Jenée Tibshraeny questions why the Government decided to draw a line in the sand on climate change by threatening an already threatened form of energy - gas

By Jenée Tibshraeny

The Government’s decision to curb new oil and gas exploration is more of an aggravator than a game-changer when it comes to New Zealand’s security of gas supply.

While gas meets around 15% of New Zealand’s energy needs and plays a key role in managing peaking electricity demand, the gas market has for years been tight.

Documents prepared by the Ministry of Business, Innovation and Employment (MBIE) for Energy and Resources Minister Megan Woods explain that since a major write-down in reserves at the Maui field in 2002/3, it’s been thought New Zealand would only have enough gas to last 10 to 14 years.

While reserve levels have been buoyed by developments at existing producing fields, there hasn’t been a major new discovery since the Turangi field was found back in 2005.

This low hit rate has made it challenging for New Zealand to attract explorers. Internationally, for every four wells drilled, it is likely it will be commercially viable for one to be mined. In New Zealand, this rate is more like 10 to one.

While New Zealand has a favourable geopolitical environment, its isolated location and small domestic gas market make attracting explorers difficult.

Since the oil price fell in mid-2014, interest in New Zealand has also waned as explorers have focussed on cheaper markets elsewhere.

While there were 40 exploration wells drilled in 2013 and 2014, only four were drilled in 2015 and 2016.

Looking ahead, a major concern is that reserve levels at New Zealand’s largest producing gas field - Pohokura - are expected to be downgraded by 18% this year.

Equivalent to two thirds of New Zealand’s annual gas demand, the downgrade is estimated to see the country’s gas reserve levels dip below the 10-year mark.

So, Woods is correct in saying New Zealand’s gas supply was on track to being depleted this decade, regardless of her decision to ban new offshore exploration and phase out onshore exploration over three years.

The question however is why would she introduce a policy that only exacerbates an existing problem?

Sure, climate change is a bigger problem. But according to MBIE, an oil/gas exploration ban won’t actually reduce emissions (we will come to this later).

So where does this leave our security of gas supply; an issue MBIE says “remains critically important”?

Methanex in the middle

All eyes are currently on Methanex - a methanol producer that in 2017 used 41% of New Zealand’s gas supply.

Should gas demand tighten, Methanex will likely be the first major gas user to exit the market.

MBIE expects this to happen by 2026, further to Methanex by 2021 scaling back its operations.

John Kidd of Woodward Partners, a sharebroking, research and advisory firm, believes it will stay for at least another four or five years, as it has just committed to refurbishing some of its plants. From there, it will reassess its situation.  

While MBIE believes Methanex closing could provide a “buffer” to other gas users like Fonterra, Balance Agri-nutrients, the pulp and paper sector, Refining New Zealand and New Zealand Steel, Kidd says it’s too simplistic to assume an exit would make more gas available further into the future.

Due to the symbiotic relationship gas producers have with Methanex, if it closed, the supply of gas might be cut back accordingly.

Kidd says the leverage Methanex has in the gas market is triple that which Tiwai has in the electricity market.

Methanex contributed $834 million to New Zealand’s economy in 2017, which is equivalent to 0.3% of GDP. It employed 270 staff and 100 contractors.

It has declined interest.co.nz’s invitation to comment on its situation.

The cost of risk

“I don’t think we’re in a crisis,” Kidd assures.

“But we’re definitely in a tightening market.”

He says it’s essential companies already operating in New Zealand keep investing locally.  

He notes the outage at Pohokura emphasises the exposure New Zealand’s domestic gas sector has to asset-specific outages that affect major fields.

It also highlights the need for ongoing investment to ensure assets are maintained and new production is brought to market before it’s physically needed.

“Each of these become more difficult propositions under the Government’s policy shift on offshore exploration, which brings rise to heightened continuity risks to the supply-side,” Kidd says.

“Increased risk is typically priced by the market.”

Long term, this is likely to hike domestic energy prices as oil and gas companies cover higher capital costs.

Short term, supply disruptions also come at a cost.

“It is unsurprising to see spot gas prices surge over the past month as gas sellers have taken advantage of tighter supply conditions to sell into good demand volume,” Kidd says.

This MBIE graph shows how gas prices have fluctuated with supply:

An emissions delusion

Coming back to lowering carbon emissions - the supposed driver behind what the Government admits was a “political” decision to ban new offshore exploration - MBIE says this will have a "negligible impact" on reducing domestic greenhouse gas emissions and will "likely increase" global emissions.

It says the methanol produced in New Zealand by Methanex using gas, is likely to be replaced by methanol produced in China using coal.

The International Energy Agency expects the growth in coal-fired energy generation to be equivalent to four new 1,000 megawatt coal-fired Huntly power stations being built every three months for the next 23 years.

So should a major gas discovery be made, MBIE says New Zealand’s LNG exports could offset some of this higher coal usage.

And should a discovery be made that would allow reticulation to the South Island, gas could also replace the low grade coal typically used for large industrial processes in that part of the country.

Further highlighting gas’s role in the transition to a low emissions economy, MBIE says, “Transitioning to 100 per cent renewable electricity too quickly risks raising electricity prices to levels that could impact on fuel-switching, for example, by slowing the uptake of electric vehicles or high temperature electric heat plants that replace coal-fired boilers.”

MBIE points out New Zealand’s climate change efforts should be focused on reducing demand. After all, the vast bulk of energy-related emissions stem from the combustion of fossil fuels.

A cynical conclusion unavoidable

So where does all of this leave us?

Looking at a future where there’s a higher likelihood that coal rather than gas will be used in the transition to a low-carbon economy; a future with higher energy costs - at least in the near to mid-term.

We weren’t facing a particularly comforting future on the energy front before the Government’s oil/gas exploration ban was announced.

But the Government's political move, which ignores all the advice it was given, only adds to the uncertainty we were quietly contending with before.

While a court ruling or a change of government may see the ban reversed, investor confidence has already been rattled and we don’t have much time on our side.

Against the challenging backdrop New Zealand already faces in terms of attracting explorers, this decision may be the final nail in the coffin.

It will take a major find, some hefty investment, and a deal with Methanex for there to be gas available for anyone in New Zealand to use in 10 years’ time.

The hope of course is that by then the production of cleaner forms of energy will have ramped up to the point they’re economic to use at scale.

The MBIE documents released under the Official Information Act don’t provide detail on this.

Coupled with the fact Woods couldn’t provide any clear comment on this when I interviewed her in May, one can safely assume the Government doesn’t actually know what the capacity is for cleaner forms of energy to be scaled up.

Increased uptake of electric vehicles will see demand for oil drop. However I can’t see New Zealand’s overall demand for energy falling, unless we take the not-in-my-backyard approach and pawn off the energy-intensive production of the likes of methanol, steel and milk powder to other countries, only to then import the goods they produce.

It is clear that with the security of gas supply already vulnerable, the Government has taken the wrong approach to drawing a line in the sand on climate change.