Opinion: Rocketing energy prices confront NZ with dilemma

By Michael Daly of NZPA

Friday 14th March 2008

As world energy prices ride the escalator ever higher, fuelled in part by apparent insatiable demand, New Zealand has some big calls to make about the use of its resources.

For example, what to do with the vast quantities of lignite at the bottom of the South Island that Solid Energy thinks could be turned into liquid fuels.

Then there is the Government's 10-year moratorium on baseload thermal generation, its emissions trading scheme, and its target of having 90% of electricity generation from renewable sources by 2025.

Some industry players fear those policies, aimed at reducing carbon dioxide output, could lead to too little exploration for new gas resources.

It is also suggested the Government policy could limit the amount of exploration for oil in the huge offshore basins where so far the surface has barely been scratched.

The fat over those issues and many others affecting energy resources was well and truly chewed over at the industry's New Zealand Petroleum Conference in Auckland this week.

As an indication of what could be at stake, investor and champion of this country William Buechler, raised the possibility New Zealand could be following in the economic footsteps of Norway.

Were that to happen this country could emerge as a serious source of energy for the world and become a powerful economic force to be reckoned with, while the capital provided by major discoveries would change the country forever, he said.

Associate energy minister Harry Duynhoven seemed to fancy the idea, telling the conference that New Zealand "should set its sights on becoming an oil exporter to the world".

He also wanted to emphasise that while the Government would be focusing on renewables, particularly for electricity generation, fossil fuels and especially gas would continue to have an important role to play in New Zealand's energy mix.

The petroleum production sector was looking "particularly buoyant", he said and reminded the audience that companies were proposing to spend $1.2 billion exploring in the southern oceans off Southland in the next five years.

But Chris Hall, chairman of industry group the Petroleum Exploration and Production Association, raised concerns that Government policy was not providing the environment needed to bring new gas resources to market.

Assuming realistic assumptions were being made about annual demand, New Zealand had enough proven gas reserves to last about another 12 years, he said.

Scope for the recovery of further reserves, if brought into production, from existing fields would be enough to take this country through to about 2030.

But bringing that extra 10 years of supply on stream would take significant investment, with the policy environment a key factor in whether that went ahead, Hall said.

While oil production was increasing, it was coming from small fields that produced strongly for a short period, then dropped off quickly.

It was not safe to assume that companies would keep exploring for oil if there was no market for any gas they found.

New Zealand was known to be gas prospective, so any hydrocarbon discovery was likely to be of gas, or if it was oil, gas would be with it, he said.

So companies needed to know there would be a market for their gas.

On the Great South Basin, he said it would develop differently from the rest of the country.

Because of factors such as the distance from land, water depth and its hostile environment, any development in the Great South Basin would occur only if a substantial discovery was made.

Mr Hall also pointed out that the consortia exploring the area had so far committed to spending about $US100 million ($NZ124m), and would make decisions about future spending based on the success of the work being done now.

Another conference speaker George Hooper, executive director of the Centre for Advanced Engineering based at the University of Canterbury campus, was also worried about the effect of government policy on the search for more gas.

New Zealand was in danger of becoming a "one-trick pony" with the Maui field, not because of the fundamentals of the country's resource base, but because of poorly directed government action.

The more fundamental point was that this country's energy policy was based on domestic needs for energy, he said.

"We don't give cognisance to the benefits that might arise to us as a people and as an economy from perhaps trying to explore beyond just where we are, look at some of the non-conventional resources, think more broadly about energy."

New Zealand probably had a "huge energy endowment".

"So why aren't we exporting energy to the rest of the world?" Dr Hooper said.

"People are worried about $US110 (a barrel) ($NZ136) oil, and yet we've got one of the cheapest energy resources in the world sitting on our doorstep."

Conventional technology could be used to gasify Southland lignite to produce high quality diesel, for example, he said.

A price of around $US60 to $US65 a barrel was likely to make diesel produced from lignite that achieved required rates of return on investment.

On the environmental consequences of doing so, he said carbon capture and sequestration, using conventional technology was now in a "near-to-commercial" phase.

The wait now was for the work to be done to identify whether suitable reservoirs were available for such a process, Dr Hooper said.

Work was also now under way to assess coal seam gas resources.

Such gas now accounted for 10% of the total natural gas used in the United States, even though it was not being produced there at all 20 years ago.

Then there are methane hydrates -- methane locked in ice which forms in low temperature and at high pressure and are found in sea-floor sediments.

Hooper said New Zealand's hydrate resources based on what would be called inferred resources were probably seven times the size of Maui.

Production tests on hydrates were already under way in North America, and the Japanese and Indians in particular were making major investments in the technology.

It was possible to accurately determine where hydrates were, so deposits had been mapped and drilled, and it was known with some degree of certainty they existed on the eastern seaboard of the North Island and in Fiordland.

Some of the very sweet spots for hydrates were just 10km to 15km offshore, some only 40km from Wellington.

Dr Hooper likened the investigation into hydrates to that of coal seam gas 20 years ago.

While he could not say whether hydrates would become economically viable for this country within any given timeframe, they were now "within the bounds where they can no longer be ignored".

It was important for reducing price volatility, increasing security and reducing uncertainty that New Zealand had a strong strategic reserves position. "We have got to basically identify, prove and then protect our strategic energy resources. They are part of the endowment to this country," Hooper said.

"None of us today can even begin to estimate or understand what future generations may need in energy."

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