It’s tough turning down an old flame

Thursday, 11 July 2024

Alarm bells have been ringing in the Beehive and at some of the country’s biggest exporters over a sharper than expected drop-off in gas production.

There should be enough gas to supply homes and light commercial users such as cafes and restaurants for many decades, given they only consume about 10% of the country’s gas and traditionally pay the highest prices for it.

But the Ministry of Business, Innovation and Employment (MBIE) has warned that big industrial users of gas are facing headaches renewing supply contracts.

More than that, it is understood that some industrial gas customers that do have supply contracts are being told they can’t be fulfilled in full.

Consumers could feel the pinch as a shortage of gas could push up electricity prices and increase the risk of power cuts in future winters.

Energy Minister Simeon Brown revealed in May that the Government could be one of the first to feel the pinch.

MBIE has been attempting to renegotiate an “all-of-government” contract that expires in September for the supply of gas to schools, hospitals and tertiary institutions.

“Low production could mean higher prices and shorter-term contracts for these critical services,” Brown said.

Sources say that while they don’t expect schools and hospitals will ultimately be left high and dry come September, when the ministry first put its all-of-government contract back out to tender it received no bids from suppliers.

The root of the problem is that gas production is coming in short as production declines faster than expected from many of the countries’ ageing fields.

A maintenance outage at OMV and Todd Energy’s Pohukura gas field offshore from Taranaki in March contributed to New Zealand’s gas production in the first quarter of this year being almost 28% lower than in the first quarter of last year.

Peak daily gas production in April, when all fields were back online, was still down about 50,000 gigajoules, or about 14%, on the peak in January.

The Gas Industry Company warned in April that some industrial consumers of gas might not be able to secure the gas they expected and that prices were likely to be significantly higher, with supplies constrained “throughout the decade”.

Since then, the outlook appears to have deteriorated.

On May 22, Genesis reported that KS-9, an in-fill well it hoped would boost gas supply from the Kupe field it jointly owns with Beach Energy and New Zealand Oil & Gas, hadn’t produced the desired results.

A month later, Genesis warned it expected to have to revise down its estimate of proven and probable gas reserves at Kupe by about 80 petajoules, knocking about 5% off the country’s total reserves of gas at the click of a mouse.

The failure of the well and “general field decline” meant Genesis would need to rely on burning more coal to generate electricity at a higher cost, it told investors.

Josh Adams, a spokesperson for the Major Gas Users Group, which represents most of the largest industrial users of gas, says it is very concerned by the supply outlook.

There is a risk the closure of some gas fields may be brought forward, he says.

“What I'm worried about now with Kupe, is what is the minimum operating pressure before they really have to think about ‘shutting-in’” — in other words reducing production.

Some in the industry are suggesting Kupe has a couple of years left at most.

Adams says he will be watching how another infill well designed to reverse some of the decline in production from the Pohukura field pans out later this year, with failure there likely to mean an even tighter supply situation.

The Government moved into action before the failure of KS-9, setting up a Gas Security Response Group comprised of government officials, gas producers and major gas customers in early May.

Its brief has been to identify the nature and extent of the supply problems and try to coordinate a response.

Though none of the advice of the response group has yet been made public, murmurings in the Beehive suggest ministers may not like what they are hearing.

MBIE deputy secretary Paul Stocks says the group is concerning itself with gas supply and demand “in both the short and longer term”.

“It is critical to our economy that the lights stay on and businesses have the energy they need to keep the doors open,” he says.

In recent years, when gas has been in short supply, Canadian-owned Methanex has usually provided the slack.

In normal times, it is the country’s largest gas user, consuming up to about 45% of the country’s gas production, which it converts to methanol — the vast bulk of which is exported to customers elsewhere in the Asia-Pacific region.

Methanex has almost halved its gas usage since March under an arrangement that essentially sees it sell gas back to Genesis when supplies needed by the electricity industry are tight.

But Adams says Methanex has invested a lot of money in the maintenance of its facilities and has “already been very gracious in terms of freeing-up some gas for the market a year or so ago”.

“You need to consider whatever contract obligations they might have. They may not be in a position where they can not be producing methanol.”

Methanex NZ declined to comment on its levels of concern with the outlook for gas production and reserves.

But managing director Stuart McCall said it continued to work closely with government and upstream gas producers to advocate for additional support to “help stabilise the industry and restore the sector to its full economic potential”.

Global demand for methanol was growing and that was “good news for the Taranaki economy, where we indirectly support about 3000 jobs and contribute just under 10% of the regional economy, McCall said.

“During the last three years, Methanex NZ has operated at reduced rates, or shut plants over high electricity demand periods over winter, to ensure that gas is available to support the electricity sector.

“Our ability to provide a demand response is obviously subject to the availability of gas. The more gas that is available in the market, the easier it is to absorb fluctuations in supply to balance the market.”

Sources say that Methanex and Tauranga-based fertiliser giant Ballance probably pay the least for gas, under their long-term contracts with suppliers.

But Adams says they are two businesses for which the absence of gas would be an “existential issue” — given they convert gas into the product they sell, rather than just burn it for electricity or as a heat source.

Some in the industry argue that, as long-term customers, their continued presence is needed to help underpin any further significant investment there may be in the sector, including that needed to maintain production from existing wells.

They argue that if Methanex was forced to shut down completely, or Ballance to import fertiliser, the country could — counter-intuitively — find itself relying on imported liquid natural gas faster than otherwise, accelerating the path to “de-industrialisation”.

Demand for gas is expected to reduce, but not necessarily at the same pace that supply is falling.

About 3% to 4% of the country’s gas supply could be freed-up when NZ Steel switches from smelting ore to producing steel from scrap at its Glenbrook mill in a couple of years’ time, for example.

Fonterra is reliant on gas, particularly in its North Island factories.

A spokesperson says it doesn’t have any immediate concerns about its ability to process milk, but is exploring alternative fuels.

“While there is no short-term solution to switch from natural gas at our North Island sites, we believe that across the industry several options could be available to improve the situation in the medium term,” its spokesperson says.

“We acknowledge the support Methanex has provided the industry in the past.”

A major gas user that is rumoured to have often had some exposure to the spot market and now be facing challenges is Auckland-based packaging giant Oji Fibre Solutions.

A spokesperson said it had no comment on the situation at this point.

The price of gas on the spot market has become very volatile in recent years, but in April was about the quadruple the prices that prevailed during a period of relative stability between 2014 and 2018.

Gas industry executives at an event organised by GasNZ last week appeared doubtful the Government’s decision to resume issuing new permits for offshore oil and gas exploration would make much difference to supply in the near term, if at all.

The possibility a future Labour-Green government might reimpose a ban on new permits, past exploration failures, uncertainty over the long-term demand for gas and changing business models prompted by climate change are all considerations.

OMV is still planning a drilling campaign to appraise what could be New Zealand’s last new offshore oil or gas field, the Toutouwhai field which lies in an existing offshore permit where it discovered hydrocarbons in 2020.

Covid forced it to leave appraising the discovery to a later date and speculation has been oscillating since then on whether the reservoir is more likely to be a source of oil, or of gas.

At the same same as appraising Toutouwhai, OMV expects to assess the viability of additional wells to eke out production within its existing permits.

Adams believes that by the end of March next year, major gas users should have “a pretty good indication of what the next five to six years is going to look like”.

“It's either going to be really ugly, or it's going to be ‘skin-of-your-teeth’.”