Hopium?
There sure seems to be a lot of hopeful thinking about NZ's energy security despite the data.
In our last post we looked at the New Zealand gas reserves profile and the potentially very short timeline we have before the gas runs out.
Cooking with the gas! or maybe not?
New Zealand’s introduction to gas as an energy source came with the 1959 discovery of the Kapuni gas field in Taranaki followed by the introduction of a gas distribution network in 1970. The introduction of a domestic gas supply in New Zealand was the fertile ground upon which industry grew. Following on from Kapuni was the Maui offshore gas field ten y…
This dilemma has also been noted by Energy Resources Aotearoa who have warned that New Zealand’s energy security is in peril.
Stuff recently reported on this and included some interesting commentary from the Government officials (MBIE) on the situation. Let’s have a look what they have to say and what it really means.
Government officials have clarified a statement that appeared to suggest the country might have less than 10 years’ gas reserves remaining, making clear that was based on an assumption that they believe is not accurate.
The Ministry of Business, Innovation and Employment (MBIE) stated in a report earlier this month that estimated gas reserves had now “dropped below 10 years of remaining use for the first time”.
That was based on an industry estimate that New Zealand had 1635 petajoules of commercially-exploitable reserves, and an assumption that the country would consume an average of 200 petajoules (PJ) of gas over the next 10 years.
The report noted while the country had been using gas at that average rate over the past 10 years, consumption dropped to 145PJ last year, down from 155PJs in 2021 and 183PJs in 2020.
A petajoule is equivalent to about a billion cubic feet of gas.
Ok so what they are talking about here is 2P reserves. You will recall from the previous post that this is “Proven + Probable” reserves.
The most important take away from the statement above is what is not said.
The reserves reported on 2022 were 1967PJ. This means that in addition to 145PJ used last year we had a reserve write down (reserves that we thought were there but actually don’t exist or can’t be recovered) of 187PJ. This means that despite what we used the total change in reserves was -332PJ.
This is the unpredictable nature of 2P reserve profiles, especially when the majority of reserves are assigned to late life depleted fields.
This information needs to be overlaid on the context that there has been a significant amount of drilling in the region over the past 24 months, particularly in the Maui field, which should have seen reserves increase, not decrease.
As a comment in terms of consumption the fluctuation in gas use has a lot to do with the Southern lake levels as can be seen in the graph below. You will see in recent years that when lake levels are low there is an inverse relationship between coal and gas (if gas is falling coal is rising). The gas deficit was offset by an increase in coal usage.
So coal and gas kept the lights on in 2021 when the lake levels were low. When Pohokura had pipeline issues dropping gas production coal saved the day.
Let’s continue….
Energy Resources Aotearoa said the ministry’s report showed New Zealand’s energy security was “in peril”.
I agree.
The association, which represents oil and gas producers and explorers and associated service providers, has lobbied for a reversal of the Government ban on new offshore oil and gas exploration permits.
But MBIE gas policy manager Dominic Kebbell confirmed the 200PJ demand estimate was “not an accurate reflection of current gas use” and further clarified the ministry expected demand for fossil gas would “continue to decline as more renewable energy becomes available”.
Hmmm that’s odd for the next 5 years at least MBIE’s own report shows that gas usage is actually predicted to increase.
Not to mention any further reserve write down’s like the 17% reported last year.
A report that Concept Consulting produced for the Gas Industry Company in 2021 forecast that gas consumption would not approach 200PJ in any year up to 2059, and would instead tail off slowly, and then rapidly from 2035.
Another way of say this is that we are deindustrializing. Replacing gas with electricity or hydrogen is a herculean task and even if it were possible it would come at a crippling cost. Expect the trade deficit to grow in unison with primary energy levels dropping.
Instead of showing a risk of gas reserves running out within 10 years, “the reserves data shows we have enough fossil gas to support New Zealand through the transition to a fully renewable system,” Kebbell said.
I wish I could share this optimism but as we have seen above with the write down of reserves that the data is at best unreliable.
The ministry’s 1635PJ reserves estimates did not include the industry’s best guess that there are an additional 1727PJ of “contingent” gas reserves, which are reserves that are not economic to exploit today, but which may be in future.
Ok let’s see what the ministry’s report has to tell us about contingent “2C” reserves.
Wow a 41% write down in one year. I sure wouldn’t be hedging my bets with these figures and more importantly where are these “other fields”?
This is of critical importance because if the “other fields” are not near to existing infrastructure, like lets say offshore of the South Island, the lead time to develop them far exceeds the window of available reserves we have left even assuming what we estimate they contain is accurate.
However there is more…
Nor did it include any gas that is confirmed at OMV’s potentially significant offshore Toutouwai discovery, which the Austrian company aims to appraise next year.
Ok that sounds exciting and is good news. What does OMV have to say about this prospect?
“OMV said at the time of the original discovery that early indications were of a “significant discovery”, which would be the first in New Zealand for a decade, but it had to delay further investigations of the size of the find and the split between oil and gas, due to the Covid lockdown.”
So how much is oil and how much is gas? We don’t actually know. Again we see the unpredictable nature of these reserves.
Industry sources have suggested it has been a good rule of thumb in the past that about two-thirds of contingent reserves end up being recoverable, which would suggest the country’s reserves could last until 2042 even at last year’s consumption rate.
Kebbell said he could not comment on the likely conversion rate of contingent reserves as that was “highly subjective and dependent on individual economic and technical criteria”.
I agree with Mr Kebbell’s thoughts on this. If these gas reserves are offshore (which is the most likely scenario) and far from existing infrastructure they are highly unlikely to be economically viable.
Despite the reassurances over the absolute volume of gas reserves, MBIE’s report did point to a potential medium term problem that could emerge as a result of annual production potentially falling short of annual demand for a period.
“Gas production is expected to fall below current levels of demand from 2027,” Kebbell said.
But that caution also comes with a caveat.
Kebbell said the risk of a production shortfall was based on average demand remaining at 145PJ, and without any continued conversion of contingent gas reserves into proven and probable reserves.
“New Zealand doesn’t face an immediate shortfall in reserves, but the data shows there would be a production shortfall in the event that gas demand does not decline,” he said.
Understandably you’re probably scratching your head after reading that bit, I was too… So I’ll try and unpack it all as there is a lot to consider here.
Firstly, usage by MBIE’s own figures gas demand is predicted to increase, and not drop below 145PJ for about 5 years as we noted above.
Secondly, 2027 is only three and a half years away. This is the real crux of this issue. What happens at this time? Gas rationing? Some businesses have to find alternative energy sources or close? Do we prioritise domestic consumers at the expense of industry and further impact the balance of trade? What is the price of gas when demand outstrips supply? What is the overall impact to the economy of this?
There sure seems to be a lot of hoping going on here. Mr Kebbel better be doing a lot of rain dances to keep those lake levels high and making sure that the coal stockpile is fully topped up.
However, all jokes aside this is a real problem given how short the timeline is. The cold hard reality is that we lack the infrastructure to give us any optionality. Importing LNG is not possible without significant infrastructure and let’s be honest what can you build in New Zealand of any significance in 3-4 years? I doubt you could even negotiate the RMA and get a consent in that time frame let alone build anything. Germany has faced a similar dilemma since the NordStream pipeline sabotage and is only functioning thanks to electricity imported from France’s nuclear powered grid.
We don’t have a connection to any other counties and have to fend for ourselves.
Many of the factors that have led to a decline in the use of gas are long term, and some look set to accelerate.
They include new investment in renewable energy, warmer and wetter weather forecast as a result of climate change and which last year boosted the contribution of hydro generation, and the closure of the Marsden Point oil refinery which has reduced annual gas demand by about 10PJ.
I sure hope we don’t have a dry year again soon.
About a third of gas is burnt to generate electricity, but the Government wants to reduce that to zero by 2030.
I think for once they are going to achieve their target and well before 2030. I’m also pretty confident that the voters aren’t going to be as enthusiastic about it as the politicians are imagining.
Genesis Energy, the country’s biggest gas-fired generator, while eschewing that target, suggested in its last annual report that only 2% of electricity need come from burning gas in 2030, down from just under 10% last year.
Concept Consulting noted in its 2021 report that the country’s largest gas consumer, methanol exporter Methanex, was likely to exit the market early if gas production tailed off.
That meant it would “likely play the role of the ‘balancing demand’ to ensure sufficient gas is available to meet higher-value gas users’ long-term needs”, it said.
The gas market implications of the largest industrial consumer shutting up shop would be significant and would have a large effect on the economics of the entire gas industry. We would likely see early decommissioning of the higher cost to operate offshore fields as lower volumes fail to generate sufficient revenue to cover operating costs. This would in turn result in further reserve write downs as any remaining gas in these fields becomes stranded.
Methanex leaving is also further deindustrialization of the country with a negative impact on our balance of trade.
Paul Goodeve, chief executive of the country’s largest gas distributor Firstgas, did not endorse Energy Resources Aotearoa’s assertion that the country’s energy security was in peril.
“There have been genuine drops in absolute gas reserves, but more analysis of these estimates is required before I would comfortably reach a conclusion on this,” he said.
An absence of evidence is not evidence of absence. I would have thought that this analysis was of huge significance and should be at the top of the agenda for our politicians and industry leaders.
“We are certainly in a period of increased risk for the New Zealand energy system. At the same time, I remain confident in the ability of gas producers to continue delivering New Zealand’s energy needs for more than a decade,” he said.
Based on what? How are you confident?
Thanks for reading!
More on why this issue is so important to everyone who calls NZ home in the next edition and what is our relationship to energy for those who like to get a bit more philosophical. Also coming up in the future what we can do about this problem for something a bit more upbeat.
Until next time have a great weekend ahead.