New Zealand needs to think about importing LNG due to a looming gas shortage, energy analyst John Kidd says. Photo / Getty Images
Independent energy analyst John Kidd says it’s time New Zealand considered importing liquefied natural gas (LNG) to offset a looming gas shortage.
Government data out last week showed the country’s natural gas production is expected to drop below demand very soon.
The Ministry of Business, Innovation and Employment (MBIE) said the country’s gas reserves will produce 10 petajoules (PJ) less than recent demand levels for “at least” the next three years.
Kidd, who heads energy research firm Enerlytica, said last year’s numbers drew the largest single-year reserves downgrade in the sector’s history and saw remaining 2P (proven and probable) reserves fall to their lowest since the discovery of the Maui field in 1970.
“This year the downgrade is even more severe.
“The result is that in just the past two years New Zealand has lost more than one-third of its 2P oil, gas, and LPG reserves.
“While deeply concerning, the bottom line is unsurprising and is the product of a long sequence of negative outcomes from development drilling campaigns across most of the six major fields that dominate the sector.”
Kidd said LNG imports should be looked at.
Natural gas, cooled to very low temperatures, becomes a liquid, reducing it to 1/600th of its original volume, making LNG much easier to transport and store.
The technology is commonplace overseas and has been used extensively and in quick order in Europe after Moscow’s invasion of Ukraine.
“LNG is getting quite a bit of traction now and the MBIE reserve numbers serve to reinforce that,” Kidd told the Herald.
“We are short [of] gas in the market here, and LNG is a lot like any other variety of fuel that we bring into the country.
”Fundamentally, New Zealand is short [of] energy - we don’t make enough domestically to meet our demand.”
New Zealand already has to import coal as a part of the structural make-up of the electricity sector, which relies on Genesis Energy’s coal and gas-fired Huntly Power Station to back up the system.
In terms of carbon emissions, gas is the lesser of two evils compared to coal.
Kidd said importing gas is favourable for the climate, for New Zealand, and for the cost of doing business.
“LNG can be delivered quite quickly and does not require a huge amount of infrastructure, land-side.”
Most of the kit required for LNG floats.
It involves a moored floating storage regasification unit (FSRU), which takes in LNG from a special-purpose carrier and converts it back into gas.
In New Zealand’s case, Port Taranaki or Marsden Point could accommodate FSRU’s, Kidd said.
Kidd says LNG can bring in significant volumes of energy very quickly and it can be bled into the gas network as little or as much as is needed.
Queensland - two days’ sail away - is already a significant LNG exporter.
“LNG should not be ruled out as the industry tries to manage its way through what is a deep supply crunch for indigenous gas,” Kidd said.
Kidd said the ministry data highlighted a continuation of a trend that has been around for the last five or six years.
“I guess the most concerning aspect of it for us is not so much where we are, but where we are going to be,” he said.
“We have had a lot of wells drilled over the last five years [within existing licence areas] and about $2 billion has gone into the ground.
“We are probably at the end of the capital cycle. The big question is what happens next, because a lot more investment is required to be able to bring new supplies into the market, and it’s not obvious as to where that investment is going to come from right now.”
He doubted there would be much in the way of exploration wells being drilled in the future.
Existing well owners needed to be incentivised to reinvest and bring new gas to the market.
There have already been big investments made in the likes of the Maui field which have failed to bear fruit.
The “book-end” of them was the Kupe South well - KS-9 - which has been deemed non-commercial.
In May, Genesis - which owns 46 per cent of the Kupe field - cut its earnings forecast for 2024/25 after KS-9 came up short.
Kidd said the industry was now coming off a high in terms of capital investment and that capital had not been successful in terms of what was expected.
“We are now coming into the lows [for capital investment] and that’s the thing that worries me the most.
“It is not obvious where the next round of capital is going to come from.”
The Government is in the throes of reversing a ban on exploration put in place by the previous Labour Government.
Kidd said decisions made by the previous government made it much harder to attract capital back into the sector due to a perceived increase in sovereign risk.
In the immediate future, Kidd said a lot more coal will be imported to make up for reduced gas supply.
“There’s been a resumption of coal imports for power generation and it is a direct consequence of what is happening in the gas sector.
“We don’t have enough gas domestically to keep our lights on, so unfortunately, we will have to call on international markets again [for coal].”
The last two winters have been very wet and highly beneficial for the hydro lakes, but the current winter is not shaping up so well.
Futures market pricing for August has baseload power trading at $362 per megawatt hour - a record high.
“It tells you a lot about how the market is feeling about risk at the moment,” Kidd said.
“It reflects the fact that coal imports have resumed and lake levels are low. There is risk all over our market at the moment. Whether it’s hydro or gas availability - having to fall back on coal is expensive.”
Kidd said the recent failure of Genesis Energy’s gas-powered unit five at Huntly and Contact’s gas-powered peaker in Taranaki would have been more serious had it not been for the healthy state of the hydro system at the time.
“Last year it didn’t matter so much because we had so much water in the system.
“We were able to muddle our way through because we had such a huge amount of fuel from hydro.”
Hydro and wind power generator Meridian, in a recent update, said its fourth quarter total water inflows were 86% of the historical average, and down 33% compared with the fourth quarter of last year. Meridian’s Waitaki catchment water storage at the end of the quarter was 52% lower than the fourth quarter of last year.
While the electricity markets are under pressure, consumers are unlikely to feel the pinch due to the way generator/retailers hedge their positions, Kidd said.
For industrial users, however, it’s likely to be a different story, depending on the type of contract they are on, he said.
Further along the futures market curve, summer 2025 prices now rest above $250/MWh, reflecting increased risk.
“The compound of the risk premia now being applied by the market is extreme,” Kidd said.
Genesis has said that it intends to maintain an operating stockpile of solid fuel at Huntly Power station of around 350,000 tonnes, or about 670 GWh of electricity.
The company has ordered more coal deliveries to maintain this operational stockpile ahead of the winters of 2025 and 2026.
Genesis is also working on sourcing a local supply of biomass, and hopes to announce a first supply agreement in the coming weeks.
The company says biomass can be used interchangeably with coal and will form part of the stockpile management strategy as the supply chain is established, gradually displacing coal over the next few years.
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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