Government hypes gas crisis ahead of restarting drilling

Analysis: Energy Minister Simeon Brown took the rare move of making a ministerial statement in Parliament on Wednesday, warning New Zealand could struggle to keep the lights on due to an unexpected shortage of gas supply in the latest regular update from the Gas Industry Company.

While the projections in the company’s report may have been a surprise to Brown and Resources Minister Shane Jones, a tightening of gas supply has been well-forecast for several years and widely expected by the industry. Indeed, the report itself specifies supply is within “expected volumes this year”, albeit at the bottom of that range.

Gas production levels have been falling consistently since 2014, according to the Ministry of Business, Innovation and Employment – for nearly a decade. Managing the transition away from gas, which releases the greenhouse gas carbon dioxide when burnt and contributes to the five million annual deaths from fossil fuel-related air pollution, was the focus of the previous government’s Gas Transition Plan.

Brown said Thursday that some elements of that transition plan were being continued but refused to say which.

Presenting a situation of declining gas supply that has long been expected and is well-understood as a sudden crisis is an attempt to make the case for the Government’s pivot back towards fossil fuels for industrial uses and electricity production in New Zealand. The centrepiece of this pivot is the reversal of the ban on new offshore oil and gas exploration, which Jones has hinted could be accompanied by legislative changes to remove requirements around cleaning up discontinued wells or even government underwriting of major capital investments.

Both Brown and Jones have therefore taken aim at the oil and gas ban as the cause of the current problems. However, there’s no direct connection between declining gas production from existing wells and the exploration ban which came into effect less than six years ago.

That’s for several reasons.

First, even if oil or gas had been found in an exploration block since 2018, it would still be years away from production. Five offshore oil and gas fields have been developed in New Zealand, with an average time of over 16 years from the exploration permit being issued to first production. The shortest was a decade.

In other words, no oil or gas from a new field would make it onto market until 2028 at the absolute earliest.

Second, the decline in gas supply started well before the oil and gas ban came into effect. Production peaked in 2001, fell sharply in the 2000s and experienced only a brief recovery in the 2010s. It has been falling consistently since 2014, four years before the ban was implemented.

Third, exploration is not the barrier to the development of new offshore fields. There are already known reserves that companies can exploit now in up to five fields that have been exempted from the ban covering more than 5400 square kilometres of ocean off the coast of Taranaki and the Waikato.

Two of these fields are known to have oil and gas, including OMV’s Toutouwai field west of Taranaki and Todd Energy’s Karewa field near Raglan. Todd applied for a permit to produce gas from Karewa in July last year, suggesting new supply could come online later this decade.

The largest barrier to the production of new gas is certainty of demand. Gas consumption, like supply, has been falling since 2014 and is now a quarter below the supposed baseline of 200 petajoules a year.

New Zealand has limited gas storage (although more is coming online). This means supply and demand need to be closely matched, as any gas produced above demand will go unused.

It is uneconomic for companies to produce gas if they’re unsure anyone will want to buy and burn it. Decarbonisation of industrial and public sector users has reduced some demand for gas. This process may slow now that the Government has eliminated subsidies for switching from gas and coal to electricity and green fuels.

The anchor of gas demand in New Zealand, however, is Methanex. The major methanol producer used about a third of New Zealand’s gas in 2023. It can reduce its usage to free up supply for electricity producers for a steep price, helping it serve as a form of demand-side “storage” in the sector.

The consistency of Methanex’s large demand underpins offshore gas development, according to a paper commissioned from Concept Consulting by the business ministry as part of the Gas Transition Plan. And the facility itself is partially subsidised by taxpayers, receiving free carbon credits worth an estimated $50 million in 2022 alone.

If Methanex were to close, the gas transition paper found, remaining demand for gas could easily be met by onshore development, which is far less costly than producing from offshore fields.

“Existing onshore fields have more than enough gas reserves and resources to meet non-petrochemical demand for the duration of the transition away from fossil gas,” the report said.

A smaller gas sector, involving only onshore production, would be far easier to manage on a transition away from fossil fuels. This is the general direction of the sector as it stands, but the Government is seeking to reverse this process.

While it may be more difficult to guarantee demand for gas, the Government is looking at two ways to sweeten the pot for potential investors. The first is to repeal rules implemented by the previous government about decommissioning old wells.

In 2019, the operator of the Tui oil field went into liquidation. That left the government footing a $443 million bill to cap the Tui wells and perform other work to safely close down the field. In response, new legislation was passed to require oil and gas developers to put aside collateral to cover the costs of decommissioning before they begin new drilling.

Brown said this had also affected the confidence of investors and could be repealed. He declined on Thursday to say whether such a move could leave taxpayers footing another bill for hundreds of millions of dollars, instead walking away from reporters.

The other change, raised by Jones, would be to give developers a guarantee that the Government would cover its costs if projects turn out to be uneconomic. While initially raised as a scheme that would only pay out if a future government re-banned oil and gas development, the policy is still being shaped and could be turned into a more general underwrite for offshore fossil fuel extraction.

Such schemes raise the risk of stranded assets worth hundreds of millions of dollars, if development goes ahead but the country continues to decarbonise. The alternative scenario is even worse, however.

The development of new fields could stymie the transition away from fossil fuels. Offshore fields produce fossil fuels for decades and a new one beginning sometime in the late 2030s (after time needed to secure exploration permits, make a discovery, secure mining permits and build production infrastructure) could lock New Zealand into gas dependency well into the second half of the century.

This would not only see higher pollution than otherwise, but also higher costs for consumers and energy users. Fossil fuels are far more expensive than renewables and new ways to store electricity like batteries are falling rapidly in price as well. The Concept Consulting paper found transitioning away from all pipeline gas by 2050 would “deliver least-cost outcomes for New Zealand”.

The climate implications are critical here as well. A series of robust analyses from authoritative international bodies has found new oil and gas developments are not consistent with the global goal of limiting warming to 1.5C above preindustrial levels – a target also enshrined in the Zero Carbon Act.

Since 2021, the International Energy Agency has found that no new oil and gas fields are needed to meet its net zero pathway. “The unwavering policy focus on climate change in the net zero pathway results in a sharp decline in fossil fuel demand, meaning that the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets,” it wrote in a landmark report on net zero that year.

The International Institute for Sustainable Development likewise concluded in 2022 that new oil and gas is “incompatible” with 1.5C. “According to a large consensus across multiple modelled climate and energy pathways, developing any new oil and gas fields is incompatible with limiting warming to 1.5C,” the 2022 report found.

Finally, just last year, the influential Intergovernmental Panel on Climate Change found even keeping warming to 2C required keeping half of known gas reserves and a third of known oil reserves in the ground. “Significantly more reserves are expected to remain unburned if warming is limited to 1.5C,” the panel said.

This implicitly means searching for new reserves is not consistent with either 1.5C or 2C.

Brown said the only alternative to relying on gas to keep the lights on was burning coal, after Genesis announced it was seeking to import more coal for its Huntly Power Station.

Experts say this is a false dichotomy. Nick Henry is the climate justice lead at Oxford Aotearoa and the author of the 2023 Closing Time report on the transition away from fossil fuels.

“The truth is that New Zealand, like all economies, needs to be making the transition to renewable energy as fast as possible. There’s still so much capacity for replacing baseload [fossil] electricity generation with fully renewable sources. When you’re at the last 5 or 10 percent, you do have issues with secure supply and that’s when you get into the need for increased storage,” he said.

“We understand that will take some time to build and so there is a need to manage the supply of gas to make sure that it’s available for the essential functions of peak demand. The problem of gas supply is because it’s not managed and if it’s not available for the electricity companies that are, like Genesis, switching to coal, that’s largely because it is tied up in contracts for methanol production and other non-essential uses including baseload electricity generation.”

Work on renewable electricity storage has been halted by Brown, however, as one of his first acts as energy minister. Instead, he has repeatedly pointed to gas as the tool for both peaking and getting New Zealand through once-a-decade dry years, when hydro lake levels run low and extra generation is needed over winter.

Given the lack of gas storage in New Zealand, such an approach implies continued gas production indefinitely. That is difficult to sustain at low levels, beyond the context of a managed decline to zero production, which again means the country could be locked into long-term dependency on a significant amount of gas if it eschews searching for zero-carbon power storage mechanisms.

Such an outcome would be a lifeline to a fossil fuel sector that otherwise has very little going for it. Coal is obviously out of fashion. Its use at Huntly, while unfortunate, is decidedly temporary. By 2037, almost all industrial coal users will be required to transition to other energy sources.

The obvious, most economic, choice is renewable electricity. The price of solar in the Asia-Pacific region fell 23 percent last year alone and utility-scale solar is the region’s cheapest source of energy.

But the complex interdependencies of the gas market in New Zealand mean particular policy and investment decisions could keep us hooked on expensive, dangerous fossil fuels for far longer, while the rest of the world moves decisively towards a renewable future.

Arguing that the steady and expected decline in gas supply and demand is in fact a sudden and violent cratering in the market helps lay the groundwork for those policy and investment decisions.