Pattrick Smellie: Government's oil and gas exploration shutdown plan going swimmingly

Owenership of the remaining Taranaki basin gas reserves is changing.

COMMENT:

At any other time in the history of New Zealand oil and gas exploration, this week's announcements by US-based Chevron and Norway's Equinor to abandon 25,000 square kilometres of offshore exploration permits would be relatively unremarkable.

The acreage they're quitting is off the east coast of the North Island in areas where geologists know there are hydrocarbons, but where the prospect of a commercial discovery has never been high.

Few have ever explored there seriously and the fact that either company took up those permits in 2014 reflects the enthusiasm of the previous Government to encourage a larger oil and gas sector.

That saw substantial investment in the exploration block offer process, which succeeded in attracting a range of new entrants to New Zealand in the early part of this decade. A key part of that push was encouraging Schlumberger, an international oil and gas field research firm, to gather geological data before new exploration permits were offered.

This was intended to assist would-be explorers to bid for acreage beyond the country's only proven commercial oil and gas resource, the Taranaki basin.

It was Schlumberger's data that Chevron and Equinor – the Norwegian Government's oil and gas company previously known as Statoil – pored over for five years before deciding they had better options elsewhere in the world.

US-based Chevron and Norway's Equinor will abandon 25,000 square kilometres of offshore exploration permits.

The current Government's lack of enthusiasm for the oil and gas sector would have been swept aside had there been any prospect of a commercial discovery.

After all, one of the Government's most oft-repeated reassurances when it banned future offshore exploration permits was that existing permits would run on – perhaps for another 30 years.

While that was a key talking point in the narrative of orderly transition to a low-carbon economy, it never had any credibility with the oil and gas sector. This week's pull-outs show why.

In one fell swoop, around a quarter of all existing offshore oil and gas exploration acreage has been handed back to the Government. Similar decisions are likely over the next three or four years as other permit-holders reach "drill or drop" dates in other lightly explored basins where the odds are stacked heavily against new commercial discoveries.

That is the nature of oil and gas exploration – when an exploration permit fails to show promise, the explorer seeks another permit elsewhere instead.

The timing of discoveries is inevitably hit and miss, so countries seeking secure, long-term access to domestic supplies of oil and gas work hard to create diversity and depth in their forward exploration programmes.

New Zealand is no longer doing this, except for onshore exploration, where discoveries are likely to be smaller and where there may yet be a ban imposed in the future.

Natural gas is the important fuel for New Zealand in this context because, unlike oil, there are no natural gas imports.

If domestic gas supplies start to become less secure and more expensive, using coal instead is likely to be one immediate answer for the electricity and industrial heat sectors, both of which rely on gas to varying extents.

Industrial heat users such as Fonterra may have no option but to keep burning coal for longer than they might have, while others may even turn to coal in the absence of gas, which has far lower carbon emissions than coal.

That future will become even more certain if the only remaining international explorer of scale operating in New Zealand, Austria's OMV, is unsuccessful in its drilling campaign this summer. If it finds nothing with the drilling rig it has just brought here, OMV has already announced it will cease exploration.

That will leave the owners of the remaining Taranaki basin gas reserves in a perfect position to extract maximum value from them, secure in the knowledge that there will be no competition unless plans to import liquefied natural gas, which were first considered but shelved in the 2000s, are revived.

It's surprising that Greenpeace hasn't already claimed credit for scaring off a couple of multinational oil giants.

For those who believe that this represents a victory for taking the moral high ground on climate change, this decline in local oil and gas production is a fantastic outcome.

It's surprising that Greenpeace hasn't already raced out of the blocks this week to claim credit for scaring off a couple of multinational oil giants and good riddance at that.

Yet, if anything, Equinor's departure represents a lost opportunity for collaboration and learning as the Norwegian company pursues its own, potentially world-leading transition to decarbonisation.

It also makes more likely a sharp, costly transition away from the use of natural gas that the Government has been trying to avoid, potentially accompanied by a counter-productive increase in the use of high-emissions coal instead.

If that happens, far from a climate change win, it will be the costly own-goal that the critics of the Government's exploration ban have long predicted.