When permit economics just don’t stack up

In the current oil price environment with oil hovering around $US 30 / bbl, the name of the game is conservation and cash flow. It’s cash flow, after all, that supports our exploration and development drilling program. Historically, exploration acreage work programs were developed when oil was circa US $100 / bbl. Clearly with current cash flow reduced, TAG isn’t able – in good conscience – to undertake all of the work program obligations for some of the exploration licenses we held. Additionally, with the current low oil price environment, drilling economics just don’t always stack up. 

TAG Oil Taranaki Permits 2016

TAG Oil’s permit holdings, February 2016.

Given that this issue is across the sector, many companies are in a similar situation. So few (if any) companies are in a position to share the financial risk associated with frontier acreage, such as the East Coast and Canterbury basins, in a joint venture partnership. We are even seeing a similar response in the producing Taranaki Basin. Therefore, as noted in the company’s Q3 financials, we’ve had to make some tough decisions when it comes to the retention and relinquishment of existing exploration acreage. As a result, we have relinquished exploration acreage on the East Coast and Canterbury basins, and a few permits in Taranaki as well.

Once oil starts to move back up, we expect to obtain additional exploration acreage once again, with work programs that match expected revenue being generated from the business once more. 

But the name of the game at the moment is preserving the balance sheet: conserving cash and executing projects that reach the appropriate hurdle rates, such as the workover program that TAG executed in late 2015. We have been focusing on reducing our operating cost base where we can, while always remaining conscious that we need to meet the company’s Health, Safety and Environment (HSE) and Regulatory obligations as a prudent operator.