Lifting the ban on oil and gas exploration is ranked 19th on the National-led Government’s new 36-point “to do” list.
For the energy sector, it can’t come quickly enough.
Point 19 says “take decisions on the removal of the ban on offshore oil and gas exploration”, but the industry is largely in the dark as to how that’s going to happen, and what the new regime is likely to look like.
“We are delighted to see it make the priority list for the next quarter, but we are yet to see anything,” John Carnegie, chief executive of Energy Resources Aotearoa, says.
“There are a lot of positive signals from the Government, which of course we welcome, but as of yet there has been no detail.”
Associate Energy Minister Shane Jones said the tricky part of any new legislation would be recalibrating the obligations of the oil and gas developers once they move on.
As it stands, the industry says the current rules around decommissioning wells are too onerous, relative to other markets.
“But the taxpayer is not going to thank me if we allow the pendulum to swing too far towards permissiveness,” Jones told the Herald.
Jones said the Government was looking at the rules employed by other countries in the OECD.
He had also engaged with explorers who may seek to chance their arm in New Zealand.
“They have not said that they are not going to come back, but they are going to require a hell of a lot more insurance before they do come,” Jones said.
The Labour-led Government’s ban on oil exploration means sovereign risk is now a big issue.
Jones said he had been taking advice on matters such as compensation bonds and stabilisation clauses for any possible newcomers.
With players such as Woodside and Chevron having packed their bags long ago, Jones says the focus was on the oil and gas companies who have remained.
Carnegie, whose Energy Resources Aotearoa counts Mobil, Genesis Energy, PowerCo and Methanex among its members, said the rules around decommissioning were “disproportionate and mostly unwarranted”.
“Those rules are more relevant to the incumbents because the rules passed by the previous Government fundamentally changed existing field economics, and imperiled security of supply by effectively shortening field life.”
As it stands, the rules around decommissioning specify the total removal of infrastructure.
Decommissioning can take many forms.
Overseas, it’s common for oil and gas platforms to be simply removed and the supporting structures toppled.
Carnegie says the industry needs a more “balanced and proportionate” set of decommissioning rules.
“Unfortunately, the current laws that we have are at the extreme end of the spectrum.”
As for the exploration ban, Carnegie said the Government was going to have to deal with the spectre of the sovereign risk now attached to activities in New Zealand.
“It’s going to be tough.
“You will need something that will assure new permit holders that their rights will be respected if there is a change of government.
“These are 20-, 30-, 40-year projects so you don’t want to be subject to the vagaries of the decision-making of future governments.”
Carnegie said it’s hard to know if the oil and gas exploration investment will return to New Zealand.
In 2008, New Zealand’s offshore environment was opened up for further oil and gas exploration by Sir John Key’s National-led Government.
But the sector’s growth came to a halt when Dame Jacinda Ardern’s Labour-led Government implemented the Crown Minerals (Petroleum) Amendment Act 2018, which banned all new oil and gas exploration permits in the New Zealand Exclusive Economic Zone, except for a small area of active production off Taranaki.
Since the ban, three onshore petroleum exploration permits were granted in 2018 and 2019 block offers, as well as an additional exploration permit that was a hangover of the 2017 block offer. Only one petroleum mining permit has been granted since the ban was enacted.
International Energy Agency research shows investment in renewables is already outpacing investment in fossil fuels worldwide.
In terms of renewables versus fossil fuels, Carnegie says people have it in their minds that it’s an “either/or” situation.
“And it’s not. We need both.”
While billions of dollars are being invested in New Zealand’s renewable power generation, there is broad agreement - even among the greenest of the power generators - that gas will be required to bridge a gap while the country moves to decarbonise by 2050.
In February, state grid operator Transpower said the system needed more flexible resources to ensure sufficient electricity supply capacity to meet peak winter demand as the country transitioned to a more renewable and intermittent electricity supply.
New Zealand is currently 85 per cent renewables-driven in terms of its electricity demand - already the envy of many countries - but its Achilles heel is its reliance on coal and gas during dry spells or supply disruptions.
As the industry sees it, gas needs to fill a gap while new technologies play catch-up as the country heads towards its decarbonisation goals.
The energy sector already sees gas security of supply issues coming up for gas, which backs up the mostly hydro-powered national grid through Genesis Energy’s coal and gas-fired plant at Huntly and Contact’s gas-fired assets in Taranaki.
“We got through the last winter because it rained a lot, but there are risks in the electricity system,” Carnegie says.
It takes five or six years to develop a gas field and Carnegie says there is potential for problems.
“We have the gas fields declining and demand is declining less so, which is opening up a gap.
“Alarms are ringing in the energy sector around the absence of available gas, so that’s what we will primarily be talking to the new Government about.
“There are some significant unmet demand and electricity security risks that we just need gas for.”
Carnegie says batteries, already under construction, will only go so far.
“The issue with batteries is that they can shift the peak from hour to hour, but they are no good if we don’t have any rain.
“Batteries will solve a three-hour problem, but they don’t solve a three-month problem.”
Carnegie says there is “nervousness” about the role of gas in the energy matrix but that there was cautious optimism.
“Now that we are on [the Government‘s] radar list, we expect to see some engagement.
“The sector does not want wild policy swings from one set of policy settings to another every six, nine or every how many years.
“The investments that the sector makes are in the hundreds of millions of dollars and are long-lived.
“So companies want to have at least a broad understanding of the fundamentals around which they can invest.”
In the exploration industry, New Zealand is seen as being “gas-prone” - meaning the chances of finding gas are quite good.
The Ministry of Business Industry and Employment estimates gas reserves have now dropped below 10 years of remaining use for the first time, based on an average gas use of 200 petajoules over the last 10 years.
″We’ve seen our reserves fall in recent years, so our members have had to work harder just to keep our fields producing,” Carnegie says.
“It gets harder and harder because they are all heading towards end-of-life, so we have a perfect storm brewing.
“The investment signals are bad, our major fields are reaching end-of-life, and demand is still there because the alternatives are not there yet at scale in an affordable way.
“The damage to the sector [from the ban] has been so great, that the Government will have to be quite sharp in terms of what it offers the sector.”
The reason the ban came into force in the first place was due in no small part to protests from Greenpeace.
In its latest statement on the matter, the environmental group said attempts to lift the ban were “bound to fail”.
“For 10 years, alongside iwi, hapū and a whole movement of opposition, hundreds of thousands of New Zealanders successfully resisted the oil and gas industry’s attempt to start oil exploration,” it said.
“The industry knows that New Zealanders will stand up to resist them again if they try to come back.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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