Submitted on April 18, 2018

It’s ironic that this month’s announcement that there will be no new offshore oil and gas exploration permits issued in New Zealand was titled “Planning for the future…”.  This announcement was totally out of the blue and if there is a “plan” somewhere, it appears that no one outside of government knows what it is.

By Greg Sise, 18 April 2018

It took everyone by surprise, the government’s announcement on 12th April that new oil and gas exploration permits will no longer be offered offshore.  Furthermore, this year’s block offer is limited to onshore Taranaki which suggests that new exploration may also be geographically limited onshore in future.

There’s already been a lot of comment, both positive and negative, so I don’t want to simply repeat it all.  The gas sector has a huge impact on electricity so we will, of course, be considering the implications very carefully before issuing our next long term Price Path in June.

However, there are a few salient points about natural gas that I wish to add on this topic.

Natural gas sector consumption was around 196 PJ in 2016 (compared to total electricity sector production of 154 PJ per annum) with an estimated 46% of this consumed at Methanex’s methanol plant, 26% for electricity generation and 17% in industry, with residential and commercial comprising only 7% of the total.  The price and availability of gas therefore has a huge impact on the economy.

Methanex has produced up to 2.2 million tonnes of methanol per annum in the last four years since returning to full production, which at current methanol prices is worth up to $1.4 billion.  That’s a large sum to put at risk.

In our post of 3rd March 2017 we pointed out that the wholesale price of gas has a major impact on electricity prices.  It’s hard to see how the change in exploration policy is going to make New Zealand a more attractive destination for investment in oil and gas, so we’re likely to be more reliant on existing players to develop existing and new fields.  70% of current production comes from three offshore fields (Maui, Kupe and Pohokura) and since 1974, 77% of all production has come from these fields.  Given the risks and costs of working offshore, especially in frontier basins such as offs the south-eastern coast of the South Island, it’s hard to be optimistic about much beyond further development of already producing fields.  Given history, is there enough new gas still to be found onshore?

The gas price could go up or down in the medium term, with particular sensitivity to how much Methanex continues to use and for how long, but in the longer term our reliance on a smaller pool of onshore fields and players seems likely to push the gas price up.

How long is the long term?

According to MBIE data, the total proven gas reserves of 2,020 PJ on 1st January 2017 were sufficient to supply current demand for almost 11 years.  However, this assumes that the industry can simply keep the tap wide open and then in 11 years the supply just stops:  unfortunately, it doesn’t work that way.  As gas is drawn from a well, the production rate falls.  Again based on the MBIE data, we only have production at current rates through to 2019 after which, all other things being equal, production starts to fall away and by the middle of next decade it is only about half of what it is now.  Maintaining production rates therefore requires further investment.

Also according to MBIE data, there is another 1,900 PJ which could potentially be added to proven reserves, but again this requires further investment triggered by higher gas prices, unless technology lowers the cost of developing the reserves.

Gas remains extremely important to the economy and it will be interesting to see if the new policy has any unintended consequences. I really do hope that the ‘goal’ of reaching 100% renewable electricity in a “normal year” by 2035 doesn’t get in the way of making the enormous reductions in emissions achievable by switching transport away from fossil fuels, even if we burn more gas to produce electricity to power EVs. 

I’ve just finished reading “Thinking Fast and Slow” by Nobel laureate Daniel Kahneman[1], which recounts an interesting problem about changes in fuel consumption, and the answer is not what most people (he claims) would think at first glance.  The problem is an illustration of how the framing of an issue (“nasty fossil fuels” in this case) can get in the way of finding the best solution.  According to MfE data, a medium sized car emits 231 grams of CO2 per km on average.  A gas-fired peaking station running at 40% efficiency emits 477 grams of CO2 per kWh generated, so an EV averaging 17 kWh per 100 km (US EPA data for similar cars) would emit only 81 grams of CO2 per km.  Add in total electrical losses of 8% on the grid and this becomes 87 grams CO2 per km, but this is still a reduction of 62% over a petrol-driven car.  Of course, we are already, and will remain, dominated by renewables in the electricity sector, so the actual average emission factor is closer to 100 grams CO2 per kWh.  And the light vehicle fleet travelled 45 billion km in 2016 - you do the math!

[1] (You can read the book, or the original problem is described at https://slooowdown.wordpress.com/2014/06/09/thinking-fast-and-slow-by-daniel-kahnemann/ )