10 Jun 2024

'Damage done': Oil exploration ban reversal unlikely to attract investors, keep up with demand - industry

9:58 am on 10 June 2024
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The shortage in gas supply is being blamed on lower-than-expected production as well as underinvestment in the sector. Photo: 123RF

Gas production has been falling for several years. But this year, it is even lower than projected.

Meanwhile, demand for electricity is increasing.

"Reports suggest that Q1 this year saw a 3-4 percent increase in electricity demand, compared to the same time last year," offshore wind developer BlueFloat Energy's New Zealand manager Nathan Turner said.

"There's a number of reasons for this: we have a growing population and we're seeing the electrification of more parts of our economy.

"But our fuels are not seeing the same level of growth, so we're experiencing a supply and demand imbalance."

A supply shortage could trigger another call for New Zealanders to manage their usage.

"When the wind doesn't blow or the sun doesn't shine, we have to call on something else," sector adviser Enerlytica head researcher John Kidd said.

"When gas isn't there to the extent that we need, the filler role falls onto whatever is left. And in New Zealand, that balancing item is coal."

The government is looking for solutions.

Resources Minister Shane Jones confirmed reversing the ban on oil and gas exploration.

Jones said the ban, which was introduced by the previous government in 2018, not only halted exploration to identify new sources, but shrank investment in further development of fields which sustained current levels of use.

But according to industry experts, reversing the ban was unlikely to see this investment bounce back.

"The damage to market confidence has been done," Kidd said.

"A number of companies have left the sector and they won't just come back. Going forward, it's going to be about investing in the assets and the fields that we have."

He said the shortage in gas supply was multifaceted - caused by lower-than-expected production as well as underinvestment in the sector.

A supply shortage

Figures released by industry co-regulator Gas Industry Company showed production reduced by nearly 30 percent more than expected in the first three months of 2024.

Genesis announced in May that attempts to extract more gas from its Kupe South 9 well, which was drilled last year, had failed.

"The Kupe well didn't deliver what was expected, which will see 20-30 terajoules a day not available to the power system this winter," Kidd said.

"That emphasises the nature of risk in this industry. These are not assets with 100 percent probability-type outcomes, you're never entirely sure what will come out of drilling," he added.

Industry representative group Energy Resources Aotearoa chief executive John Carnegie said there was a supply issue when the sector was forced to ask users to decrease demand, rather than scale up supply.

"It isn't a sign of a well-functioning economy when, to keep the lights on, you have to ask your industrial base to curtail production."

Aging infrastructure

The second issue, according to Kidd, was underinvestment in peaking power plants.

These are high-cost, high-emission plants that scale up quickly when existing fuels can't meet demand.

"They're fast start, able to come into the system at literally five minutes notice," he explained.

Most of New Zealand's peakers are at the end of their lives. But some of the last government's policies discouraged investment in new ones.

"They signalled that investors might only get five or seven years of operation out of their assets as they wouldn't be required after 2030, or because a massive pumped hydro scheme would come in and swamp the market."

Carnegie said there was a link between the policies and current supply issues.

"The halting in 2018 of offshore oil and gas exploration was touted as being world leading," he said.

"But five years on we're ... increasingly facing the likelihood of blackouts. That appears to be an own goal for New Zealand."

Kidd said the current situation could not entirely be blamed on the 2018 ban.

"These investments take a long time. What we see today relies on decisions that were taken a long time ago. It takes years to get the infrastructure, human capital and financial capital together."

What happens next, he said, would be influenced by the soon-to-be reversed ban.

"The sector needs to address the supply issue that we have in front of us. But the ability to attract another round of capital is very much weakened."

Turner said if New Zealand wanted to encourage investment, it needed a bipartisan energy plan laying out the role of different fuels going forward.

"Frequent changes in policy from one election to another is not helpful for anyone. At the end of the day, we're all investing in projects that have very long-term lives, so we need long-term policy certainty," he said.

"If we know how much longer gas will realistically be part of the energy mix in New Zealand, we can ensure there is enough investment to meet demand, while also investing in the batteries and renewable electricity sources that will replace it in the longer term."