and cost slippage lies with Kupe's onshore infrastructure, particularly pipework and prefabrication.
"While much of the production station is to be prefabricated offsite, thereby reducing the requirement for onsite resource, the JV is experiencing strong cost and timing pressure," the report says.
"Delivery or construction delays will further impact time and cost realisations."
Potential upsides for the project include possible increased reserves from the central field area (CFA) or elsewhere in the Kupe mining licence.
Present P50 reserves are based on estimates of recoverable hydrocarbons within the CFA, which is broken by faults into three blocks. CFA reserves stand at 253.5 petajoules of gas, 14.7 million barrels of condensate, and 1.06 million tonnes of LPG.
"As the northern block is as yet undrilled, any reserves estimated to be held in this area are relegated to possibles (less than P50).
"However, one of Kupe's three development wells will target this northwest block, which, if commercial, could add 100-150PJ of gas," McDouall Stuart says, assuming the same oil-water contact as in the southern blocks.
In addition, there are three identified structures - Momoho, Denby and Leith - immediately south of the CFA.
Following the completion of development drilling in mid-2008, the Kupe venture plans to drill two wells into the Momoho prospect, which is bounded by the Kupe South-4 gas discovery well to the north and the Kupe South-5 oil discovery well to the south. Momoho has the potential to contain 100-150PJ of gas, although it could also hold oil. No reserves have yet been assigned to Momoho.
Wells at Denby and Leith could follow later.
"These three structures could be tied into the Kupe development, although producing oil may require some modifications," McDouall Stuart says.
The Kupe partners are operator Origin (50%), Genesis (31%), NZOG (15%), and Mitsui E&P NZ (4%).
