Keeping the lights burning

The Maui field was always going to run out, but 2007 seems uncomfortably close. CHRIS DANIELS writes that other fields might not be as kind to consumers or power stations.


The mighty Maui gas field off Taranaki has given homes and businesses some of the world's cheapest gas for more than 20 years.

But the party cannot go on forever, and as the band begins to pack up, businesses that rely on Maui are eyeing potential partners to accompany them to the next bash - which all predict will be smaller, but much more exciting.

Computer projections have revealed that Maui, which supplies more than 70 per cent of New Zealand's gas, will start tapering off in 2007, two years earlier than expected.

It's not homes or businesses using gas that have the most to lose as the gas runs out; electricity generators are especially worried, and forecast power cuts and rising prices if a way is not found through the looming gas shortage.

Major Maui customers were told in November that, despite an original expectation that the field would supply 4085 petajoules of gas over 30 years, this was now likely to be around 3800 petajoules. One petajoule of energy would satisfy the country's electricity needs for two days.

This warning of a premature end to the Maui party raised interest in one of the less-publicised Government reviews, now looking into the whole gas sector.

The gas review follows the still-incomplete review of the electricity sector, which is grappling with the central dilemma of how much regulation is needed.

On the gas front, producer and retailer Todd Energy has told Energy Minister Pete Hodgson that the industry seriously needs restructuring, dominated as it is by the transmission system owned by the Natural Gas Corporation (NGC).

Apart from the Maui pipeline, which connects Taranaki with the Waikato, almost all other gas pipelines are owned by NGC.

"A clear and unambiguous message of a change in regime needs to be conveyed. The message needs to convey the signal that light-handed regulation has not been successful and that the continual threat of regulation is not a sustainable premise upon which to build a long term regulatory regime," said Todd in its submission to the Gas Review.

Energy Minister Pete Hodgson has been quiet about what sort of changes may be in the wind for the gas sector, saying it will be at least next month or June before officials advise him of any action needed.

Todd Energy's managing director, Richard Tweedie, has told the Government what he thinks the problem is - NGC using its dominance of the country's pipelines to charge monopoly prices.

The solution, he says, is Government intervention. "Where you have got a monopolist, it is totally natural behaviour for a monopolist to take as much as he can."

It's not home or business gas consumers who should worry most, he says. The big issue will be electricity generation.

The recent discovery of the Pohokura gas field - which is around one-fifth the size of Maui - gave some short-term relief, but shortages are looming sooner than many realise.

A gas field the size of Pohokura needs to be discovered and brought into production every five years. Unless this happens, there will be a deficit of gas in 2009, meaning electricity generators will not have enough gas to burn.

Canadian methanol maker Methanex, which uses 44 per cent of all gas produced, is not expected to stay in New Zealand once Maui runs dry.

"We're ploughing along merrily - not looking beyond the ends of our noses," says Tweedie. "Our economy is today based on cheap energy. Our industrial sector, primary producing, dairy industry, all relies on cheap energy by world standards."

Electricity generators Contact Energy and Genesis are watching proceedings with concern. Thermal power stations in Taranaki, Otahuhu and Huntly need natural gas to generate electricity.

Without Maui gas and the electricity it helped create during last year's cold, dry winter, power prices would have skyrocketed and blackouts would likely have followed.

"Essentially the gas sector in New Zealand is the Maui contract, and we have an industry that is rapidly becoming a legacy," says Contact's corporate affairs general manager, David Hunt, "because a whole lot of things that work very well at the moment and worked well in the past won't work into the future."

Contact is arguing for the establishment of a wholesale gas market that would allow customers to buy gas from the variety of smaller fields that will soon be replacing Maui.

One of the beauties of Maui is that the tap can essentially be turned up and down according to demand. Known as "swing", this ability to increase and decrease gas means there is no need for onshore gas storage.

Contact Energy argues that as new fields with less swing are found and developed, a more sophisticated market for wholesale gas is also needed.

New contracts will also be needed to provide for the "unders and overs" - times when a big power station, for example, needs more or less gas.

The looming shortage of gas described by Todd needs to be addressed, says Hunt.

"It is a pressing issue ... 30 per cent of New Zealand's power is generated by gas. At the moment we are running on a fuel tank that has only got five years or so left in it."

Contact also wants open access to transmission pipelines and a world where NGC is unable to enjoy monopoly power over such a vital part of the market.

Phil James, chief executive of NGC, unsurprisingly disputes any claim that his company is gaining excessive profits through its exclusive ownership of much of the national gas transmission system.

There is no barrier to entry into the transmission market, says James.

Anyone can build a network. NGC had to be as efficient and competitive as anyone else. Big companies, with financial scale were able to "achieve synergies in the market".

NGC will be using the Government's gas review to argue for better "governance arrangements" - agreed rules and systems among rivals in the gas business, rather than government regulation.

Despite the formidable challenge of building a gas distribution network that would be needed to compete with NGC, James says he still expects to see a more competitive gas sector and has no problem with others "taking him on".

"The issue is about free and fair access to monopoly assets and we already provide that."

Not so, says Simon Terry, energy analyst with Simon Terry and Associates.

Terry's analysis of prices charged by the gas transmission network (read NGC), published last year contained some disturbing figures.

Consumers are, he says, paying many millions of dollars more than they need to, solely because there is no true competition in gas transmission.

So as the Maui party winds down, Government and the gas industry players - the explorers, producers, transporters and users alike - must tread a difficult path to develop a legal and regulatory environment that allows "new" gas to be found and brought into production, without granting monopoly players excessive profits.

The alternative is for everyone to sit on their hands, waiting for someone else to go and find the gas - and that means the lights go out across New Zealand.