Why New Zealand is running out of gas

Summary

New Zealand's energy sector faces a severe gas shortage, with supply down and demand up, leading to record high gas prices. Power companies, like Genesis, are struggling with the financial impact of declining gas fields and are forced to import coal as a backup. The government and industry are considering importing LNG as a solution, despite previous reluctance. The conversation highlights the need for dynamic storage and the challenges of relying on indigenous gas, which has seen a 40% reduction in supply, impacting major industrial users and the economy.

Takeaways

• 📉 New Zealand is facing a significant gas shortage with supply nationally down and demand up, leading to an energy crisis.
• 🔍 The country's six main gas fields are in decline, accounting for 95% of the supply but requiring uncertain and unconfirmed investment to stabilize or increase production.
• 🏭 Industrial users, including major exporters like Methanex, are being forced to reduce operations due to lack of gas, impacting the economy and export receipts.
• 📈 Gas wholesale prices have reached a new record high due to the shortage, causing distress across the energy industry.
• 💔 Despite substantial investment in the gas sector over the past three years, production has not increased, and reserves have hit a record low.
• 🌐 The energy system is stressed, with hydroelectric storage very low and reliance on less preferred fuels like coal to maintain the electricity system.
• 🚧 The conversation around importing gas, which was previously dismissed, is now becoming more prominent as a potential solution.
• 🚀 The technology for importing LNG (Liquefied Natural Gas) has matured, offering a quicker and more cost-effective solution than considered in the past.
• 💰 The cost of importing gas is currently about half the price of indigenous spot gas, making it an economically viable option despite previous reluctance.
• 🤔 The future of investment in the gas sector is uncertain, with the political climate and lack of success from recent exploration wells potentially deterring investors.
• 🌍 The situation highlights the broader challenges of energy security and the need for dynamic storage solutions, as well as the impact of climate change on energy production.

Q & A

What is the current situation with gas supply in New Zealand according to the transcript?

New Zealand is facing a gas shortage with supply nationally down and demand up. Production at all major fields is declining despite significant investment over the past three years, and gas reserves have hit a record low, leading to a significant increase in wholesale gas prices.

How does the decline in gas supply affect power companies like Genesis Energy?

The decline in gas supply has forced companies like Genesis Energy to import more coal for backup. Genesis Energy, which relies on gas for its Huntley power station, had to import 350,000 tons of coal due to low hydro lake levels and insufficient wind power, impacting its finances materially.

What is the role of the Coupe oil and gas field in the New Zealand energy sector?

The Coupe oil and gas field is significant as Genesis Energy has a 46% stake in it. However, attempts to extract more gas from it earlier in the year failed, which has had a material impact on the company's finances.

How has the lack of gas storage impacted the energy sector in New Zealand?

The lack of gas storage facilities, with only one gas storage facility in the country, has made it difficult to manage supply shortages. This has led to a reliance on less preferred fuels like coal, which is more expensive and involves environmental trade-offs.

What is the potential solution discussed in the transcript to address the gas shortage?

One potential solution discussed is the import of Liquefied Natural Gas (LNG) through floating modular terminals. This would add capacity and dynamic storage to the system, allowing for gas to be pumped into the system at varying rates.

What are the economic implications of the gas shortage for New Zealand's industrial sector?

The gas shortage has led to major industrial users, such as Methanex, reducing their operations significantly due to lack of gas, impacting export receipts, GDP, and jobs. This has increased uncertainty for businesses and affected the viability of staying operational.

Why has the investment in the indigenous gas sector not yielded the expected results?

Despite about $1 billion being invested in the indigenous gas sector over the past three years, the investments have not resulted in increased production. The wells drilled have not been commercially viable, leading to a 40% reduction in the gas supply expected two years ago.

What is the role of hydroelectric storage in New Zealand's energy mix?

Hydroelectric storage plays a significant role in New Zealand's energy mix. However, the country is currently experiencing very low water levels in its hydro lakes, which has forced a reliance on less preferred and more expensive energy sources like gas and coal.

What are the challenges faced by residential consumers due to the gas shortage?

Residential consumers are not the primary concern in terms of gas supply, as their demand is relatively small compared to industrial users. However, they may face indirect effects such as increased energy costs and potential demand response measures that could affect their daily energy use.

What is the current state of investor interest in New Zealand's energy sector?

Investor interest in New Zealand's energy sector has waned due to a combination of unsuccessful investment outcomes and political decisions, such as the expiration ban, which has made the country a higher risk for investment. The remaining investors are cautious about further investment without significant changes.

What are the potential implications of importing LNG for New Zealand's energy independence?

Importing LNG could provide a short-term solution to the gas shortage, but it also raises questions about energy independence and the long-term sustainability of relying on imported energy. It also involves significant investment in infrastructure and potential changes in the governance and operation of the energy sector.