Gas shortage: Methanex pressured to fill key government gas contract in the midst of supply squeeze

Methanex's Waitara methanol plant, mothballed in 2021. Its Motunui plant is now also idle. Photo / Ross Setford

After months of scrambling, the Government is in the process of finalising its shortest-ever centralised gas supply contract and, sources say, the supply has been obtained from Methanex.

The new contract will run for just a spare 12-month term, from October 1, 2024 to the end of September 2025. The piped supply keeps heat, cooling and hot water running in roughly 700 public facilities, including schools, hospitals and prisons.

Methanex – the country’s largest gas user – will sell a portion of its long-term supply to the Government, at the expense of its own ability to manufacture. Sources told the Herald the deal follows “heavy-handed” pressure from officials.

A Ministry of Business, Innovation and Employment (MBIE) spokeswoman confirmed to the Herald that it has “provisionally secured a temporary solution” to extend the all-of-government piped gas contract for 12 months.

The current contract expires on September 30, and officials have been struggling for months to sign a successor agreement – the MBIE began its search for a supplier with a “request for information” released through its GETS procurement system in July 2023.

Genesis will provide the retail services, including transmission and invoicing, related to the government contract.

The news comes in the midst of an economically painful gas shortage in New Zealand that has led to record high electricity prices that, in turn, are forcing some industrial users like pulp mills to close. Methanex’s methanol production has been idle since last week, when it announced it would temporarily shut down and sell its gas supply through to the end of October to electricity generators.

The Canadian headquartered multi-national is the country’s largest gas user and a significant Taranaki employer and exporter.

The MBIE spokeswoman did not confirm the price it’s paying, but industry observers say it has likely agreed to more than $24 a gigajoule (GJ), roughly double the MBIE’s likely current price.

Though expensive, the contract will shield government gas users, come October 1, from the risk entailed in footing the soaring “on demand” or spot price of gas, currently in the region of $39GJ.

The contract secures 1.8 petajoules (PJ) of supply for the year (there are one million gigajoules in a petajoule).

The MBIE spokeswoman said the current all-of-government contract costs some $46 million per year. This is a total figure and includes the gas cost, as well as the cost of transmission and carbon offsets.

”Due to the ongoing gas supply challenges our approach has focused on guaranteeing supply for participating agencies in the short-term. We intend to explore a range of options to meet agencies’ energy needs in the longer-term,” the spokeswoman said.

Neither the ministry nor Methanex would confirm that the gas to fill the new contract will be supplied through Methanex.

The Herald understands that, after the MBIE’s procurement division failed to secure a natural gas provider for its “all-of-government contract” in March, officials turned to Methanex.

Several industry sources told the Herald that MBIE officials placed considerable pressure on the company to release gas for the contract, and even threatened to use the government’s “special powers”.

The sources are not authorised by their organisations to speak publicly on the matter, and the Herald has agreed not to name them.

It’s widely accepted that the Government’s “critical contingency management” regulations, which direct the apportionment of gas supplies in the case of an emergency, would not apply in the current case of simple short supply.

The Herald asked the MBIE if its officials had mooted the use of such powers to fill its contract.

The spokeswoman said only that “the Critical Contingency Management regulations relate to specific situations where there is a drop in pressure in the system as a result of a particular event. They are not intended to generally regulate the supply of gas”.

Sources said it was also clear to industry players that the Government didn’t have special powers of compulsion in this instance, but that that hadn’t stopped officials from making the suggestion.

The sources noted that there are a variety of reasons why Methanex, a Canadian multinational petrochemical company, would not want the issue of the contract to escalate, and that heavy industry in New Zealand is sensitive to public perception and the ill-defined notion of a social licence to operate.

Last week, Methanex temporarily halted all production at its only active manufacturing plant, Motunui, and announced it would profitably sell its contracted gas through to the end of October (6.7PJ) to electricity providers Genesis and Contact.

Stuart McCall, Methanex managing director, said the company chose temporary closure through to the end of October “to alleviate New Zealand’s energy shortage”.

The news that Methanex has surrendered additional gas to fill the government contract raises the question of the company’s future in New Zealand.

However, sources told the Herald that the amount of gas surrendered to fill the government contract is not large enough to prevent Methanex from reopening.

Previous all-of-government contracts

Genesis is the current supplier of gas to the Government, however, because of the current shortage, the electricity generator and retailer told MBIE it was “not in a position to keep supplying all-of-government gas beyond 30 September” .

A Genesis spokeswoman said “the Government has engaged a new gas supplier and Genesis has agreed to act as the billing agent between the two parties from 1 October”.

The MBIE has handled the all-of-government contract since 2013. The first contract had a four-year duration, with one right of renewal for one year; and the second contract, signed in 2018, had a three-year duration, with three rights of renewal of one year each.

New Zealand gas is currently in short and diminishing supply, for reasons including field production declines that have been steeper than modelled, and a 2017 Government ban on most oil and gas exploration, and attendant policies, which chilled investment.

The short supply, combined with soaring demand for gas to power electricity production – hit by a combination of low wind and water levels in hydro-lakes – has led to high prices.

An MBIE spokeswoman said the department will provide further information about the all-of-government contract, “once the details of the contract have been confirmed in the coming weeks”.

A Methanex spokeswoman said: “We typically don’t comment on the details of our contractual gas arrangements or operating rates.”

Methanex has a history of acting as a kind of national buffer against short gas supply in New Zealand. From time to time it has sold its contracted gas supply to electricity generators, rather than use the commodity as feedstock for methanol production. Methanol is a key ingredient in products like paint and plastics.