The incoming Government is expected to reverse New Zealand's ban on oil and gas exploration. Photo / Rob Tucker
New Zealand’s energy sector is poised for a reset if, as promised, the incoming National-led government reverses the offshore oil and gas exploration ban.
Prime Minister-elect Christopher Luxon has promised to overturn the ban on new offshore oil and gas exploration, which was put in place in 2018 after a long campaign by iwi, hapū, and environmental group Greenpeace.
John Carnegie, chief executive of Energy Resources Aotearoa - an industry group that counts Mobil, Genesis Energy, PowerCo and Methanex among its members - said the incoming government would have a chance to reset the industry.
Carnegie, and many others in the energy sector, see gas as playing a bigger role in the power generation game.
The argument goes that a more renewables-based system will bring with it a greater degree of intermittency, thereby increasing the importance of gas-fired power generation to fill the gaps for when the wind stops blowing or the sun stops shining.
“So it’s back to boring, almost, rather than overlaying climate change policy as the key driver for energy,” Carnegie told the Herald.
“I think the new Government will rely more heavily on the emissions trading scheme (ETS) and take a fuel and technology-agnostic approach to achieving its climate change targets,” he said.
As it stands, gas backs up the electricity grid - mostly through Genesis Energy’s coal and gas-fired Huntly Power Station and Contact Energy’s fast-start peaker plants in Taranaki.
Genesis Energy’s gas-fired turbine - Unit 5 - at Huntly has been out of action since June after one of its three circuit breakers failed.
The turbine, which pumps out enough electricity to supply up to 400,000 households, is due back on line in late January next year.
As bad luck would have it, in September, Contact Energy advised that one of its gas-fired, fast-start, peaking units - which supply power to the grid when the system is stretched - failed.
The unit - GT22 - is not expected to be back in business until February or March of 2025. Contact expects to have Taranaki Combined Cycle (TCC), the other Peaker Unit, GT21, and the Whirinaki units available throughout 2024.
Fortunately for the power grid, this year’s far higher-than-normal rainfall allowed the system to rely more heavily on hydro over 2023.
For Genesis, renewables have made up 44 per cent of its total generation on average over the past five years. Thanks to a bumper year for hydro, the company’s share of renewables jumped to 65 per cent.
Even so, ASX-traded New Zealand energy futures prices have been elevated in recent years, reflecting investors’ views about risk concerns about the ongoing availability and deliverability of peaking gas over seasonal hydro droughts.
Support for gas comes from some seemingly unlikely sources.
Meridian Energy is spending billions of dollars on renewable electricity generation, yet chief executive Neal Barclay told the Herald in August there needs to be more investment in gas.
“There needs to be further investment in the gas system, that’s for sure, if we are to transition in a seamless way to make a more renewable electricity grid,” he said then.
“It will still require – and need – gas because it is a much stronger alternative than coal.”
Barclay says gas will be part of the energy mix for at least the next decade or two.
“The gas sector needs a bit more certainty as to its ability to get a return on investment.
“That certainty will come in two forms. One, it will come from parties probably from the electricity sector contacting them to make sure that they can deliver capacity as and when needed.
“And they need regulatory and political certainty as well, because that’s been quite disruptive for the gas sector,” Barclay said.
Mercury, which generates all its power from renewable sources, also sees thermal generation as having a critical role to play in managing New Zealand’s security of supply over the medium term.
National grid operator Transpower said in a report that for 2024, New Zealand’s gas production expectations were lower than what it had seen in 2023, which increased the energy supply risk if there was a prolonged dry sequence, despite new generation output.
This risk can be mitigated in the short term by investment in additional stored gas, or gas reallocation agreements ahead of any dry sequence, Transpower said.
“In the long term, the risk can be mitigated through investment in increased gas production, or increased investment in a diverse pool of renewable resources,” it said.
Energy Resources’s Carnegie said the ban on exploration had caused a “crisis of confidence” in investment in the energy sector.
He says Transpower’s customer advice notices (CANs) - which are issued as a “heads up” to power generators when residual power to the grid is expected to drop below 200 megawatts - are on the increase, illustrating the fragility of the system.
Transpower issued 10 CANs in 2021,13 in 2022 and there have been 14 so far this year - the latest one this week.
Carnegie says the number of notices show how fragile the energy system – predominantly electricity - is.
“These things will set the tone for the new Government, regardless of its make-up.”
The Ministry of Business, Innovation and Employment says New Zealand’s estimated 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 past 10 years.
Carnegie says potential producers need confidence there will be a market for them.
“The previous Government was unremittingly negative about the role of natural gas both in terms of its policy settings and its rhetoric,” he says.
“In energy policy, there is quite a surprising degree of commonality across the three of them, so abandoning [Labour’s pumped hydro plan] Lake Onslow – which no one wanted – would signal a shift in tone.”
Carnegie wants the new Government to talk about the importance of natural gas in terms of delivering affordable energy.
“My question is that if we get a dry period over the next six months, with the El Nino weather pattern, what is in place to back that up?
“We have got old thermal kit – and Huntly’s Unit 5 is out.
“Because the investment climate has been so negative, no one is building the gas-fired fast-start peakers that everyone in the sector acknowledges is required.”
Energy players have long said as the electricity system becomes more renewable, it becomes more vulnerable to changes in the weather.
“Ironically, as our system becomes more intermittent, you really need gas there for resilience,” Carnegie says.
With players like Woodside and Chevron having packed their bags long ago, what would it take to get explorers back?
Carnegie says once permits become available again, it becomes an economic choice made by investors as to the magnitude of the sovereign risk.
New Zealand used to be known for its “below-ground” risk - whether there is gas there or not.
“Now it’s known for its regulatory, or above-ground, sovereign risk.
“But we have confidence that if the overall regulatory settings are right, then slowly and gradually investment will return and investors will seek more permits.
“But it will not happen overnight.
“It’s an insurance option that will allow more participants to make a call on whether or not the conditions are right to invest and therefore support our energy security.
“If you stand back and look at the risks that we are now facing, and the possibility of a refocusing or re-framing of the debate around security and affordability, I think that will lead to an exciting time for the energy sector – for renewables and other forms.
“When you have gas underpinning renewables, you are actually giving confidence for renewables investment by backing up physical and financial contracts.”
Any return to oil and gas exploration is likely to meet with stiff opposition from environmental groups.
Greenpeace said New Zealanders had fought “long and hard” to stop oil and gas exploration.
“So I’d say to the next Government, it’s time to get serious about climate change, and I’d say to the oil industry, if they think that they’re going to take Luxon’s ill-considered invitation seriously, they should think again,” Greenpeace director and former parliamentarian Russel Norman said.
Carnegie is optimistic the explorers will return once the ban is lifted.
“It’s unlikely that we will see a rush to take up permits and to drill, but I think it will happen over time, and a lot of that depends on the stance of the opposition,” he said.
Then, Carnegie says, it comes down to investors’ willingness to take on sovereign risk.
“And that’s the $64,000 question.”
"When it doesn’t perform, everybody notices. When it does perform, nobody notices.”