Submitted on November 15, 2016

Greg Sise, Managing Director

The NZ Gas Forum is held each year and run by the LPG Association, and this year was held at the Millennium Hotel in Queenstown on 3rd and 4th November.  I presented on possible long term scenarios for the thermal sector of the electricity market, which is still a major driver of demand for natural gas despite annual gas-fired generation falling by over 20% since the 2000s.

By Greg Sise, 18 November 2016

After concern in the early 2000s that the giant Maui gas field was running out, and that reserves of natural gas could fall significantly, reserves have actually held up well having dipped below 2,000 PJ (about 11 years of supply based on current demand for gas of 1880 – 190 PJ per annum) only twice since 2008.  But since 2005 the new reserves have come only from development wells drilled in producing fields, while the success rate for exploration wells in new fields has fallen to zero.

Exploration chart

We’ve watched the exploration success rate fall for several years now, and have become increasingly concerned about the implications for future gas supply.  In the last two years, along with the fall in the price of oil, the number of exploration wells drilled each year has also fallen dramatically.

One of the objectives for my presentation to the Gas Forum was to make the audience aware, if they weren’t already, that exploration has ground to a halt and that we are now more reliant than ever on development drilling to maintain reserves.

Drilling technology has, and still is, making leaps and bounds in terms of technical capability and cost.  Gone are the days of moving a large drilling rig into position over a possible gas pocket, putting down one hole, maybe finding some gas, then having to move a permanent rig into position over the hole.  Nowadays, a gas production platform can be unmanned and have little infrastructure, the offshore Pohokura platform being a good example.  

When a new gas pocket is identified, a floating rig is moved into position over the production platform, a hole drilled vertically down thousands of meters, then the drill bit is turned horizontal, possibly for thousands of meters, until it reaches the pocket.  Furthermore, gas that is held tightly in less porous rock can now be released using techniques such as “fracking”.  The capability/cost ratio of this technology is still improving, lately driven by developments in shale oil and gas fields offshore, combined with pressure on production costs due to the dramatic fall in oil prices after mid-2014.

Nevertheless, there must eventually come an end to production from any given field.  The biggest fields in a region tend to get discovered first, so over time not only does production fall, but it becomes less and less likely that a large new field will be found, and the result: eventually reserves start to fall.

Falling gas reserves eventually lead to rising gas prices, so another objective of my presentation was to highlight the potential impact of this on the electricity sector.  I presented five different scenarios, some of which are more of a speculative nature, but nevertheless they can be useful in stimulating thinking about how to tackle potentially difficult issues before they actually arise (if they do arise).

Increasingly, the cost of carbon is a key component of the variable cost of fossil-fuelled generation, and carbon prices rose from $7.50 per tonne one year ago to $18.40 per tonne today.  If projected increases materialise, and allowing for the fact that subsidies relating to generation are to be phased out over the next two years, this adds further upward pressure to the price of fuel (coal, diesel and gas) for the fossil-fuelled sector.

For electricity, I made the case for demand growth returning to the residential and commercial sectors of the electricity market, with a little less certainty in the industrial sector, based on a rapidly rising domestic population.  Rising demand means that more generation will be required in future.

Falling reserves and rising gas prices could make it difficult for gas-fired generation to compete with renewable generation in future.  If this occurs, then how does the thermal sector respond?  One possibility is that the sector puts more pressure on gas suppliers to keep gas prices competitive.  Another possibility is that coal-firing remains entrenched at the steam turbine units at Huntly and gas-fired generators fulfil a purely peaking role.  

To sum up, I stated that gas consumption for electricity generation is not likely to return to previous levels, but to remain static at best, and that falling reserves will eventually put upward pressure on gas prices.

gas consumption