By David Dempsey, Jannik Haas & Rebecca Peer*
The coalition government recently announced its plan to reverse a ban on new oil and gas exploration to deal with an energy security challenge brought on by rapidly declining natural gas reserves.
But this assumes, rather optimistically, that repealing the ban will prompt companies to invest in new gas fields.
In practice, those companies will be carefully considering whether there is anyone to sell their gas to, or whether a future government could change the rules again.
Investors don’t love political volatility or market risk, and New Zealand currently has both.
The coming gas crunch
Modelling by the Ministry for Business, Innovation and Employment (MBIE) suggests the ban repeal would result in an additional 14 million tonnes of carbon dioxide emitted by 2035.
This estimate is based on an assessment of climate impacts resulting from the policy reversal, compared to a baseline.
The usual baseline used for such assessments was set in 2022 by the Climate Change Commission. But the government argued it was already out of date and instead proposed a different one, with 15% fewer emissions from gas, because the country is running out much faster than expected.
In one sense, New Zealand is perpetually running out of gas. Energy companies estimate how much is left underground and how long that resource will last. At the same time, they are drilling new development wells – $350 million worth between 2016 and 2020 – which adds more gas to the reserves and pushes out the ultimate end date.
What has changed is that all the extra drilling hasn’t turned up much extra gas in the past few years. This is despite record amounts spent on new wells – nearly $1.3 billion between 2020 and 2024. Energy companies now think there’s less gas than previously thought.
It seems the end date is much closer, which is why the government has shifted to a new baseline to reflect less gas (and lower emissions). This is a good result for the climate – but it might not be great for New Zealand’s economy in the near term.
When gas runs low
As an island nation, New Zealand can’t easily import more gas from overseas. There is no pipeline to Australia, and liquefied natural gas terminals are expensive to build.
Macroeconomics tells us that when a resource becomes scarce in a closed market, the following things happen.
First, with a fixed amount of gas to go around, its use has to be prioritised. This means some users might miss out. As it happens, the government has been struggling to renew a contract to supply schools, prisons and hospitals with gas.
Second, when a resource becomes scarce, its price tends to rise. This tracks with the experience of Pan Pac, a forestry owner and processor in Hawkes Bay which reported a three-fold increase in gas costs, from $3 million a year to potentially $9 million at current prices.
Now, some would say the cure for high prices is exactly that: high prices. A gas crunch could ultimately shift demand to other sources such as heat pumps for home and industry. Some of this was subsidised through the previous administration’s Government Investment in Decarbonising Industry Fund.
But until the switch happens, resource scarcity means you can’t produce as many goods, and this could have an effect on GDP. Methanex, a major exporter of methanol produced from natural gas, is a key concern here. Less methanol would mean fewer exports and, potentially, job losses.
Methanex is already operating at reduced capacity, and it recently initiated high court proceedings against Nova Energy, which uses natural gas to produce electricity. Nova cut gas supply to Methanex and the companies disagree on whether their contract allows for this.
Tough decisions ahead
A new gas field could take a decade or longer to find, develop and bring online. At the same time, if there are no new reserves (regardless of whether the government goes through with the repeal of the ban), we can expect gas supply to drop to half within six years, according to MBIE forecasts.
This means there might not be enough gas to simultaneously maintain synthetic (ammonia-based) fertiliser production, peak electricity generation and methanol exports. What should get prioritised?
Ammonia is essential to the farming sector and food production. In the future, we might replace natural gas used to make ammonia with green hydrogen produced from ultra cheap solar. But that’ll take investment and intention.
Methanex exports are worth $800 million a year and the company is a significant contributor to the economy. A transition to a green methanol industry is possible, but would need a huge amount of green hydrogen (made using renewable energy) and green carbon dioxide (sourced from biomass or direct air capture).
This would be transformative to the economy but also take a lot of financial support.
Lastly, we burn a lot of gas to keep heat pumps running in winter when hydro lakes are low. And we almost ran out earlier in the year.
A future energy system with abundant solar, grid-scale batteries and smarter use of hydro storage might avoid this as gas is phased out. The problem is that these solutions cost a lot of money and take time to implement. New Zealand apparently doesn’t have much of either.
*David Dempsey, Associate professor, University of Canterbury; Jannik Haas, Senior Lecturer of Sustainable Systems, University of Canterbury, and Rebecca Peer, Senior lecturer, University of Canterbury.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
70 Comments
'What has changed is that all the extra drilling hasn’t turned up much extra gas in the past few years. This is despite record amounts spent on new wells – nearly $1.3 billion between 2020 and 2024. Energy companies now think there’s less gas than previously thought.'
Aye, exactly what I've been pointing out, here, for years.
Good to see they can self-peer-review.... :)
And mostly - this is the question we should have been asking all along; can economic growth outlast fossil energy? (spoiler alert - it can't)
We don't.
The biggest reserve is likely off the coast of Gisborne, however it is not technologically possible at this time regardless of commercial viability. i.e. even if oil was $1,000,000 per barrel they still can't extract it.
It is looking likely that the 2030 estimates were optimistic and for many operators based on "assumed" finds that never eventuated.
Note the inability to factor energy separately?
Reminds me of RNZ Business; 'interest-rates, oil and gold' (as if they were equivalents).
The question is: beyond fossil energy, who will have the 'money' to visit a theme park? To maintain it? We'll be too busy doing food-production and infrastructure-triage.
Mind you - if his head is in it, it's likely sand; easy to dig, not so easy to shore up.
Kiwis were encouraged to switch to electric and gas by Comrade Ardern's govt., and now the gas supply is short because there's been no exploration.
And when the temperature drops the electricity supply's on the ropes.
What a cock-up. Let's go back to good old-fashioned fires.
What has changed is that all the extra drilling hasn’t turned up much extra gas in the past few years. This is despite record amounts spent on new wells – nearly $1.3 billion between 2020 and 2024. Energy companies now think there’s less gas than previously thought.
I'll leave that there for you Mr Riverhead as you seem to have missed it in the article and PDK's comment above.
Fossil fuels will run out and get more expensive to extract. It's over buddy, no matter how much you throw your toys out of the pram and blame mama.
Not just could; always does.
We go after the best, first (otherwise someone else would). So the closest, most pressurized, easiest to tap; they go first.
What amazes me, is the inability of some (maybe Upton Sinclair had a point) to understand 'finite'. Probably they have the same cranial incapacity to understand 'limits'.
NZ with the highest per capita car usage is uniquely placed to get screwed over by higher fossil fuel prices. I feel most other countries are far more adaptable.
I was in the gold coast recently. With the new light rail system you can easily live without a car. Solar is also booming in Australia. Which is a natural hedge against higher fossil fuel prices.
Yeasty economic geniuses as in all of our parents??? How dare they have a child which demand resources to survive (sarc). But yes, things were more abundant in the past and with less humans. It will be interesting to watch the UK implode when the north sea field starts running dry
Excellent article. There is a lot of industry in NZ that is no longer profitable once gas prices reach xyz price.
However this will only become an issue at contract renewal. Most natural gas contracts between suppliers and large users are 10 years or so.
The long term effect for your average Kiwi is lower real incomes and a lower quality of life.
This is going to strike the world over. The prosperity of the last couple centuries has been on the back of cheap energy. We may not be running out, but we are getting to reserves that are more difficult to extract so the price will go up.
Optimists will tell you of the rapidly declining costs of solar and that we can use that to sustain our quality of life, but I'm not so sure, especially given it's become an us against them issue politically
Well we have China beavering away on the development of thorium reactors - they would solve the energy problems - if sorted - for centuries. USA dropped their development (I think it was Nixon) because they were no use as weapons..... I wonder who we should be mates with - I wonder.
You might 'solve' the electricity problem - but remember that electricity is 40% of NZ's energy. FF is the rest; same goes for the planet.
To replace all FF, with electricity, requires heroic assumptions, multiple thereof. We've left that too late - which tells us about thorium, and any other yet-to-be-developed techno-fix. It needed to be in production by 20 years ago.
Copied from today's Transpower weekly market report: 'Hydro storage continues to decline, although the electricity risk also shifts downward in the coming months as inflows are expected to increase based on historic trends, along with lower demand over spring and summer'. Nothing to see here! Oh....wait there is bugger all snow so we don't get those expected spring inflows see : https://www.meridianenergy.co.nz/power-stations/snow-storage
A significant portion of incredibly high value land in Auckland is used for free car storage. Our unwillingness to adabt is for the most part cultural. The baby boomers and gen X of Nz are a suburbia loving car orientated generation.
Photo of free, under utilised car storage space. There is actually more car storage space on the side of the street also.
https://www.google.com/maps/@-36.8648386,174.794735,3a,75y,347.44h,73.1…
Yes, based on "historic trends". AKA consulting the crystal ball. Those heavy rain events of equinoxial fronts blowing off the Tasman are becoming less reliable, even moreso during La Nina events. Guess what, near term predictions are a trend towards La Nina conditions.
Good thing hopium is such a powerful energy source. We'll be digging deep into it.
"coldest couple of winters I can remember here." So you're under 10 years old, or suffering dementia? But seriously, do you have actual data to support your "feelings"? What does your nearest official recording site say? I've been a keen observer of climate since childhood and lived in the same district all that time and climate has most definately changed! Winters are definately warmer, just observing disappearing southern alps snowpack and ice should be a clue to most?
COPs are all about how the oil industry can extend and pretend, not about mitigating global warming.
"The scale of oil and gas influence in Dubai is unprecedented, with almost four times as many industry-affiliated lobbyists than the number registered for Cop27 in Sharm el-Sheikh – which itself was a record year."
https://www.theguardian.com/environment/2023/dec/05/record-number-of-fo…
Next Cop is petrostate Azerbaijan. Surprised you aren't going yourself, to rub shoulders with the rest of the burner community?
For electricity production, yes. In Melbourne there is a very serious industrial heartland that are serious users of gas, for them the more likely outcome is re-locate (to Queensland probably).
I was watching an ABC news clip on this a while ago (https://www.youtube.com/watch?v=8ZKoyrNmCFM), my memory is a bit hazy. The desired solution seems to be a new pipeline from Queensland.
But, the gas from Queensland is Coal Seam Gas, and the drilling and extraction for that is very intrusive on the landowners (Queensland farmers) compared to the traditional natural gas.
The owner of the national gas pipeline infrastructure, Firstgas, surely have a very vested interest in making sure gas doesn't run out or get to the point that the major users up-stick. Do they have the pockets to build an LNG import terminal? Which, if it were to go ahead, surely needs to start off as a 'supplement' to domestic gas, to keep the security of supply attractive to their customers.
Looking at Firstgas ownership, they are owned by 'investors', rather than serious oil & gas infrastructure types. So, probably not?
There is a mothballed LNG terminal in the Manukau Harbour. It is connected by a 5km pipeline to a storage facility in Wiri. Can that be resurrected and supplied by LNG Tankers from Australia?
There is a mothballed Mercury Energy gas fired electricity cogeneration plant in Southdown. Can that be resurrected?
This means there might not be enough gas to simultaneously maintain synthetic (ammonia-based) fertiliser production, peak electricity generation and methanol exports. What should get prioritised?
More stats in the analysis would be ideal. What is the consumption pa of each of those uses - and if dropped altogether how many life years are extended to that which is left?
For example, I assume it's a whole lot easier to import and store fertiliser than it is to import and store natural gas itself. We need to start thinking with a how-to-triage mindset.
Perhaps MBIE has done the analysis but the political masters don't want to be seen to 'pick' winners and losers - a hangover from the neoliberal market-solves-all approach. In times of abundance, perhaps it does, but we are a long way past such times. .
On the subject of the pumped hydro, after reading the article on here a few days ago. I was doing some reading online.
I was interested in some of the smaller potential options from this report, and how they would compare to Onslow: https://www.mbie.govt.nz/assets/hydro-generation-stack-update-for-large…
In particular the smaller reservoirs located upstream of loads of generation.
E.g. Moawhango pumped to Koroteti Stream. A potential 21 GWh storage.
Can someone help me with the maths. If 21 GWh is stored upstream of the 10 dams on the Tongariro/Waikato schemes. That presumably means there is 21 GWh x 10 of storage? Plus the new generation from the reverse pumping. So 210 GWhs +?
Energy stored in the lakes behind river hydro dams is minimal in New Zealand, The energy storage is almost all in one or two large lakes in the hydro catchments. For example, if you think of Waikato / Tongariro as a single scheme, almost all the stored energy is in the operating range of Lake Taupo.
Also, pumped hydro doesn't work by pushing water back up rivers in the reverse of a hydro system in a series of steps. Therefore, locating a small pumped hydro scheme at the top end of a hydro dam system is not an energy advantage, except in the traditional hydro storage sense for one-off water release into the hydro system.
I’m still not sure I fully understand.
In the hypothetical situation I referred to above of a 21 GWh new reservoir pumped above the level of Lake Maowhango
I'm assuming it is unlikely that 21 GWhs of inflow would ever occur to Lake Maowhango that would not just be stored in the natural Lake Taupo (with control gate) just 2 stations further down the scheme, anyway.
Maybe even in a Cyclone Hale than Gabrielle situation.
What about the other hypothetical referred to in that document, on the same scheme. Whakamaru pumped up to a new reservoir at Pokuru Rd. Also 21 GWhs.
As this is downstream of Lake Taupo. In an extreme shedding situation (or excess wind, or even overbuild of solar). If that reservoir held 21 GWhs, and there is no natural lake downstream. Would the storage capacity be considered as 21GWhs plus the 5 downstream dams?
So 21 GWhs x 6, 126 GWhs? Would that maths be correct? If 21GWhs are stored from spilling power (from the same scheme) during excess spring water flows? and spring wind, etc. Would that mean there is an exponential increase to 126 GWhs stored for winter?
But then, even if the above was on the right track, I started asking myself the question if it only increases the storage if it is from spill from the same scheme?
If it was from power from excess wind or other schemes - etc, is it robbing Peter to pay Paul buy denying 21Gwh from going down the last 5 dams, until later.
My head started hurting at this point.
The spill aspect is a bit of a distraction. Pumped storage operation may or may not reduce wind or water spill, depending on the size of the scheme and what else is happening around the country.
Strictly, the potential energy of the stored water of a pumped storage scheme is a function of the elevation difference between the upper and lower reservoirs. For example, one possibility for Lake Onslow would be to have a connecting tunnel to Lake Roxburgh as the lower reservoir. Another option is to have a shorter tunnel to the Clutha River downstream of the Roxburgh Dam.
For a given water level of Lake Onslow, the "pumped storage energy" is less in the first case than in the second, because the elevation difference is less - even though the water released into Lake Roxburgh would then generate further power when it passed through the Roxburgh station. That's why the preliminary drilling for the Onslow investigations indicated a Clutha River connection - a lesser discharge (narrower and less costly tunnel) would generate the same amount of power when water is released from Lake Onslow.
For small schemes, it's possible to create the upper reservoir by cutting off the top of a hill, if in the right location. A hypothetical Whakamaru scheme is shown in the Nov 2022 edition of the NZ Hydrological Society Newsletter. There is something on Onslow also, in the Nov 2018 issue.
It will be interesting to see if grid batteries or small pumped storage schemes might replace gas peakers as the gas runs down and becomes increasingly expensive.
Wouldn't it be better to replace gas base loads, and save the gas for peak use. After coal is phased out first, of course.
Yes, generally with small hydro, higher head is preferred over high flow systems. Part of this is because a low head hydro would be situated in a floodable position, to get as much head as possible, whereas high head means you can afford to be out of the flood zone.
Could be a income source for hill country farming, or at least a way of reducing their power bill
Saving gas for peaking only makes a lot of sense for sure - an idea shared by the gas industry I think. See the reference to Gas Industry Co in this article.
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