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Gas production problems cost Methanex $2m a day

A long-running, barely noticed and unscheduled cut in natural gas production from the Pohokura natural gas field is costing its main customer, methanol producer Methanex, around $2 million a day in lost revenue, according to analysis from Wellington investment firm Woodward Partners. Total revenue foregone in the last 13 weeks could be as much as $15 million a week, the company says.

"The current situation at Pohokura is one that is materially under-appreciated for its significance," says Woodward's energy industry analyst John Kidd. He takes issue with government ministers' statements in defence of the decision to stop offering offshore oil and gas exploration licences.

"The simple current reality is that New Zealand's largest gas field, which normally meets 35-to-40 percent of gas market demand, has a suffered a major unscheduled part-outage, with no external visibility as to when a return to normal service can be expected."

That made the incident similar in scale to the gas pipeline break in 2011 that saw gas users throughout the upper North Island, including industrial consumers, electricity generators, businesses and households, on short rations while it was repaired.

"The 'crisis' as it rightly became labelled at that time became very heated in both public and political circles, with headlines of widespread milk-dumping by Fonterra ... and cancellation of elective surgeries in Auckland hospitals and even idle crematoriums grabbing headlines," Kidd says.

If it were not for the fact that the reduced output is being fully absorbed by one user - Methanex - such a significant loss of gas supply security "would in other circumstances attract heavy scrutiny", he says. Methanex plants on the northern Taranaki coast use around 40 percent of gas produced in New Zealand annually.

While Methanex had been undertaking maintenance during part of the unscheduled Pohokura outage, that was now finished, meaning its plant was now capable of producing at full capacity. The company was likely to be foregoing some $2 million a day in lost revenue, Kidd says.

"For each week that Pohokura remains constrained (noting it has been around 13 weeks), the foregone revenue impact to Methanex is $10m-$15m.

The government's decision to reduce the incentives to explore for and produce oil and gas in New Zealand makes a potentially unstable situation worse, Kidd says. "In our view, it will serve to increase the risk to security of forward gas supply and potentially accelerate any future decision by Methanex to withdraw from part or all of its New Zealand operations as a response to gas availability."

Elsewhere, Kidd rubbished a claim by Energy Minister Megan Woods that Methanex closing its New Zealand plant would not have a negative impact on the environment. There has been concern that if Methanex stopped production, China would increase methanol supply to fill the gap. Because Chinese producers use coal not natural gas, this could boost greenhouse gas emissions.

Woods claimed China's cap and trade system for pricing emissions would limit the ability of Chinese producers to ramp up methanol supply. But Kidd says that the system applies only to electricity production.

Chinese methanol production operates as the world's 'swing' supplier, he says, stepping in to shore up supply when demand rises.

Kidd's critique comes after a report on the Stuff website saying ministers were told by the Ministry of Business, Innovation and Employment that there had been growing interest among oil and gas explorers to take new acreage in New Zealand this year. This follows a period of low demand for exploration territory.

Kidd suggested in his analysis that MBIE officials were kept in the dark about the government's decision not to offer more offshore oil and gas exploration licences until about four days before the April 12 announcement, leading to a "burst of four pieces of advice on 10 April, each of which was clearly prepared under urgency", Kidd says.

"The string of advice the minister cites as having informed the decision was prepared on the basis of officials not having any awareness that the decision was even an option. The only piece of policy advice that did address the decision was extremely negative in both its analysis ... and its conclusions," says Kidd.

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