Between the lines - Tension mounts on Maui contract

By FIONA ROTHERHAM

Like the build-up inside a well, pressure is rising on the tailend of the 30-year Maui gas contract.

The field's importance is undervalued. Since entering production in 1979, Maui has underpinned the gas market. Gas accounts for a third of the country's energy input and Maui is the swing producer.

In the final decade of its life, the Maui contract's ambiguous wording is causing tension as demand grows and supply declines.

Explorers say the wholesale gas price, depressed largely by the take-or-pay contract terms, does not provide incentives to look for alternative supply.

The Crown's role is pivotal in ensuring a smooth transition post-Maui.

It remains the largest gas trader contracted to buy Maui gas from the three mining companies, Fletcher Challenge, Shell and Todd. The Crown on-sells through back-to-back contracts with Methanex, Contact and Natural Gas Corporation.

The contract encourages consumption by penalising purchasers for drawing less than the take-or-pay quantity. NGC and Contact both recently managed at last to match demand to their gas entitlements, including pre-paid gas.

Fletcher Challenge Energy says the Maui mining companies do not have to deliver as much gas as customers want. It is a matter of interpretation on whether the mining companies have to deliver above the maximum daily quantity rates on a sustained basis.

That could force a court battle or a race by the purchasers to draw off rapidly as much as they can.

The gas reserves are there. The problem is the fixed price that declines in real value over the term of the contract. Fletcher Challenge Energy says it will consider full delivery, at the right price.

The difficulty in renegotiating or topping up the contract is the Crown's presence as the risk-averse middleman. Instead of heeding calls to exit the contract entirely, it avoids liability.

Treasury spokesman David Taylor said the Crown wanted to preserve its neutral position despite the consternation of other parties. People should not confuse the Crown's commercial role with the Government's wider public policy role, he said. That's Treasury-speak for ``finding new gas is someone else's problem.''

Just who takes responsibility for the economic risk if the Maui contract is not managed properly, or if the transition to new supply results in a sudden price shock when the contract ends in 2009, is not clear.

It is not all doom and gloom. Recent gas finds such as Pohokura in Taranaki and Kauhauroa on the East Coast provide hope for future supply.

But as the contractual pressure rises, so too will calls for the Crown to become more than just a messenger boy between the players.

It can be argued that doing nothing is not risk-averse.

The ostrich with its head in the sand leaves the most vulnerable part of its anatomy exposed.