Natural gas back in focus as New Zealand faces energy crisis [Global Gas Perspectives]
New Zealand is preparing to pass laws to reverse a ban on offshore oil and gas exploration by the end of the year and remove regulatory barriers to LNG import projects in a bid to shore up its energy security.
The country’s previous Labour-led coalition government halted the issue of new oil and gas exploration permits in 2018, with the intent of hastening the electricity sector’s transition to 100% renewables by 2030. The oil and gas industry blames this decision for contributing towards New Zealand’s current problems with power supply.
Natural gas production has fallen significantly since the ban was introduced, from 177.8 PJ in 2017 to only 128.4 PJ in 2022, according to the International Energy Agency (IEA). The rate of decline has accelerated recently, with output dropping by a further 12.5% in 2023 and an alarming 27.8% in the first three months of this year.
The steep fall in output this year has coincided with months of dry weather that has reservoir levels at hydroelectric power plants, responsible for over half of New Zealand’s electricity. This has triggered a spike in wholesale power prices, which have climbed as high as NZ$1,000 (US$622)/MWh in recent weeks. Households have been asked to conserve energy and some industrial gas and power users have closed down plants, most recently methanol producer Methanex, which has idled its operations until the end of October.
“It’s kind of a perfect storm,” John Carnegie, CEO John of Energy Resources Aotearoa, tells NGW. “One reason is the massive regulatory risk that was created by the previous government, disincentivising oil and gas production and use. We’ve also had an incredibly dry year here, and the third factor is diminishing capacity at thermal power stations.”
Change in course
New Zealand’s centre-right coalition government took office in 2023 and has said it will revitalise the country’s energy sector. This week it unveiled a raft of measures aimed at alleviating the country’s energy supply shortage.
Prime Minister Christopher Luxon did not mince words in slamming the previous government’s ban on oil and gas exploration.
“The reality is we didn’t need to be here if we hadn’t banned oil and gas in a cap-handed way that the previous administration did,” Prime Minister Christopher Luxon said. “It’s a bumper sticker, post it note, didn’t-think-through the second and third order consequences and now we pay the price for that.”
New Zealand has also ramped up coal use in part as a response to dwindling gas supply.
“The bottom line is less gas means more coal,” Luxon said. “More coal means higher emissions because coal has around twice the carbon intensity of natural gas for the same amount of energy.”
Beyond providing affordable and secure energy, the upstream sector also contributes more than $2.5bn to New Zealand’s gross domestic product, generates $420mn in royalties and tax for the government and earns $700mn from oil exports annually, according to energy industry association Energy Resources Aotearoa.
In addition to reversing the ban on oil and gas permitting and removing barriers to constructing LNG import facilities, the government has also committed to easing restrictions on electricity lines companies owning generation, ensuring access to generators and retailers and reforming energy market regulation.
The government also wants to accelerate the build-out of renewables. Despite the previous government’s 2020 ambition to make the grid 100% renewable within a decade, there has been a significant slowdown in the commissioning of new wind capacity in recent years. After surging from 690 MW in 2020 to 913 MW in 2021, installed capacity was expanded to only 994 MW in 2022 and 1,059 MW in 2023, according to IRENA’s data. It accounted for only 7% of power generation in 2023, while gas contributed 9%.
The government wants to establish a new regime for offshore wind by mid-2025, aimed at providing developers with greater confidence and investment certainty. However, consents might not be the biggest issue. The New Zealand Wind Energy Association estimates that 1,551 MW of new capacity is currently consented or likely to be consented. But not all of this capacity will be built, as developers are waiting for improved policy.
In spite of soaring power prices, wind developers do not receive subsidies or tariff support. and so can only produce power at a cost competitive with other forms of generation. As such, there is not enough confidence in a return on investment.
Faith in LNG?
Energy Minister Simeon Brown has said he expects an LNG terminal to be ready by the winter of 2026 at the latest. The government estimates that imported LNG would cost between NZ$17-24/GJ, which is less than half of the record NZ$55/GJ that gas is currently trading at on the spot market.
The LNG would most likely be imported either in the Taranaki region, home to all of New Zealand’s gas production, or at Marsden Point. The most feasible option would be leasing a floating storage and regasification unit (FSRU). According to consultancy Enerlytica, it would cost as little as NZ$80mn to ready Marsden Point’s old refinery dock for LNG imports, or up to NZ$180mn to install the necessary pipes and connections at Port Taranaki. Port Taranaki authorities claim a lower estimate of only NZ$50mn.
New Zealand power company Meridian Energy, which is 51% state-owned, is vying to be part of a consortium to finance the project.
LNG could be sourced from as close as the east coast of Australia. Once imported, it could be delivered to Contact Energy’s 377-MW combined-cycle power station in Taranaki, the nearby 200-MW Stratford station, or Genesis Energy’s Huntley power plant, built to run on either gas or coal. Contact’s plant was on track to be closed this year, but it may well yet stay open, company CEO Mike Fuge told local news agency Newsroom on August 15. That is, if a secure source of gas supply can be found for the next 20 years.
Given six years of limited exploration for new reserves, LNG may be the only option to avoid the closure of the plant and potentially others like it. The government estimated in July that New Zealand only had enough reserves remaining to last for 8.7 years of current consumption. Reserves dropped by 20% last year alone.
“It depends on how quickly the incumbent, major gas producers can be encouraged to produce more gas,” Carnegie says. He believes the most reliable way of getting more gas into the system is with domestic supply, adding that imported LNG may be more expensive than coal.
“LNG has been increasingly seen as a backstop,” he says. “We can’t see why we should invest in Australian gas and jobs when we can invest in New Zealand ones.”
Gas-fired power generation will be needed to support further uptake of renewables and may even need to be expanded for this task, and for eliminating remaining coal use. Energy Resources Aotearoa estimated last year that New Zealand would need an additional 380 MW of gas-fired capacity by 2038 to back up renewables.