Gas in NZ: It's tough parting with an old flame

Friday, 28 May 2021

In February, the Climate Change Commission recommended ending new connections to the gas network in 2025.

ANALYSIS: Consumers and businesses who rely on gas could be forgiven for being worried.

The Government announced in 2018 that it would not offer new offshore permits for gas exploration.

The Climate Change Commission twisted the knife in February, suggesting no-one should be newly connected with piped natural gas from 2025 and that gas should be phased out as a fuel by 2050.

The price rise would be independent of any increase in the price of gas itself.

But there have been hints the Government may think carefully about its next steps.

Meanwhile, an industry source says there is a record amount of drilling going on, with Austrian oil company OMV alone planning to spend $500 million improving the flow of oil and gas from its fields off Taranaki.

* Budget's carbon savings equal about five days coal use at Huntly

* Time to ban new gas connections in houses?

How much gas do we have?

New Zealand had 2021 petajoules (PJ) or about 2 trillion cubic feet of natural gas sitting in existing gas fields at the start of last year that could be economically extracted.

Or that is the best guess of the Ministry of Business, Innovation and Employment (MBIE).

To put that in context, New Zealand typically consumes about a tenth of that amount each year, to supply industry and homes and to burn for electricity.

That means New Zealand may now only have about nine years supply left, at current consumption rates, which would take us through to 2030.

But that’s just the gas we can be pretty sure of?

Yes. In addition to the “proven and probable” reserves, MBIE puts contingent reserves of gas at 2943PJ.

Those contingent reserves are its best guess of the volume of gas that is potentially recoverable, but which is not currently considered to be commercially recoverable.

Different industry sources suggest a good rule of thumb in the past has been that about half to two-thirds of contingent reserves eventually end up being recoverable.

Parliament has declared a climate emergency noting the 'devastating impact' volatile weather will have on New Zealand. (First published December 2020)

So we may have enough gas to see us through to 2040 or close to it, based on current consumption.

But that’s about it, as there’s no new offshore exploration allowed?

Not quite. OMV is planning to re-drill its Toutouwai-1 well in an existing permit offshore from Taranaki where it discovered hydrocarbons last year.

Due to the Covid lockdown, it plugged the well before running the usual tests to assess the potential of the find, but OMV says early indications are of a “significant discovery”, which would be the first in New Zealand for a decade.

OMV New Zealand chief executive Henrik Mosser says it is probably a good guess that if the find is commercial it would take about five years to bring production on stream, and it is too early to tell what any mix between oil and gas might be.

But the find is clearly giving major gas users some encouragement.

So we have gas until 2040, plus whatever is found at Toutouwai?

About that, but remember that timeframe is based on past consumption.

As gas starts to run out and become more expensive, consumption will decrease, particularly by commercial customers that either have alternatives or were economically marginal anyway.

Sheridan believes the closure of the Marsden Point oil refinery will reduce the price of petrol.

Indeed, that process is already under way.

Methanex mothballed the smallest of its three New Zealand plants that turns gas into methanol in February, (its Waitara Valley plant), and on Friday also agreed to suspend production at its larger Motunui facility for almost three months.

Another big gas user, Refining NZ, looks likely to cease refining at its Marsden Point oil refinery in Northland next year and instead switch to importing pre-refined fuels.

The likely permanent closure of the refinery should reduce New Zealand’s gas usage by about 5 per cent, spinning out our reserves a little longer and Methanex’ actions will have a much larger short-term impact.

Other big consumers will probably drop out as time goes on.

The bottom line?

Even with the ban on new offshore permits there will probably be natural gas around until 2050.

Only about 9 per cent of New Zealand’s gas is used by consumers, for the likes of hot water and home heating and cooking.

So the long tail of declining gas supply could potentially see out consumers until towards the end of the century.

Industry estimates found current reserves hold 10 years’ worth of natural gas. The lawsuit argues that’s more than enough.

So nothing for gas users to worry about then?

The above was the good news.

There is certainly a short-term supply problem, with the likelihood of more bumps in the road ahead.

Even though there might be enough gas in the ground to last a few more decades, that doesn’t mean it will continue to be produced or distributed at the exact rate that people want to buy it.

Gas prices have risen this year because of an unexpectedly fast decline in production from the country’s existing fields.

That is one reason why Genesis Energy has been burning vast amounts of Indonesia coal at its Huntly power station to produce electricity – another arguably being a failure by the power industry to invest soon enough in additional renewables.

What’s caused the supply problems?

Part of it is that scaling caused by mineral deposits has restricted production from two wells in the Pohokura field off Taranaki, which is owned by Todd Energy and OMV.

Genesis chief executive Marc England indicated to Stuff that he was doubtful about the prognosis for improving that.

Energy Minister Megan Woods appears concerns shutting off new connections to the gas network from 2025 could undermine infrastructure the country may want later to distribute greener fuels.

“They have done acid washes, they have done re-performation; a whole lot of work in the last couple of years on that field and they are still struggling to get production up,” he said.

Mosser says the joint venture partners hope to drill a third well at Pohokura in the second quarter of next year that could boost production, subject to final approvals for the investment.

What else is being done?

OMV has a rig on its Māui-A field at the moment drilling several wells to extend the life of that field and is planning to bring in another to work on Māui-B for about a year, from the end of this year, which would create 200 jobs.

That latter rig could be used afterwards to properly appraise the nearby Toutouwai discovery.

A whopping two-thirds of the estimated 2943PJ of contingent gas reserves sit in the Todd-controlled Mangahewa and Kapuni fields, onshore in Taranaki.

Todd is believed be having good success drilling several wells at Kapuni which could see a chunk of those reserves firmed-up and brought on stream.

So how short-term is this problem?

The Gas Industry Company, which is an industry body reporting to Energy Minister Megan Woods, forecasts tight supply will last at least until the middle of next year and perhaps into 2023 and 2024.

There may be faster supply after that, but then question would be, for how long?

Methanex is the country’s biggest user; if it ceased production here that could free-up supply, but there are fears it could also kill investment.

The challenge of matching demand and supply in a declining but capital-intensive industry where ocean rigs have to be brought in from overseas is, by its nature, only likely to get harder.

So the current short-term production problem could prove to be one of a number of short-term problems that together look much more like a medium-term problem.

The tightrope that will need to be walked is cutting back on gas while still leaving producers with enough confidence to invest far enough ahead to ensure there are no sudden wobbles in supply.

If Methanex permanently closed one or both of its two larger methanol plants that would free-up a large amount of supply (the company said in 2019 it accounted for 45 per cent of gas demand).

But the Gas Industry Company has warned that could that kill investment in production, reduce security of supply, and lead to something of a domino effect.

One of those dominos, which the industry body describes as “the worst case scenario”, might mean gas not being available for Genesis to burn at Huntly to see the electricity market through any dry years from 2026.

Energy-hungry hydrogen can still be “really efficient if you just burn the stuff,” Sally Brooker says.

It said Methanex was the only buyer large enough to underpin production investment over a long enough timeframe to make investment in production economically viable.

“Demand could even drop to unsustainable levels, leaving it impossible to rely on natural gas for existing assets much sooner even than 2030,” it has warned.

Aren’t we going to switch to piped hydrogen anyway?

First Gas set out a proposal in March to stop piping natural gas to customers between 2035 and 2050 and switch instead to ‘green’ hydrogen produced through electrolysis using renewable electricity.

Green hydrogen does appear likely to fill at least a series of niche roles in the power market where high “power-to-weigh ratios” are required, such as trucking and aviation if that ever goes ‘green’.

But it would probably be fair to say the jury is out on whether it will become a mainstream fuel, at least in anything like the timeframe discussed by First Gas.

The large inherent inefficiency of converting water into hydrogen and oxygen, and then back again when hydrogen is burnt, can only be reduced to a degree and never avoided.

Hydrogen and oxygen are two elements that really like to stick together.

Another obstacle is that hydrogen is a tiny molecule – an eighth of the atomic weight of methane which is the main component in natural gas – and more explosive, and hence more difficult and dangerous to store and distribute.

What was that about the Government thinking carefully?

There are signs Woods is increasingly aware of the tough balancing acts future governments will need to perform.

If piped hydrogen or biogas does become a key fuel for the 21st Century then it would be pretty handy to still have the 7000 kilometres of gas pipes that First Gas owns to pipe it around, for example.

But that is arguably less likely if the Government does as the Climate Change Commission suggests and bans new connections to the network from 2025.

Woods appeared to recognise that consideration at an event hosted by Contact Energy in Parliament in May, acknowledging the phase-out of gas was a complex issue.

“Our current gas distribution infrastructure provides many opportunities for alternative lower emissions fuels to be used, including biogas and hydrogen,” she said.

“These are all matters the Government will need to consider before making recommendations about the future of natural gas use in commercial and residential applications over the next 30 or so years.”