Minister for Resources Shane Jones has asked for advice on whether the Government should offer oil and gas investors an insurance policy that would pay out using public money if new exploration was banned again.
The Labour-led Government, that was in coalition with Jones' NZ First and had a confidence and supply agreement with the Greens, banned all new oil and gas exploration permits in 2018. While existing rights were upheld, the policy shift undermined confidence in the sector’s future.
National and its coalition partners want to lift that ban and encourage oil and gas companies back into New Zealand as part of a transition to a low-emission economy.
However, the opposition still backs the ban and elections are never more than three years away. Investors may not be willing to take the risk if restrictions could come back at any time.
A blog written by lawyers at Russell McVeagh said oil and gas exploration requires significant financial investment over a long period of time.
“Investors have low appetite for any actual or perceived jurisdictional instability of law or policy that could impact the ability to continue planning, investing in, developing, and operating oil and gas assets and prospects”.
Oil and gas companies may prefer to set up shop in South East Asia, Australia, or Africa, where the policy settings are less likely to move against them.
“Therefore, while a repeal of the ban is important, to attract new investment, it is equally critical for the new Government to give assurance to the sector that the Government's support for the sector is an enduring one that can withstand change of political winds”.
Jones confirmed to the NZ Herald this week that he was looking for that assurance.
A briefing to the incoming resource and energy ministers warned “policy uncertainty” would deter investment given the long lifetime of petroleum investments, especially offshore.
The NZ First MP has reportedly asked officials to look at issuing some sort of bond that would provide compensation to the industry if a future government limited exploration again.
While there aren’t any details about how this bond would be structured, it would likely function much like an insurance policy and would be backed up by public money.
Oil and gas permits already require the company to have financial securities—such as a bond, a deposit, or insurance—that would cover clean up costs if the company collapsed.
The NZ taxpayer was landed with the near half billion dollar cost of decommissioning the Tui oil and gas field in Taranaki after its permit holder went bust in 2019.
Jones appears to be exploring a similar scheme but flowing in the other direction, with the Government providing financial securities to permit holders to offset regulation risks.
Sovereign risk
A growing policy gap between the left and right political blocs in New Zealand has been causing some concern for overseas investors.
S&P Global Credit Ratings warned it thought the “institutional framework” for local government was weakening, in part because of the “sudden reversal” of water reforms.
New Zealand has had a “historically stable policy environment” but the recent change in government had created uncertainty around a key policy.
While NZ still has the best possible credit rating in this area, the credit analysts said it had been weakened by sudden policy shifts.
The issue of sovereign risk raised its head again last week, after the Government announced it would grant its ministers the power to issue resource consents.
Green Party MP and former leader James Shaw said investors should be aware that resource consents granted through that process may not be honored by future Ministers.
“There is a possibility that the next time that there is a change of government, those projects will be subject to proper scrutiny and that could lead to the loss of the consent, including the possibility of loss without compensation,” he said.
Chris Bishop, the Minister responsible for Resource Management Act Reform, said in a Parliamentary debate that Shaw should be careful “throwing around language around cancellation of consents without compensation”.
“I think all members in Parliament have an obligation to bear in mind sovereign risk to New Zealand and the way in which projects happen,” he said.
Interest.co.nz asked Bishop’s office for a comment on whether the ministerial approval process could increase sovereign risk for investors but did not receive a response.
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