NZ heading for gas supply gap - OMV

Wednesday 17th October 2018

New Zealand is heading into a gas supply gap and will need a new discovery to arrest the production decline it is on now, MPs heard yesterday.

The country has just seven years’ firm supply, and production is forecast to start falling away from 2021, according to Patrick Teagle, a New Zealand-based executive for Austrian oil and gas company OMV. Teagle was talking to Parliament’s environment select committee.

The company, soon to take over operatorship of the Maui and Pohokura gas fields, will work to mitigate the decline in production from those fields as a priority, he said. But that will only slow the decline.

What the country needs is a new discovery, just when the government’s proposed ban on new offshore exploration is “discouraging” the potential partners that OMV and other firms will need if they are to explore offshore, he said.

“It needs to be understood that demand will outstrip supply and we are heading towards a gas supply gap in New Zealand,” Teagle said.

“We have real concerns about our ability to maintain security of supply over the next decade.”

The committee is hearing submissions on legislation the government is pushing through to effect the ban on new offshore exploration it announced in April. The ban, intended to allow a managed transition away from fossil fuels as part of the country’s 2050 targets, also bars onshore exploration outside Taranaki but keeps intact all rights to develop discoveries made in existing permits.

The clash of viewpoints among the 12 submitters was stark. Government MPs didn’t appreciate being told the ban would increase emissions rather than reduce them, that the ban had already halted some investment, and that reduced domestic gas supplies would increase electricity costs for all consumers and sacrifice opportunities to reduce coal use and replace higher-emitting imports – like fertiliser – with lower-emission local production.

Supporters of the bill tended to want tougher action, with several seeking the immediate revocation of existing permits. They focused on the scale of global hydrocarbon reserves that can’t be burned in order to limit global warming, while largely ignoring domestic energy security and non-transport uses of oil and gas as industrial feed stocks.

The oil and gas sector was to blame for climate change – which governments had denied for too long - and for creating the societal “structures” that made individuals so reliant on their products for transport.

“Their time is finally up,” Low Carbon Kapiti chair Jake Roos told the committee.

“Adding to the pile of fossil fuels we plan to set on fire is madness.”

Committee chair Deborah Russell asked New Zealand Oil & Gas executives how they could claim to have been “caught by surprise” by a change that was always coming for the sector.

The Labour-led government has leaned heavily on its claims that the 100,000 square kilometres of existing exploration acreage is sufficient to ensure on-going gas supplies during a managed, 30-plus-year transition.

Official advice issued last month estimated the potential loss of Crown revenue at $1.2 billion to $23.5 billion out to 2050, and warned of a potential increase in global emissions if locally-made petrochemical production was replaced with product made offshore.

John Carnegie, responsible for climate change policy at BusinessNZ, told the committee the proposed legislation is “bad law” based on “scant evidence”. The impacts of the ban include higher emissions, increased energy costs, reduced competitiveness for New Zealand firms, and worsening balance of payments.

“Those are far wider than just the oil and gas sector per se.”

In a testy exchange with Labour MP Kiri Allan, he said the impact of the ban had been immediate. He cited the decision of Ballance Agri-Nutrients not to proceed with an expansion at its Kapuni plant due to the lack of certainty over long-term gas supplies.

“It’s not a 30-year transition,” he said.

“We are now in that transition.”

OMV’s Teagle told the committee the government’s transition timeframe appeared to be based on a fundamental misunderstanding of the exploration process.

Firms target the most attractive potential prospects. Acreage that does not show promise in early drilling – typically at the end of the first five years, or early in the second five years – will most likely be surrendered.

In the current environment “the chances of further exploration drilling in those permit areas is very, very low,” he said.

New Zealand Shipping Federation executive director Annabel Young silenced the committee with a detailed explanation of the challenge ship owners will face if they can’t access locally-made methanol – made from gas - to meet new international fuel pollution standards.

News that Methanex may start cutting production as soon as 2026 due to the tightening gas market had been a shock, she said. Refining NZ, operator of the Marsden Point oil refinery, is still not clear on whether it will be viable for it to make the ultra-low sulphur marine fuels the sector will need otherwise, she said.

Paul Goodeve, chief executive of pipeline operator First Gas, said the shipping issue illustrated the complexity of climate change policy and the risks of unintended consequences.

He said the gas sector has an important role to play in lowering emissions in New Zealand and longer-term, while options like hydrogen – either as a stand-alone fuel or blended with natural gas - are developed. Access to fast-start thermal back-up is also essential in a renewable generation sector increasingly reliant on solar and wind.

Goodeve said the “ad hoc” exploration ban – in an otherwise sensible policy framework – risks distracting from or slowing the major near-term opportunity to reduce emissions by electrifying transport, he said.

Trying to shut down gas, coal and fuel oil at the same time risks "sinking" the country under the cost of the new generation, distribution and transmission that would be required.

Forest & Bird climate advocate Adelia Hallett told the committee the strategy of using gas to replace higher emitting fuels may have worked 30 years ago. Inaction during that time means the world now needs to make significant reductions in the next 10 to 14 years.

“The cuts we need to make now are harder and faster.”

NZOG managing director Andrew Jefferies said the debate wasn’t about climate change, but over which are the best tools to address it.

Another billion people joining the world population need low-emission energy. New Zealand can help meet that directly with exports of gas or methanol, or by using gas locally to replace imports of fertiliser and other products made from higher-emission sources and then shipped here, adding further emissions.

If countries like New Zealand stop exploring for gas, higher emitting hydrocarbons like Canadian tar sand or Venezuelan bitumen, will continue to be extracted, he said.

“If you vote against gas you are voting for coal and bitumen and tar sands,” NZOG external relations manager John Pagani told the committee.

The hearings are scheduled to continue for the rest of the week.

(BusinessDesk)

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