A tax deduction change specifically for some expenditure by fossil fuel companies was initially proposed as a potential Budget 2025 option to increase gas production in New Zealand.
Officials from the Ministry of Business, Innovation and Employment (MBIE) advised ministers the option would “provide a greater benefit” than the Investment Boost tax deduction measure eventually announced on Budget Day.
Inland Revenue recommended not providing the separate initiative, but the MBIE believed its option was a “stronger incentive” to “drive increased investment in drilling”.
Ultimately though, the option wasn’t progressed during Budget 2025 and ministers instead promoted the $200 million contingency fund for Crown co-investment in new gas fields.
Documents released publicly this week reveal how ministers sought to address gas supply issues as part of Budget 2025.
A March briefing from the MBIE to associate Finance Minister Chris Bishop and Resources Minister Shane Jones outlined that New Zealand’s “energy shortage” was “putting the affordability and security of gas and electricity at risk, as we transition to Net Zero in 2050”.
“Our domestic gas supply is not adequate to meet demand and reserves are falling faster than anticipated. In 2024, gas shortages and low hydro inflows left the electricity system short of energy, leading to high prices and deindustrialisation.”
There were two primary factors for this: a “significant negative perception of the risk of investing” in New Zealand’s petroleum sector, as well as “poor drilling results in our ageing gas fields”.
The briefing sought the ministers’ agreement to include two initiatives in a draft Budget 2025 package. These were deemed “likely to increase domestic natural gas production for electricity generation”.
One option: “Accelerate deductions for petroleum development expenditure from the current seven-year straight-line method to either three years or immediate deduction”.
According to the Income Tax Act, petroleum development expenditure refers to spending by petroleum miners relating to a permit area and mining assets.
This can currently be deducted for tax purposes, with the default method being in equal amounts over seven years.
The proposed changes would have accelerated this, allowing deductions over three years or immediately.
“Some countries, including Norway and the United Kingdom, allow upfront deductions for petroleum development expenditure,” officials told ministers.
“But this is typically combined with relatively high marginal tax rates specific to the petroleum industry (eg 78% in the United Kingdom and Norway).”
This option would “provide a greater benefit than the Budget 2025 investment boost initiative”, the MBIE said.
Investment Boost, a key part of the Government’s Budget, allows businesses to immediately deduct 20% of the cost of a new asset on top of depreciation. It isn’t sector-specific and has no cap.
The MBIE reported that Inland Revenue recommended including petroleum development expenditure within Investment Boost and not providing a separate tax deduction as proposed.
Mining expenditure was specifically mentioned in the communications for Investment Boost, with Inland Revenue saying businesses could claim deductions on any such expenditure on or after May 22 – the day the Budget was announced.
Had ministers agreed to a specific accelerated deduction for petroleum development expenditure, they were told bringing it down to three years would cost $254 million over the forecast period, while immediate deduction would cost $398m. The costs were expected to decrease over time.
“There are fiscal upsides. If investments result in gas production, the Crown can expect to receive increased revenue in the form of royalties ... and the Energy Resources Levy.”
Officials said the sector had been advocating for the immediate deduction option “because it would have the most material and beneficial impact on balance sheets”.
“Given this proposal equalises over time and the significance of the risk of energy shortage, we recommend it should be adopted. The three-year spread option requires a smaller upfront Crown cost, however we would expect it to have a less material impact on drilling activity.”
There were risks, however, with the MBIE acknowledging it may not achieve the outcomes the Government desired. For example, instead of leading to more investment, companies could continue investing at current levels “and benefit from accelerated depreciation without achieving the outcomes we want”.
“The risk of failed drilling is high in our mature fields. In the last five years around $1.8 billion has been invested in drilling 58 wells, and this investment has not managed to maintain or increase our gas reserves. But this is why Crown intervention is needed, to increase drilling activity and the likelihood of more gas production.”
The option ministers went with – the $200m contingency fund to allow for co-investment in new gas fields – was considered an approach to “countering sovereign risk perceptions”.
Sovereign risk refers to a concern that a Government may unexpectedly change policy or investment settings.
The Government – in particular Resources Minister Shane Jones – has argued the previous Labour-led Government’s decision to ban new offshore oil and gas exploration dented New Zealand’s reputation internationally as a safe place to make investments.
To address concerns of sovereign risk, officials said the Crown could take on some of the risk of investment in new gas fields, which could in turn “convince other investors that the risk is mitigated”.
It recommended the Government be open to taking an investment in new developments – ministers eventually agreed to a 10-15% stake – and advance work on a business case.
“This decision would not bind the Government to any investment decisions. Specific business cases would need to consider the benefits, risks and mitigations of any proposed cornerstone investments.”
In a paper presented by Jones to his Cabinet committee colleagues in May, the minister said “bold steps” were required to improve investor confidence “if we want to support secure and affordable energy supply”.
He said it was important the Government be visible in addressing the issue.
“Being able to state publicly that the Government has set aside funds to use as a cornerstone investor will raise New Zealand’s profile and investor confidence.”
Jones said the fact the Government was prepared to take a stake “will be a powerful message” and contribute to New Zealand having a “positive story to tell”.
The paper made clear that access to the $200m fund would be subject to an indicative business case. Approval would be needed for any specific investments.
Labour’s Megan Woods is not a supporter of the fund, saying the money should instead go towards ensuring a transition away from fossil fuels. She wants to know the conditions which would allow a drawdown of the money, though Jones has said it would be “unwise” to release that publicly ahead of any negotiations.
“There is a fund that has no criteria yet that can be made public for how people will qualify for it, to take an equity stake in a search for gas where billions of dollars have already been spent looking for that gas and have come up dry,” Woods said last month.
“Even if it were to be found, it would take five to seven years on average to come to production, some even longer. This is at a time when New Zealand households and businesses are struggling to pay their power bills.”
Greenpeace has been critical of an error found in the committee paper which overstated how much gas prices rose in 2024. In the version released publicly, a note is added acknowledging the error and providing the correct figures.
Jamie Ensor is a political reporter in the NZ Herald press gallery team based at Parliament. He was previously a TV reporter and digital producer in the Newshub press gallery office. In 2025, he was a finalist for Political Journalist of the Year at the Voyager Media Awards.