New Zealand’s sovereign risk gas bill comes due

Thursday, 8 August 2024

Labour energy spokesperson Megan Woods says it had a plan.

ANALYSIS: It happened relatively quietly in the clamour of Parliament’s general debate on Wednesday afternoon.

The payment for a decision taken years earlier that created sovereign risk in New Zealand’s gas and energy sector came due.

Minister for Energy Simeon Brown announced that the Government is now actively pursuing a feasibility study for importing liquefied national gas in order to stave off the gas shortages which have pushed up energy prices. He claimed that New Zealand now has the highest energy prices in the world.

This was on the same day that Oji Fibre Solutions’ Penrose Pulp Mill announced it was likely the latest victim of the energy crisis that has seen wholesale electricity and gas prices soar.

This is a result of botched policy which has seen gas exploration as well as investment in new gas plant dry up over the past few years.

This is a gas market issue, not primarily an electricity market issue, but one with knock-on effects for the electricity market. Twenty per cent of New Zealand gas goes into energy and is responsible for 10% of electricity that is produced.

Gas is mostly an industrial feedstock. The shortages have driven up prices in the gas market: that’s meant higher prices for industrial user and higher electricity prices.

At issue is peaking power, which is effectively power that can be turned on quickly to provide the amount of electricity needed at peak usage times or to smooth out low lake levels.

A mixture of the previous government’s policies had resulted in capital in new gas projects grinding to stand still. Partly, it was as a result of the offshore oil and gas ban, partly the 100% renewables target and partly a general worry that firms with ESG (environmental, social and governance) policies would stay away from gas.

The upshot is policy uncertainty has made long-lasting investments into gas processing facilities too risky. The risk profile is such that they cannot get past company boards to approve.

Twenty per cent of New Zealand gas goes into energy and is responsible for 10% of electricity that is produced.

This is not a problem indigenous to New Zealand. Australia also created problems in its energy markets over the past decade. An uncertain and poorly designed policy environment saw investment in baseload electricity generation dry up, while intermittent renewables were force-fed into the grid. This all resulted in energy shortages and massively drove up prices. Australia’s energy mix is different, the basic problem was the same. Getting the policy mix wrong is costly.

New Zealand’s offshore oil and gas exploration ban — which was announced by Jacinda Ardern in 2018, much to the surprise of coalition partner NZ First and virtually everyone else — is being repealed by the Coalition Government. Although how much international interest there will now be in exploration is an open question, given the fact that Labour may well reinstate the ban if it gets back into office.

The Ardern government ban was ostensibly a climate change measure, but it along with the 100% renewables strategy had the perverse outcome of actually increasing emissions and making New Zealand more reliant on burning imported coal in the creaky Genesis energy-owned Huntly power plant for its peaking power needs.

At issue is peaking power, which is effectively power that can be turned on quickly to provide the amount of electricity needed at peak usage times or to smooth out low lake levels.

The previous government’s strategy was always an extremely high cost and low certainty way of giving New Zealand a renewables future. The now mothballed Lake Onslow energy storage project sat at the apex of this costly future. The intent was fine in the long run but the policy mix was wrong.

The perceived extent of the sovereign risk — risks created by governments changing rules to render investment and assets less valuable — is of course debatable, but at the time of the ban there were 20 international and five local companies engaged in resource exploration and production in New Zealand with about 82,000km2 of frontier exploration acreage permitted.

Today, there are nine investors active in the sector — seven international and two local. All New Zealand frontier exploration acreage permits have been relinquished. There is currently 0km in frontier acreage under permit.

Now the question becomes a practical one. If significant imports of LNG are to be brought into New Zealand it becomes a question of where, when and how much. Where will a LNG terminal be located, when will it be able to be built and how much will it cost.

The Government’s feasibility study, which it is doing with industry co-regulator the New Zealand Gas Industry Company, will be all but done. The question is going to be a more concrete one: who pays for an onshore gas umbilical cord?

Given the urgency with which it is needed, it would be a good bet that the Crown will end up either kicking in some cash or providing some firm guarantees.

It is likely that this will need to happen.

All of the Government’s talk of New Zealand being open for business and trying to get overseas and rustle up foreign direct investment rings hollow if a simple Google search from any would-be investor reveals that New Zealand has an energy crisis that will require fast and decisive action to fix.