Methanex emissions-reduction project falls victim to exploration ban

Tuesday 25th September 2018

The government’s proposed ban on new offshore exploration looks likely to halt plans by Methanex for a $100 million-plus emissions reduction project at its Motunui plant.

The company uses natural gas to make methanol and had been considering a project to recover and re-use CO2 from its production processes in order to reduce emissions per tonne of product.

But that project is now unlikely to proceed due to uncertainty about the longevity of affordable gas supplies in New Zealand, says John Kidd, director of sector research at Woodward Partners.

“This is a project that should have been an absolute slam-dunk,” he said. “It’s good for emissions, it’s good for the economy and it’s good for gas continuity.”

Vancouver-based Methanex is the world’s biggest methanol maker and the biggest gas user in New Zealand.

Methanex New Zealand declined to comment on the emissions reduction project. In July it said it had secured sufficient gas to meet half its New Zealand requirements through to 2029, but noted its disappointment with the exploration ban which it said would impact it long-term.

Kidd said carbon dioxide recovery would be a good project, but it required a long pay-back period. Methanex refurbishes its production trains every five years and the uncertainty the government policy change has created means it would struggle to justify investments needing more than five to 10 years to pay off.

Kidd says it is an example of the environmental costs of the proposed ban, which he believes is more likely to increase emissions than reduce them.

The potential for carbon leakage as New Zealand-made products are replaced with products made overseas is “absolutely real”, he said. The fact the coalition is proceeding with the ban shows the government is more focused on shutting down the country’s oil and gas sector earlier than would have been the case, rather than reducing emissions.

“All of the scenarios are negative – some of them dramatically so,” Kidd told BusinessDesk.

“And the policy objective of reducing emissions is actually worse.”

The Labour-led coalition shocked the industry in April when it said it would stop offering new offshore exploration permits. It also restricted onshore exploration to Taranaki and plans to stop offering new acreage there after three years as part of it is calling a long-term transition away from fossil fuels.

The government argues the existing 100,000 square kilometres of exploration acreage will ensure sufficient long-term gas supplies for industry and generation while the country moves over 30 years to lower-carbon options.

But that analysis ignores the fact that only about a third of that acreage is anywhere near the country’s gas infrastructure, which extends north and south of Taranaki, the low probability of offshore discoveries, the staged nature of exploration work programmes, and the impact the ban has already had on investor confidence.

Last month, New Zealand Oil & Gas chief executive Andrew Jefferies said the ban had given overseas explorers the impression the country was “closed for business.” He believed the firm would have had another partner for its Barque drilling programme off the Oamaru coast had it not been for the ban.

Today Kidd said he suspects many exploration permits may be relinquished as they approach the next stage of work programme commitments during the next two years.

The government yesterday released a bill amending the Crown Minerals Act so that it can effect the ban. With the bill and an accompanying cabinet paper was an assessment by officials of the likely impact.

They estimated the potential loss of Crown revenue through to 2050 at between $1.2 billion and $23.5 billion and said the changes were more likely to increase emissions globally rather than reduce them.

Their analysis didn’t include any estimate of the impact on the broader economy from reduced exploration, development work and engineering support in Taranaki, the country’s most prosperous region by income per head of population.

Nor did it estimate the economic consequences if major gas users like Methanex, NZ Steel, or Ballance Agri-Nutrients reduced production as supplies tightened or gas prices rose.

Energy & Resources Minister Megan Woods yesterday questioned how officials could credibly quantify the financial impact of unknowable exploration outcomes. Deputy Prime Minister Winston Peters described the officials’ estimates as flimsy and told Radio New Zealand the ranges were so broad as to be meaningless.

Kidd said the range of outcomes reflected the inherent uncertainty in oil and gas exploration and development.

He said MBIE’s methodology on lost revenue was sound and precisely the approach used in the sector for this type of work.

But he said the ministry’s narrow focus meant their report “materially understates” the broader economic impact the policy change will have in terms of jobs and balance of payments.

Oil and gas account for just over half the country’s primary energy supplies. Kidd noted that gas – produced as methanol – brings in more than $1 billion in exports. When converted to urea it displaces about $200 million of imported product, while locally produced LPG displaces about $200 million of imported fuel.

(BusinessDesk)

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