Warning bells rung loud and clear over oil/gas exploration ban adding pressure to an already stressed energy sector. Govt gives OMV more time to drill in Great South Basin

The Government has granted OMV a two-year extension on the conditions of its permit to explore in the Great South Basin.

The Austrian company, which will become the country’s largest upstream operator and gas producer once its purchase of Shell’s New Zealand assets is settled (likely by the end of the year), now has until mid-2021 to drill its first well off the south coast of Dunedin.

However OMV New Zealand’s head of commercial and legal, Patrick Teagle, warns the New Zealand energy sector is at a “watershed moment”. 

Presenting the company’s submission on the Crown Minerals (Petroleum) Amendment Bill at an Environment select committee on Tuesday, Teagle stressed that banning new offshore oil and gas exploration would exacerbate existing concerns over the future of New Zealand’s energy supply.

He clarified that as things stand, we only have enough gas to see us through the next 10 years at best, or seven years according to a model using a 90% level of certainty.  

“Demand will outstrip supply soon and so we are heading towards a gas supply gap in New Zealand,” Teagle said.

No commercial discovery, no further investment

OMV in its written submission went on to explain: “The reality is that, absent a discovery or the ability to explore new permit areas, it will be extremely challenging to continue further offshore exploration drilling after 2020.

“OMV currently operates over one third of the total offshore exploration area of roughly 100,00km2. If the planned exploration drilling campaign over 2019/20 in offshore Taranaki and GSB [Great South Basin] results in no commercial discovery, it is almost certain that no further investment will be made.

“Further, given that the Minister has made it clear that the Bill is a precursor to wider reviews of the Crown Minerals Act 1991, OMV sees little scope to rely on the Government’s current position to justify additional investment.”

Keeping in mind the fact OMV entered into its US$578 million sale and purchase agreement with Shell less than a month before the Government on April 12 announced its exploration ban, Teagle told the committee of the globally competitive environment for funding OMV NZ was in.  

He went on to say: “With the withdrawal of Shell in New Zealand and us [OMV] taking up the end of life assets – Maui and Pohokura – the current climate will actually be discouraging to other investors coming in.

“So we are at a watershed moment in terms of taking forward this industry and ensuring we have a security of supply of energy in this country.”

Stressed energy system posing 'immediate risk' to economy

Woodward Partners energy sector analyst, John Kidd, is using equally as strong language as OMV to describe the state of the energy sector.  

In a report sent to clients on Tuesday, he detailed how the energy sector as a whole (not just oil and gas) was “creaking and groaning,” posing an “immediate risk” to the economy.

Kidd noted two unrelated outages over the past six months had halved the output of Pohokura, New Zealand’s largest gas field.

He said Methanol producer and major gas user, Methanex, is “doing the heavy lifting in providing the demand-side response to meet supply shortfall”.

As for crude oil, Kidd noted geopolitical tensions hiking prices; the weak New Zealand dollar only adding to the cost of importing oil.

He pointed to “solid international refining margins” and higher fuel taxes increasing the price of refined oil products, or petrol at the pump.

Turning to coal, Kidd said global markets remain strong, causing “high import-parity pricing”.

As for electricity, Kidd said: “Hydro storage has fallen from 128% at the start of winter to sit currently at 74%.

“Storage at each of the major lake and river systems is materially below average for this time of year. Firm demand on a cold close to the winter season in August and September saw operating margins remain taut.

“Restrictions on fuel and asset availability are constraining operating and dispatch decisions.

“The pending restart of Tiwai Point’s fourth potline, which is now underway, will make for further demand pressure.”

Market intervention not the way to go

Kidd concluded: “While most of the recent attention has focused on consumer response to surging petrol pump prices, the reality is that the pain stretches far deeper and involves nearly every fuel type consumed domestically."

He said the environment provided a “timely reminder that taking affirmative policy action to change behaviour is not costless".

“The physical shortages and cost pressures the sector is currently experiencing in our view serve as a helpful prompt to remind stakeholders across the economy that market interventions by governments to screw the scrum to incentivise “good” and/or disincentivise “bad” sources of energy risks can attract a significant economic and financial cost.”

By way of background, here are a couple of graphs showing the make up of New Zealand's energy supply.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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48 Comments

Fact: if you have lots of hydro, wind and solar electricity generation, you need lots of open cycle gas turbines available.

If you double the population by 2050 you will double the energy demand; you will have to get that horrible coal out of the hole, especially if you pass on the gas(exploration).

Hydro should be sufficient, particularly if turbine capacity is increased on large southern lakes to provide day to day capacity to deal with solar and wind generation fluctuations. We need about 5000Hectares (10GW) of PV installed over next 20 years to increase average generation by about 3GW and provide enough extra capacity for switch to electric cars.

Tell us why NZ should be installing large scale PV?

Non-polluting energy generation not dependant on inputs priced internationally.

Tell us why we shouldn't?

It would be pretty stupid to opt for the most relatively costly generation form, is why.

We don't subsidise renewables in NZ for a reason.

And what energy generation costs are priced internationally in NZ?
The only places would be Marsden and Whirinaki diesel generators. Also Huntly, I guess, if using imported coal. But generation by imported fuel is extremely minimal in NZ - As far as I'm aware we don't pay international prices for wind, geothermal heat, opportunity cost of water, or natural gas.

You think the price of the natural gas and coal burnt at Huntly is not based on international prices for natural gas and coal?

Cost of PV is falling constantly, cost of thermal generation is rising constantly. Geothermal is good, but how much more feasible geothermal is there?

As for solar being the most expensive.. these analysts seem to think its really not: https://www.lazard.com/perspective/levelized-cost-of-energy-2017/

Given that we don't import or export any CH4 (other than in the form of Methanol), our prices are pretty much domestically determined.
We do pay an pseudo-internationally determined price of CO2 emissions, though.

The amount of coal that Huntly uses is minimal. It is only a backstop for peaking during times of constrained CH4 supply.

Sure the cost of PV is falling but that's not the point. Until it is cheaper than alternative zero marginal cost generation, it shouldn't be used.

"Feasible" needs more elaboration - essentially it is the cost of CCGT production that has determined feasibility recently on economic grounds.
There's probably about another 250MW of planned geothermal in the works, currently.

I'll tell you what is pretty stupid.

It's pretty stupid to count long-term sustainable resilience in terms of 'cost'.

Whether we subsidise renewables or time-progressively tax non-renewables, or legislate against inter-generational fraud and just outlaw the non-renewables, the target has to be effecting the change before we can't.
Just outlawing them is the clearest message, the least convolutable in driving outcomes.

No 'market indicator' ever drove that kind of change in adequate time. A seat on the lifeboat is cheap until the ship founders - at which point it appears a good investment. As long as 'foundering' is labelled an 'externality', choosing seating by cost is a nonsense.

Sorry. True.
I forgot that everything is much better in fairyland where the currency is kale and mushrooms.

"A seat on the lifeboat is cheap until the ship founders - at which point it appears a good investment."
Bad analogy.
The cost of the seat on the lifeboat is set at the risk of it's necessity. Essentially it is set at all times based on the risk of death, so at any point you can argue it appears a good investment.

You never look better using denigration - particularly if mis-directed.

How does your 'wait for the price to represent personal danger' approach help a Captain responsible for passenger safety?

I'd suggest that the Captain should be ordering the deck-planking ripped up and turned into lifeboats/seats. There is no demand because your kind of talk has confused the discussion, and I suspect you are continuing it in fear yourself - chosen denial in other words.

As I said, market-signals are too late - it takes time to do the physical work and some moves just have to be made.

Interesting.
You mean the same captain who piloted the ship into the avoidable ice-berg?

Great. I'll say it again...Excellent analogy.

We all make mistakes - every one of us.

Doesn't make the correct leadership action any less correct, post-collision. You - and you do it with me - are hiding behind the 'blame the messenger/persona'.

I'm pointing out that a physical action can be seen to be needed, ahead of time. I'm pointing out that 'market signals' cannot possibly be that anticipatory. In the case of renewables, we need to have effected the change before our access to the non-renewables resource becomes jeopardized.

Okay. So let me get this straight.

To paraphrase you, you believe it's best that a decision is made (a captain's call) to outlaw renewable energy as the best response to the current issue we face.

Your analogy is saying lifeboats become more expensive when the boat is sinking as a result of the captain's actions. However, that's okay so long as he makes the right decision after the decision that causes the crisis in the first place.
Would the Captain of the Costa Concordia not faced criminal prosecution had he not abandoned ship before the last passenger, despite his absolutely reckless and inappropriate decisions?

Sorry if I'm the only person who is somewhat perplexed but your rhetoric and chosen analogy.

Solar PV is only useful as a (private) partial backup system when we have grid problems.

Solar PV is not a renewable. Its doesn't regrow itself.
It isnt non polluting - its made by burning fossil fuels.
Its resilence & usefulness (longer term) is totally dependent on BAU supply chains for backup parts like anything ... And those supply chains are totally dependent on DEBT backed by burning fossil fuels.

Any EV type utopia assumes BAU is ticking along nicely. Otherwise why would there be a need to go anywhere? If fossil fuels arent readily available, viable & being burnt then there are no Jobs because Debt has collapsed

Holy cow Batman, that’s just bananas.

You know that “renewable” means the source of the energy is unlimited right? ie. not like digging up fossil fuels and burning them.

Did our hydro dams spring fully formed from the earth? No they are made out of concrete and turbines and stuff but their energy source is essentially unlimited.

All energy is unlimited, after all it can not be created or destroyed. Only converted in form.

But if all our current "Renewable" energy is based on fossil fuels. i.e. the Dam, the PV panels, the wind turbine...

How do you repair, replace, rebuild it?

these methods of electricity generation have a limited life (PV) and either require replacing and/or (constant) maintenance ... especially if you are looking at national grids ...
This is all possible courtesy of fossil fuels.

I am not particularly interested in renewable for renewables sake (though is in general sense better to save fossil fuels for things that absolutely require it like aviation and plastics). However PV is now cheap enough to be economic without subsidy at large scale - so long as we utilise NZ hydro in a complementary manner. Cost of PV electricity in Kansas (with similar sun to sunniest parts of NZ) is about USD$.06/kWh at utility scale. That's pretty similar to NZ wholesale electricity (~NZD$0.08/kWh), and learning curves should bring the price down a little more yet to make possibly the cheapest option:
https://atb.nrel.gov/electricity/2018/index.html?t=su

Pretty unarguable that NZ needs a lot more generation capacity soon, so PV seems like a good solution that won't require large ongoing international purchases that impact our balance of trade. Might even make sense to manufacture PV here.

?
PV is (effectively) zero marginal cost - that's what it would be priced at in the system, so no point quoting a psuedo kWh cost of generation.

The issue with PV is that it has large capital costs and doesn't really work at times when there is high demand.
Azimuth isn't necessarily easily optimised for 7:30am and 7:30pm and neither is solar generating potential - the time that we need high baseload input.
The argument may be batteries. But, again, I doubt these are anywhere near feasible when compared to our current alternatives.

I don't disagree that NZ needs significantly more generation capacity in the future, but I do disagree that given our current assets and the current technology that PV is what we need to be focusing on.

Batteries .... see Teslas South australia miracle ... 3 hours power for only US$50 million
https://qz.com/1165314/elon-musks-giant-tesla-battery-in-australia-prove...

.."Tesla battery is, it’s still pretty measly in the grand scheme of things. It can power about 30,000 homes, but 70 MW of the 100 MW/129 MWh system can only last 10 minutes; the other 30 MW can provide three hours of power. ..."the lithium ion battery farm is a great backup—maybe the world’s best, given its speed—but still needs to be bailed out by fossil fuels, eventuallÿ

What is the plan, Ms Ardern? Can the government please produce a detailed forecast of energy needs over the next half century and its proposals to meet that need with a margin for contingency. It does rather silly to cut a leg off before you've designed an artificial one with which to replace it.

Already done old chap - not from Ardern but Transpower no less. A more reliable source than paid consultants....
https://www.transpower.co.nz/resources/te-mauri-hiko-energy-futures
Forecast on about page 6.

Arguably you could blame government more if good 'ol Max Bradford hadn't "reformed" the electricity sector in 1998 and eliminated the state-owned grid manager Electricorp, and if our mate John hadn't sold off a few more shares to the detriment of Mom & Pop consumers in 2011.

So translation - gas supplies & infrastructure have been unreliable, fossil fuels are hitting peak prices as demand outstrips new finds, and hydro electricity is experiencing low winter flows as it does every 3-5 years.

I would find this report more useful if:
a) It didn't state the obvious; and
b) It wasn't written by a guy who used to work for Shell and has an agenda.

BTW - Genesis has been using Indonesian coal at Huntly for years. Why is this news now?
"Solid Energy closed this last Huntly mine on 22 October 2015 saying it was losing $500,000 a month...." https://en.wikipedia.org/wiki/Huntly,_New_Zealand

Interesting timing with the recent Vector solar / battery / Harbour Bridge article in the Herald too - the key source being Bryan Leyland - well known fossil fuels shill & climate change doubter.

Looks like the old boys are on the offensive.....

Huntly is unable to use domestic coal as it has too higher sulphor content so imports indonesian coal instead, its landed at Mt Maunganui. At one point nz coal was being exported via the same facility.

Well, when the lights go out we know to blame the current mob. Hope we have a dry, hot, still & cloudy summer. That will focus the minds, what is more important, having the lights go on or virtue signalling?

Lol - seriously? There's this new thing called the internet and on there you can find facts & stuff about electricity generation. Coal & oil makes up <5% of electricity generation so clearly nothing to do with Ardern and a whole lot more to do with dry years and climate.

Your desire to inflict hardship on your fellow Kiwis this summer says a lot about your nasty political beliefs.

Coal and oil might.. but natural gas is decent chunk. currently 20% of generation in NZ is coming from burning fossil fuel. https://www.transpower.co.nz/power-system-live-data

Glad I am not a FLICK customer.
https://www.stuff.co.nz/business/industries/107899242/power-retailer-fli...

As to nasty political beliefs I have not shown intent to shut down a very productive industry and sabotage our energy supply.

Fossil fuels are still required no matter what you think.

I saw someone post a screenshot of their Flick mobile phone app from Monday morning 7:30 am.

$10.16 per kwh.

Looking at the Transpower website it appears the South Island has ~4000MW of generation capacity and only uses ~2100MW of demand. Perhaps it’s time for the Heartland Republic to rise up, cut the Cook Strait cable and let our North Island friends fend for themselves! We can be toasty warm and all drive Tesla’s in our mountainous utopia!

The rule of thumb is that if we dropped Tiwai, we could run an electric domestic car-fleet now, no change.

Tim might moan a bit but the mixer was electric, no reason why the mayoral car cant't be too.

I had a chance to have a conversation with experts during a meeting in Electric Power Optimization Centre (EPOC) in AKL Uni.

I asked for their thoughts on Nuclear Plants. Unanimously, they all agreed that NZ should have it. And the plants may be built on Chatham Island.

Nuclear in the Chathams? - so only a little bit of transmission loss then?

Nuclear fission in its current form is a fool's errand inviting cost overruns, requiring subsidies, with ever present risk of disaster and huge negative externalities around waste disposal that are *always* picked up by the taxpayer.

Here's a report on HPC in the UK from a *friendly* nuclear source - http://www.world-nuclear-news.org/NN-Cost-of-Hinkley-Point-C-rises-by-8-...

Gas peakers and solar are already waaaaay cheaper as shown by Lazard - https://www.lazard.com/perspective/levelized-cost-of-energy-2017/

We already have a free fusion reactor in the sky - let's use that.

For 'experts' read: vested interests.

The old NZED was like that - they would go 2%, 2%,2%,2%, throw up their hands and go 'nuclear'.

Their problem was exponential growth within a finite sphere of operation.

I believe the power of the sea could be harnessed down in the fjords of the South Island, water in, water out, utilising huge daily tide flows. Even the Sounds or straights.

Dam the whole damn thing, Damn the consequences to the Sea and Bird Life.

(Not that I would not care, just a lot of care could be taken...then use it as a Wild Life Sanctuary..in mitigation).

Damn thing could be built using Concrete from Westport and Iron Sands from West Coast too......plus utilise recycled iron like obsolete Shipping and Shipping Containers...

Multiple Turbines, multiple Dams even.......Could make South Island Workers work for many a year.

Though that whole area could be turned into a tourist attraction as well to help pay for it in the long run.

Salmon Farms....a plenty...too

(Have you seen the price of Fresh Salmon...would pay for the whole Dam thing in the long run)

Humans have not really harnessed the sea....but one thing is certain..Tide is going out on Burning Crap to toast yer daily bread...and run yer car to the Petrol Station....

(No taxes on Petrol eventually...all electric)...Yay.

Oh and we could have free electricity for the foreseeable futures...and get rid of those Scheming Skimming Electrical Companies. given away by the Key........to his mates................finally.

The end.

Bringing y'all gently back to the point of the article, OMV's submission is also a declaration of intent to disinvest. Existing assets will be run down, no new ones will occur, and prices will rise (the classic MBA exit strategy). Exploration, to the extent that it is allowed to happen, is always a 10% scenario: 9 dry holes for the one productive one.

So consider where that leaves existing gas customers. Gas generation, the gas pipeline to Awkland, etc.

That's what OMV is telling the Gubmint: that captains' calls are not costless. And that there is a low probability of private investment to build whatever has to come next, given the likelihood of Yet Mo' Captains' Calls from this crew.

In short - Gubmint - you tilted the table, now it's up to you to work it all out....before the gas customers all go dry.

You are correct Waymad. Solution will be imported Natural gas and LPG. Most likely from our neighbors across the ditch. LNG import facility will be billions in capital - borne by consumers. LPG (Propane) is less costly from a capital perspective and can be transported in VLGC’s. So my guess is LPG not natural gas in the future for residential. Power gen will need to be something else.

Indeed. A VLGC into a West Coast port like New Plymouth - hmmm - high risk. The Port Authority there had dredged the channel in anticipation of Pike River barged coal destined for large carriers - PRCC changed their mind and went the slurry/dewater/truck/rail option via Lyttelton. Oops... So I don't see any VLGC's in Port Taranaki's future.

Perhaps AC had better reserve some shorefront for that there Terminal and the tank farm it will need.

Solid Energy had seam gas plants up and running out of the coalfields around huntly years ago, some of it was used to run the turbs in the powerstation. I think there is no shortage of gas just shortage of will and capital to get it online. Bloody market economics, always thinking of the shareholder first...

Gas isn't even worth it as a transition - you'd just get set up and you'd have to re-build all your infrastructure. First World clutching at straws.

What amazes me is how we don't get how late we are. It took 200 years to build the ff infrastructure incrementally - nobody seems to understand the enormity of the task ahead.

Why do you say that? Based on the evidence of the enormous gas fields being tapped in certain parts of Russia, its former satellite states like Georgia and the Middle East where there are virtually unlimited reserves, there are numerous pipelines in existence with more being constructed, seems to me that gas will become the new mainstay here as well. I for one am completely anti fossil fuel and long for the day cold fusion once again is revealed to an amazed world...

Everyone is overlooking the very substantial gas used for feedstocks.

Refinery is a big gas user as a source of hydrogen as in hydro cracker to upgrade low quality fuels to our market demands of more diesel and Jet.

The urea plants use gas to make our essential nitrogenous fertilisers.

The methanol plants use huge quantities of gas.

Many smaller operators use gas for direct heating processes - not all of which lend themselves to an economic electrical heating process.

The reticulated gas market for home / commercial / industrial heating also requires significant quantities of natural gas.

With dry years / no wind / evenings dispatchable CCGT's and gas fired peakers will be required into the foreseeable future.

We also need to consider our current account implications for importing at much higher costs substitute gas.

Current oil and gas policy can not end well if continued.

These two articles portray it more as a heat source than a feedstock, looks like its used more if its cheaper than just burning oil.

https://www.nbr.co.nz/article/vector-doubles-quantity-gas-available-mars...
https://www.nzherald.co.nz/wairarapa-times-age/news/article.cfm?c_id=150...

Those loveable Arabians will look after us.

The same Saudis that gave us 9/11?

Changing all remaining incandescent lights to led would be the fastest way to balance up the power demands. Of course that reduces Electricity use , so the power companies won't like that . Bio mass from the waste products of the "wall of Wood " is the way to feed the existing thermal stations till they are phased out.