Fact check: Would NZ be better off without Methanex?

Saturday, 18 January 2025

This year is shaping up to be another tense one for the energy sector.

Transpower warned in November that risks to the security of electricity supplies — the prospect of power shortages in other words — were “concerning”.

Two of the reasons it gave are that gas production is declining and generators can’t call on Rio Tinto to reduce production at the Tiwai Point aluminium smelter by as much as it did last year in the event of another supply crunch.

Yet the risk of “acute” gas shortages would only worsen down the track if Methanex, the country’s largest gas user, exited the country soon, according to a report commissioned by the Gas Industry Company for Ernst & Young last year.

On the face it, that would appear an odd claim.

Methanex has in the past consumed up to 45% of the country’s gas, though that has fallen to about 25% since March, when it closed — now indefinitely — one of its two plants that turn gas into methanol for export.

The Canadian-owned firm’s financial documents indicate it paid less than $6 a gigajoule (GJ) for its gas in 2023, under a contract with Genesis that is believed to expire around the end of 2028.

When gas supplies are tight, as they were last winter when the wholesale price of gas spiked above $55/GJ, Methanex has cut production to free up gas — at a price.

The Government is believed to have agreed to pay Methanex more than $24/GJ for gas after it found itself in a pickle securing the gas to heat schools, prisons, universities and hospitals in September.

It’s a role Methanex New Zealand managing director Stuart McCall has said it is willing to continue to play, even with only one plant in operation.

It can’t be forgotten that about 200 Kiwis rely on Methanex for their livelihoods.

But with “proven and probable” gas reserves dwindling to less than nine years’ supply, wouldn’t it be better if Methanex just closed, ensuring there was more gas for longer to keep the lights on when hydro lakes were low and electricity was in short supply?

The argument in favour

That is certainly the view of Richard Tweedie, a former managing director of Todd Energy.

If Methanex did close, it be would “just like the Tiwai aluminium smelter closing down”, he says.

“More electricity would come into the domestic market. It would have a dampening effect on prices. There would be more gas available for dry years for electricity generation.”

Tweedie accepts Methanex has probably provided the “base load” demand that has encouraged gas exploration and development in the past.

“But they have run down New Zealand's gas reserves as a result more rapidly than would otherwise be the case, so I don't think they've done a great service for New Zealand.”

The explorers aren’t coming back anyway, Tweedie says.

“We've drilled enough wells around New Zealand now to show that the only basin that's produced hydrocarbons is the Taranaki Basin, and it has been explored pretty thoroughly already.

“No major is going to come in and risk capital in a country that has previously banned them, even if it was prospective — and it's not.

“The costs of mobilisation, the problems coming here, the political risk… no, they’ll just never touch it.”

The counter-argument

The Gas Industry Company (GIC), a quasi government regulator, doesn’t believe it’s that simple, and is less ‘downbeat’ about future exploration.

Chief executive Andrew Knight, a former chief executive of New Zealand Oil and Gas, says the premise that there is a “bucket of gas that is available for allocating to people is not correct”.

It isn’t spelt out in the report it commissioned from Ernst & Young (EY).

But part of its concern appears to be that if Methanex shut down soon, at least one of New Zealand’s offshore gas fields — which ever was the most expensive to operate — would quickly follow suit.

In practice that might be either the Maui or Pohokura gas field.

Fields can be difficult to reopen once closed for an extended period of time, at least without drilling new wells, Knight points out.

The mothballed drill holes can clog up and the fields can fill with water. Even after extended shut downs for maintenance, re-starting operations can be touch and go.

That means the upshot of Methanex shutting could be gas left in the ground forever, rather than it being freed-up to provide the fuel needed until some other means of meeting peak electricity demand emerges — or so the theory goes.

Where it gets complicated

Even if the Gas Industry Company is right, one question is whether — even with some gas left in the ground and perhaps unrecoverable — the net effect of Methanex closing might still be positive for other gas users.

Another question, Knight readily acknowledges, is how the market might change its behaviour.

Might the gentailers, for example, be willing to stump up several tens of millions of dollars a year to keep New Zealand’s potentially newly-uneconomic offshore gas fields open?

That would be so they still had a bigger supply of gas to draw on when it was needed most, and for longer into the future.

If so, that scenario could give the energy sector a longer runway to complete the renewable transition with a means to still keep the lights on in ‘dry years’.

Would that be feasible in an era of lower gas demand, given there is a limit to how far operators can turn down the pressure on wells and extract gas more slowly?

Generators have in the past shown little appetite to pay for such an insurance policy.

But Knight acknowledges the Gas Industry Company didn’t ask EY to look at how businesses might modify their behaviour in the event of Methanex’ exit.

“It's probably a step too far for us to start to try and model the behaviour of the electricity generators in different circumstances,” he says.

Trouble is, without understanding that game theory, it may be hard to say much about what different futures might hold.

Intuitively, as Tweedie argues, it seems to hard to believe Methanex chomping through the country’s remaining gas reserves at speed is part of the optimal scenario.

But Knight says “the wonderful thing about this industry is there are as many views as there are people”.

“There are no right answers, right? There's just a series of wrong answers.

“The dilemma the energy sector is trying to get its head around is ‘do we need to pay for an insurance policy? How do you pay for that? What does it look like?”

Time, perhaps, for another report.