Maui miners square off

The clock is `fast approaching midnight' on the country's biggest gas resource. FIONA ROTHERHAM reports.

``In the end, and as it was in the beginning, Maui is still, by far, the largest and most influential source of gas supply in New Zealand - but it is now smaller than it was and getting smaller every day.''

So intoned Bell Gully partner James Willis, somewhat biblically, at the recent 2000 NZ Petroleum Conference.

The Maui field in Taranaki accounts for more than 70 per cent of New Zealand's annual gas production. Petrochemicals and electricity generation are the big consumers of its gas.

The field is entering the last third of its life. Contracted supply dips markedly from 2005. Kapuni, accounting for 19.4 per cent of gas production, is likely to have declining rates from about the same time.

``The end of Maui is not the end of New Zealand's gas industry,'' Shell's Thijs Koeling said.

Householders will not suddenly lose gas for their heaters. What will bite is price. Government forecasts predict gas will rise from $2.50 a gigajoule now to $3.50 by 2010. The severity of the rise depends on any significant alternative gas finds in the next few years.

As the clock ticks on, proven reserves account for just eight years of demand and there is little incentive to explore wholesale gas prices.

Increased litigation is likely as pressure mounts on the ``dinosaur'' take-or-pay Maui contract.

The three Maui miners are Fletcher Challenge Energy (68.75 per cent), Shell (18.75) and Todd (12.5). They contract directly to the Crown, the country's largest gas trader. Under the 1990 back-to-back contracts it on-sells the gas at various rates and for a margin to Contact, Natural Gas Corporation and Methanex.

The Maui companies have said there were sufficient reserves left until the contract ends in June 2009.

Fletcher has upped the ante in the supply debate, saying it does not think the 30-year contract obliges the miners to deliver as much gas as its customers will want.

``If delivery is limited they may not be able to access all their pre-paid gas. They may have missed the boat,'' said Fletcher's commercial strategy manager, David Salisbury.

The Maui contracts give buyers quantity rights based on several formulas. The annual quantity taken is simply divided by 365 days to reach the daily quantity. The maximum daily quantity is the daily rate multiplied by 150 per cent.

Downstream buyers can request gas deliveries above the daily quantity. Yet the field would have been depleted long ago if this had happened from the outset of the contract.

``The original reserves estimate ... was not sufficient to permit constant deliveries at the maximum limit,'' Mr Willis said. ``Accordingly, the exact quantum of buyers' forward purchase rights remain an uncertain issue.''

Until now, delivery has not been a problem because of the overhang in the market.

NGC and Contact recently offloaded their excess pre-paid gas, leaving their forward demand for Maui gas matching their remaining entitlements.

The contracted quantities began to decline after peaking in 1997. By 2007-08, the daily quantity and maximum quantity are tipped to be only around 40 per cent of their 1997 levels.

As gas demand grows, Methanex chief executive Bruce Aitken predicts a catfight among the buyers to access the gas they are entitled to.

Fletcher Energy is urging buyer constraint. ``It is our view that the seller (the miners) is not required to meet requests for supply at rates above the maximum daily quantity on a frequent or sustained basis,'' Mr Salisbury said.

Proper pricing of supply at rates above Maui contractual rates was important to bridge the gap between gas demand and the incentive to bring new gas on stream, he said.

In other words, delivery is not an issue at the right price. Industry sources say Fletcher's view on delivery is linked to third-party supply on the Maui pipeline.

As Maui gas becomes supplemented with gas sourced from other fields, how to transport it and at what cost become key issues.

It is disputed whether agreement on delivery is also necessary from the downstream buyers as the Maui contract entitles them to gas delivery at any point along the line.

If capacity becomes available on the Maui pipeline, NGC's gas transmission pricing policy will come under increasing pressure. While wholesale gas prices have declined, retail prices have been pushed up by escalating pipeline charges.

About a third of electricity generation is now gas-fired, but the Government has ruled out including gas in electricity reform.

Somewhat ironically, NGC chief executive Richard Bentley wants greater transmission transparency in the electricity market.

The present industry structure focused attention on the wholesale spot price rather than allowing discovery of the long-term wholesale price trend, Mr Bentley said.

``The outcome is that the price new gas-fired generators can now afford to pay for gas in this market is well below the expectations and indeed the requirements of field developers if they are to receive a reasonable commercial return.''

Clearly, no new gas contracts would be concluded if the expectation was that present electricity prices would continue, he said.

Of late, there have been loud calls for renegotiation of the Maui contract and for the risk-averse Crown to either become more pro-active or exit entirely.

Renegotiation is unlikely - it falls into the too-hard basket.

But Contact remains optimistic that the interests of all stakeholders will become sufficiently aligned at some point to sit down and negotiate the industry's long-term future. It is either that or another trip to the courts.