Gas crunch should prompt climate commission to review oil and gas exploration ban - analyst

The COSL prospector, which is drilling exploration wells for oil and gas company OMV off the coast of Taranaki and Otago this summer. Photo / Supplied

The new Climate Change Commission should review whether the Government's oil exploration ban is reducing emissions, a leading energy analyst says, in a warning that gas shortages are likely to push up both electricity prices and harm industry.

A report by John Kidd, director of energy research firm Enerlytica warns that a major exploration campaign by Austrian oil and gas company OMV represents a "defining fork in the road" for New Zealand's energy system.

Success of the programme - estimated to be costing around $500 million - could improve supplies and energy affordability in the coming years, while if no new discoveries are made energy prices could rise and major industrial users may quit the country.

The report was commissioned by oil and gas company OMV, although Kidd, a critic of the Government's April 2018 announcement to end new offshore exploration permits for oil and gas, has been warning about the threats posed to New Zealand's energy system for more than a year.

He is not the only one issuing warnings, with Todd Corporation indicating it will invest heavily in its gas assets over the next decade in the face of a likely decline in supply. "Todd's view is that New Zealand gas supply over the medium term is set for a substantial decline," chief executive Jon Young said this month.

Supply shortages in the gas market were already having an impact, Kidd said. New Zealand has not had a new discovery since 2006, while some of the major gas fields now entering decline.

High wholesale electricity prices were blamed by Rio Tinto for it announcing a strategic review of the Tiwai Pt aluminium smelter. Methanex, the methanol producer which effectively underwrites New Zealand's gas market, said in October that it would be operating at 80 per cent capacity this summer.

Kidd said despite hydro-electricity storage levels being at close to the highest level in a decade due to recent heavy rain in the South Island, wholesale electricity prices remained well above the long-run average because of concerns about gas supply.

"There is great concern at the moment about security of supply for the last mile of the electricity market," Kidd said, with futures contracts for electricity in 2020 remaining high out of concern that any unscheduled outages could threaten electricity supply.

Electricity companies would be losing money at unsustainable levels from their retail businesses. A recent announcement by Genesis that it was raising retail prices by 5 per cent next year was a sign that households "can expect their energy bills to increase materially in 2020".

On Tuesday, Climate Change Minister James Shaw announced the new members of the Climate Change Commission, which will advise the Government on how to meet its climate targets.

Climate Change Minister James Shaw. Photo / File

Kidd said if the commission examined the Government's decision to end the issuing of new offshore oil exploration permits, it was unlikely an independent review would find it would lower greenhouse emissions in New Zealand, let alone globally.

Official advice from the Ministry of Business, Innovation and Employment on the decision warned that as much of New Zealand's methanol exports displaced coal use in Asia.

Kidd said New Zealand's gas shortage meant that Genesis Energy was now importing so much coal to generate electricity at its Huntly Power Station, that New Zealand's coal imports were the highest in more than a decade at 1.1 million tonnes.

"I think it would be really healthy for the Government, whether it be this one or the next one, to ask the independent Climate Change Commission to build evidence around this and to take an analytical view as to whether that announcement last year does hold water in the context of what it was pitched as addressing, because I don't think it would," Kidd said.

In a statement, Energy Minister Megan Woods said proven and probable reserves for gas were equivalent to 11 years of supply "which has been a relatively stable figure over the past decade" and any future discoveries had not been factored into the figures.

"With strong reserves and over 70,000 square kilometres worth of existing permits, we are confident in our security of supply," Woods said, adding that it had "been known that fields like Maui would be coming off peak for over a decade".

OMV has been the subject of extensive protest by Greenpeace, including climbing up the side of the Wellington building which houses its New Zealand headquarters, boarding a support vessel in Timaru in November and protesting outside its New Plymouth operation.

Despite this, its first exploration well of the summer programme was unaffected, with drilling beginning last week.

Meanwhile the Environmental Protection Agency has granted consent for its drilling in the Great Southern Basin, off the Otago coast, in January.