"While the value benefits of holding an interest in a gushing oil field like Tui are very clear, the corollary of such a high performing, front-loaded asset is the challenge of reserve replacement," McDouall Stuart noted in its latest report on Wellington-based NZOG.
"The challenge for NZOG is now clearly to maintain and grow its earnings base (and) in an industry that places much emphasis on peer benchmarking, this means expanding its 2P (proven, possible) reserve base."
McDouall Stuart said that with the assumed production profiles for the offshore Taranaki Tui oil and Kupe gas-condensate fields, NZOG's remaining 2P reserves by the close of the June 2012 financial year would be about 8.3 million barrels of oil equivalent.
Therefore, NZOG would need to triple its projected 2012 financial year reserve position to meet its reserve target.
"Assuming a 15 percent equity stake, this would require the 2P booking of two new Tui-sized finds," the broker said.
In terms of production, McDouall Stuart's base case had NZOG at 1.4MMboe per annum by June 2012, implying that the producing base also needed to rise 40% to achieve the target.
"These are clearly very ambitious targets," the broker added.
NZOG chief executive David Salisbury last week said that NZOG's 2012 targets were to increase reserves from 14.1MMboe to at least 25MMboe and to increase production from the current 1.6MMbbl to at least 2MMbbl per year.
McDouall Stuart said further reserve upgrades to Tui and Kupe would be the easiest and cheapest means to achieving growth in the reserve base.
"In an industry dominated by long construction lead-times, the challenge for NZOG to achieve its stated 2012 goals is one that is becoming increasingly pressing," McDouall Stuart added.
The Tui field had produced 14.0MMbbl of oil by last Wednesday and McDouall Stuart expected full-year production to reach 14.4MMbbl by next Monday.
The broking firm also said the renegotiation of charter terms with Norwegian company Prosafe, regarding operating the Tui floating production storage and offtake (FPSO) vessel Umuroa to perhaps December 2022, saw several key features in the new contract: the existing five-year fixed term extended by 3.4 years to December 2015, securing of two further one-year options, a new, higher daily charter rate, and a revised decline profile.
The Australian Worldwide Exploration-led Tui joint venture also disclosed the value of the full charter totalled $US545 million (about $A575 million), or $US265 million ($A279 million) on a net present cost basis at a 10% discount rate).
McDouall Stuart said the decision to renegotiate charter terms so early was the likely result of the joint venture being eager to secure the Umuroa for longer and to have the option of using the vessel to bring satellite prospects into production.
At the latest 2P reserves position, of 50.1MMbbl, the implied per-unit nominal processing cost of the new arrangements equated to $US10.90 per barrel over the life of the contract, up from the estimated $US6/bbl shortly after first oil in July last year when projected 2P reserves were only about 23MMbbl over the first five years of production.
McDouall Stuart added that if technically feasible, work on increasing the Umuroa's liquid handling capacity, from 120,000 to 150,000 barrels per day, could be completed in time for the tie-in of the new Tui-4H production well, due to be drilled in early 2010.
Despite capital cost increases, the economics of the now $NZ1.1 billion ($A0.88 billion) Kupe project had improved significantly since the final investment decision of June 2006.
With the offshore segment presenting considerably higher project risk than the onshore component, its completion around nine months ahead of first flow was encouraging.
McDouall Stuart also said there was considerably more upside than downside risk to the detailed Kupe reserves reassessment, due to be completed before the end of this year.
Kupe's estimated 2P reserves are 254 petajoules of gas, 14.7 million barrels of condensate and 1.1 million tonnes of LPG.
The Tui partners are operator AWE (42.5%), Mitsui E&P NZ (35%), NZOG (12.5%) and Pan Pacific Petroleum (10%).
The Kupe partners are operator Origin Energy (50%), Genesis Energy (31%), NZOG (15%), and Mitsui E&P NZ (4%).
