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OVERVIEW ______3 1. Energy Outlook ______4 2. Oil ______5 2.1 Market Features and Key Issues ______5 2.2 Oil Supply Infrastructure ______8 2.3 Decision-making Structure for Oil Emergencies ______10 2.4 Stocks ______10 3. Other Measures ______12 3.1 Demand Restraint ______12 3.2 Fuel Switching ______13 3.3 Surge Oil Production ______14 3.4 Relaxing Fuel Specifications ______14 4. Natural Gas ______15 4.1 Market Features and Key Issues ______15 4.2 Natural Gas Supply Infrastructure ______17 4.3 Emergency Policy for Natural Gas ______18
List of Figures
Total Primary Energy Supply ...... 4 Electricity Generation by Fuel ...... 5 Domestic Oil Production and Demand ...... 6 Oil Demand in 2009 (kb/d) ...... 6 Oil Consumption by Product ...... 7 Crude Oil Imports by Source ...... 8 Oil Infrastructure Map...... 9 Total New Zealand Oil Stocks by Type ...... 11 Oil Consumption by Sector ...... 13 Natural Gas Consumption by Sector ...... 16 Gas Infrastructure Map ...... 17
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OVERVIEW
New Zealand’s relative geographical isolation from the global oil market supply chain creates a particular challenge to oil supply security. Fortunately, New Zealand has relatively abundant domestic fossil fuel resources, compared to most IEA countries. It has large reserves of coal and some reserves of natural gas and oil. The country has been fully self-sufficient in natural gas supplies; however, domestic natural gas fields are declining rapidly.
Oil consumption has grown steadily since the mid-1980s, and although there is some domestic production, imports are necessary to meet around half of New Zealand’s oil demand. Most imports are in the form of crude oil, primarily from the Middle East. Following an upgrade, New Zealand’s sole refinery is able to supply approximately 80% of the country’s product demand.
New Zealand places no minimum stockholding obligation on industry, and until 2007, it relied on the industry’s normal stockholding practices to meet the country’s overall minimum 90-day net import obligation as a member of the IEA. Rising import dependency over the past decade resulted in the country being temporarily in a state of non-compliance with regards to minimum stock levels.
In response to this, the New Zealand government acquired stockholding in other IEA member countries, in the form of ticket reservations, as of 2007. These tickets represent around 0.8 million barrels of public stocks in 2010 (down from 3.7 million barrels in 2007). Because of its growing domestic production in recent years, New Zealand’s net imports have dropped, thereby reducing its IEA stockholding obligation.
All tickets are held directly by the New Zealand government, rather than through an agency on the government's behalf. In an IEA co-ordinated action, New Zealand would likely contribute to the collective response by releasing these public stocks and implementing a campaign for voluntary demand restraint.
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1. Energy Outlook
Compared to most IEA countries, New Zealand has relatively abundant domestic fossil fuel resources. It has large reserves of coal – a large share of which is exported – and some reserves of natural gas and oil.
New Zealand’s TPES has more than doubled since 1973, growing from 8 million tonnes of oil equivalent (Mtoe) to over 17 Mtoe in 2008. Overall TPES has been relatively stable over the past decade, with the decrease in natural gas consumption being compensated for by an increase in renewable energies.
Total Primary Energy Supply
1973 2008
Coal Hydro/Renew/ Coal other 16% 29% 10% Hydro/Renew. /other 34%
Oil Natural Gas 37% Nuclear 3% Nuclear 0% 0% Oil Natural Gas 52% 20% 8 020 ktoe 16 906 ktoe *Data excludes electricity trade. Source: Energy Balances of OECD Countries, IEA
The supply of natural gas has grown by an astounding 1117% over the 35-year period, due to the development of sizeable gas fields as of the 1980s. The country has been fully self-sufficient in natural gas supplies, but domestic natural gas fields are now declining rapidly. Because of New Zealand’s inability to import natural gas (no LNG terminals and no pipeline connections to other countries), gas consumption has declined somewhat in recent years, in line with declining production.
The supply of renewables (and particularly hydro) has grown by 154% since 1973. Oil and coal, although also growing in absolute terms (by 47% and 41%, respectively, over the same period), have declined as a percentage of the country’s TPES.
As for oil demand, eighty-three percent comes from the transport sector, and an additional 11% is consumed by industry. For natural gas, 57% of demand is for power generation, with industry ranking second with 32% of gas demand.
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Electricity Generation by Fuel 50 45 40 Other
35 Hydro 30 Nuclear TWh 25 20 Natural Gas
15 Oil 10 Coal 5 0 Electricity Useˆ
Source: Energy Balances of OECD Countries, IEA
The main input for power generation is renewable energy – particularly hydro power (51% of power generation in 2008), of which New Zealand has abundant resources. Nevertheless, natural gas remains an important source of electricity generation, accounting for a quarter of inputs in 2008. Successive governments have made a strong push for the development of intermittent renewable energies (e.g. wind, wave, etc.), and these renewable fuels (particularly, wind) are expected to contribute progressively more to the country’s power generation mix (with a long-term target of 90% of power generation from renewable energies).
Whilst commendable from an environmental point of view, the intermittent nature of wind and other renewable sources means that power generation based on these intermittent renewables will require additional back-up capacity from hydro and hydrocarbon-based generation, and the bulk of this back-up capacity is expected to be gas-fired (mainly due to of the increasing economic costs of coal-fired generation, due to emissions). Thus, gas is set to play an ever-increasing role in the country’s power generation system, particularly in times of power crises. More importantly, because of the increasing reliance on gas-fired plants as back-up capacity, the electricity sector will be exposed to heightened dependence on gas-fired power generation in times of emergency, and times when power generation based on intermittent renewables (e.g. wind or wave) diminish temporarily. Thus, additional spare capacity for gas-fired generation will be required.
2. Oil 2.1 Market Features and Key Issues
Domestic oil production
All of New Zealand’s oil production is from fields in the Taranaki Basin, located on the west coast of the North Island. Most of the basin is located offshore, but the majority of small producing fields are onshore. Most oil produced in New Zealand is light, sweet crude. However, New Zealand’s sole refinery is geared towards sour crude. Thus, most oil produced in New Zealand is exported. All oil from New Zealand fields is transported to market via tanker.
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With the streaming of the Tui field and the recently commissioned Maari field, New Zealand’s total domestic oil production rate in 2008 reached 58 kb/d, an increase of over 40% from 2007. In 2009, New Zealand produced oil from 17 fields in the Taranaki region, with the two offshore fields, Pohokura (12.5 kb/d) and Tui (35 kb/d), dominating production in 2008.
New Zealand’s production is expected to peak in 2010. Thereafter, however, New Zealand’s progressively declining domestic production will have a significant impact on the country’s oil security. The fast rate of expected decline after 2010 is notably due to the fact that recent fields that have come online, such as Tui, are relatively small and have a high rate of depletion.
Exploration activity has increased in recent years. The main focus remains on Taranaki, but there has also been activity in other areas, including the east coast of the North Island, off the east coast of the South Island, and in the lower South Island. The New Zealand government recently accepted bids for exploration in the Great South Basin (off the bottom of the South Island), which is seen as the most likely location for a major oil/gas discovery.
Domestic Oil Production and Demand
200
180
160
140
120
100 kb/d 80
60
40
20
0 Jul-07 Sep-07 Nov-07 Jan-08 Mar- May- Jul-08 Sep-08 Nov-08 Jan-09 Mar- May- Jul-09 Sep-09 Nov-09 Jan-10 Mar- May- 08 08 09 09 10 10 Crude Oil NGLs Non Conventional Oils Oil Demand
Source: IEA Monthly Oil Statistics Oil demand
New Zealand’s oil demand has grown steadily since the mid- 1980s, driven primarily by transport consumption. Total New Oil Demand in 2009 (kb/d) Zealand oil demand in 2009 averaged slightly more than 154 kb/d. As in many OECD countries, the transportation sector LPG and Ethane 5 Naphtha - accounts for an increasing share of total oil demand, reaching Gasoline 58 83% in 2008. As a result of the increasing demand for transport Kerosene 22 fuels, demand has grown steadily since the mid-1980s. Diesel 48 Heating/other Gasoil 4 Residual Fuels 5 Motor gasoline, gas/diesel oil, and jet kerosene are the main Other Products 13 transportation fuels. Demand for diesel oil has grown at a Total Products 156 notably rapid pace, averaging 5.8% in the period from 2000 to 2008, compared to a rate of 2% for total oil demand.
Oil demand is expected to continue to grow at a very similar rate, and future oil demand growth will be the result of increases in the use of these transport fuels. Consumption in all other sectors is expected to remain the same or to decline.
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Oil Consumption by Product
180 160 140 120 Motor Gas 100 Jet and Kerosene 80 Diesel 60 Other Gasoil 40 thousand barrelsthousand perday Residual Fuels 20 Other -
Source: Monthly Oil Statistics, IEA
Taxes and maximum price mechanism
New Zealand has the fifth lowest taxation levels on gasoline in the OECD. These taxes include excise tax (which is paid into the National Land Transport Management Fund), the Petroleum or Engine Fuels Monitoring Levy (PEML), the Local Authorities Fuel Tax (LAFT), the Accident Compensation Corporation Levy (ACC), and the Goods and Services Tax (GST, 12.5%).
Diesel is not subject to excise tax, because all diesel vehicles are subject to road user charges, which help to fund the government entity responsible for national highways (Transit New Zealand). However, diesel fuel does incur the LAFT, PEML and GST. Road user charges for diesel vehicles vary depending on the type of vehicle. As an example, for a 2-ton vehicle, travelling 20 000 km per annum at a fuel efficiency of 9 litres per 100 km, the road user charge would be equivalent to about NZD 0.40/litre.
Imports/exports and import dependency
New Zealand’s relative geographical isolation from the global oil market supply chain creates a particular challenge to oil supply security. Oil consumption has grown steadily since the mid-1980s, and although there is some domestic production, imports have historically been necessary to meet the majority of New Zealand’s oil demand. Domestic production – which stood at above 50% of crude oil requirements in 2008 – will have peaked in 2009-2010, and is expected to decline rapidly in the upcoming years if no new oil fields are discovered.
New Zealand’s indigenous crude is generally light and sweet and is sold internationally, because New Zealand’s sole refinery can run on heavier and sourer – and hence cheaper – imported crudes.
Around two-thirds of oil imports are in the form of crude oil (primarily from the Middle East, and to a lesser extent, from Asia). Only a third of New Zealand’s imports are in the form of products.
New Zealand’s sole refinery (Marsden Point – NZRC) is historically able to supply approximately three- quarters of the country’s product demand, and the remaining fuels are thus imported (primarily from Singapore, Australia and Korea). As demand for these fuels – particularly road transport fuels – continues to rise, imports of these products will necessarily rise further. In 2008, gasoline and diesel already accounted for some 84% of product imports. Subsequent to a refinery upgrade, the country’s refinery should be able to meet around 80% of the country’s motor fuels, thereby reducing the country’s dependence on imported products.
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Crude Oil Imports by Source 100 90 80 Other 70 Malaysia 60 50 Indonesia 40 30 Singapore
thousand barrelsday perthousand 20 Total OPEC 10 - Total OECD Pacific
Source: Monthly Oil Statistics, IEA
Oil Company Operations
At the wholesale level, New Zealand is a highly concentrated market, with the four oil majors (BP, Caltex, ExxonMobil and Shell) maintaining an all-products market share of around 98% in 2008. At the retail level, there is more competition, with at least 15 branded networks and a rising number of unbranded sites. Collectively, these smaller networks account for over 15% of the retail market.
In 2008, Shell was the market leader, with estimated gasoline and diesel market shares of 29% and 27%, respectively, followed by BP, Chevron (Caltex) and ExxonMobil. Gull is the biggest independent retailer, with a market share of 3%, but the company has found its retail scope geographically limited to the northern half of the North Island because its only storage terminal is located in Mount Maunganui.
Shell and ExxonMobil were both seeking to sell their downstream assets in New Zealandin 2009, as the small size of the New Zealand market does not fit with the companies’ corporate focus on the big demand centres of the Asia-Pacific region. The key assets up for sale are the offtake agreement at the refinery and access to the coastal distribution and storage terminal networks. This provides a nationwide distribution network supplied with the lowest cost – something that has consistently hindered new entrants from entering the New Zealand market. Press reports have suggested that Woolworths, the Warehouse, Infratil and Gull have shown a sustained interest in all or part of the assets on sale. As of early 2010, Shell indicated that it was in exclusive negotiations with a consortium of Intratil and the New Zealand Superannuation Fund.
2.2 Oil Supply Infrastructure
Refining
New Zealand has only one refinery, the New Zealand Refining Company (NZRC) at Marsden Point, near Whangarei on the North Island. The refinery completed the Point Forward Project (PFP) in late 2009, increasing the refinery’s topping capacity from 104 kb/d to approximately 120 kb/d. The NZRC is able to supply approximately 80% of the country’s refined product demand. The refinery runs imported, mostly sour crude oil, coming primarily from Saudi Arabia and other Near-Middle East countries, as well as from Australia, Indonesia and Malaysia.
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The NZRC is a “toll refiner” – i.e. it charges a fee to convert crude oil and other feedstock into refined products. This fee is based on the difference between the value of initial feedstocks and final products, according to reported Singapore prices. NZRC profits are not affected by downstream pricing decisions of the four oil companies (BP, Chevron, ExxonMobil and Shell1) that own the majority of the refinery. Of note, the four oil companies are the only companies entitled to product from the refinery.
Ports and Pipelines
New Zealand is a sparsely populated country. Its sinuous landmass is actually larger than that of the United Kingdom, but there are only just over four million inhabitants. As such, the country has specific logistical challenges for delivering oil products around the country at an acceptable cost to customers.
New Zealand does not hold public stocks domestically, nor does it impose an obligation on industry to hold stocks. As such, all storage capacity is commercially-built and -used. Because of the country’s geography, ports and storage are closely intertwined, as products are primarily transported around the country by ships.
The NZRC owns the Refinery to Auckland Pipeline (RAP), which transports refined products to bulk storage facilities in the greater Auckland area, New Zealand’s major petroleum market. The pipeline has a capacity of some 53 kb/d (2.6 Mt/yr); as of early 2010 about 90% of this capacity is utilised. About half of the refinery’s production is distributed via the RAP pipeline; the balance is transported by coastal tankers and road to the rest of New Zealand.
Oil Infrastructure Map
1 As of May, 2010.
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Storage capacity
Coastal distribution delivers refined product from the NZRC to a number of locations around New Zealand, at which industry receives finished products (from the NZRC via coastal distribution as well as imports). New Zealand has 13 terminal locations (including the refinery), of which 11 are seaboard terminals. The Marsden Point truck-loading facility serves the Northland and North Auckland region, while the Wiri (South Auckland) terminal supplies Auckland (and parts of Waikato), and receives product from the NZRC via the RAP. The three major import terminals are Mount Maunganui, Wellington and Lytelton.
The oil majors employ a system that enables each company to draw product from any location subject to having access arrangements with a specific storage provider. This system is designed to offer a great deal of flexibility and efficiency to the domestic supply chain. The system works on an accounting system in which stock volumes are credited to companies based on a combination of refinery production as it accrues to the individual company processing at NZRC and as supplemented by periodic imports. A company’s ability to draw stock from the system is subject to having a positive stock balance.
2.3 Decision-making Structure for Oil Emergencies
The Ministry of Economic Development (MED) is responsible for issues related to oil supply security and in an international disruption would chair the National Emergency Strategy Organisation (NESO) and take the lead in developing a plan of action. However, the Ministry of Civil Defence and Emergency Management (MCDEM) is responsible for civil contingency planning for domestic events at the local and regional level; MCDEM’s mandate covers aspects such as pandemics and natural disasters (e.g. earthquakes), and is leading work to improve domestic contingency planning within the petroleum sector. MED is working with MCDEM to ensure coordination between operational responsibilities.
New Zealand’s NESO is comprised of staff from the Ministry of Economic Development, as well as representatives from oil companies and from the NZRC. In an oil supply emergency, the NESO would invite additional non-members to participate in consultations, including representatives of large user groups such as the Road Transport Forum and the Automobile Association.
There are two main legal instruments available to authorities during an oil supply disruption: the International Energy Agreement Act of 1976 (IEA Act) and the Petroleum Demand Restraint (PDR) Act of 1981. The IEA Act is designed to enable New Zealand to carry out its obligations as a member of the IEA. This includes ensuring compliance with international obligations in terms of petroleum supplies; the PDR Act is intended to deal with demand and distribution issues in a supply crisis.
2.4 Stocks
Stockholding Structure
New Zealand does not have domestic public stocks, and the government does not place a minimum stockholding obligation on industry. As such, all stocks in New Zealand are held on a strictly voluntary and commercial basis.
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Until the recent acquisition of government-owned ticket reservations, New Zealand relied on the industry's normal stockholding practices to meet the country’s overall minimum 90-day net import obligation as a member of the IEA.
From 1 January 2007, the New Zealand government acquired ticket reservations for stocks held in other IEA member countries, representing around 3.7 mb of public stocks in 2007 (461 kt), 2.1 mb in 2008 (285 kt), and around 0.8 mb in 2009 (107 kt) and 2010 (100 kt). Because of its growing domestic production in recent years, New Zealand’s net imports have dropped, thereby reducing its IEA stockholding obligation. All tickets are held directly by the New Zealand government, rather than through an agency on the government's behalf.
In a press statement on 2 January 2010, following the acquisition of tickets to cover New Zealand’s 2010 requirements, the Minister for Energy and Resources, The Honourable Gerry Brownlee, indicated that “the lower stockholding required with higher domestic production results in a significantly reduced cost to New Zealand – down from over NZD 11 million in 2007 to an expected cost of under NZD 2 million in 2010.”
Crude or Products Total New Zealand Oil Stocks by Type
End February 2010 As of October 2009, total stocks held by industry in New Zealand stood at 8.03 million Other barrels, of which roughly one-third was Residual products Fuel Oil 4% comprised of crude and unrefined oils, and 8% two-thirds were finished products. Crude Oil 38% There are no government-held or strategic Middle stocks in New Zealand itself. Distillates 26%
Location and Availability NGL & Feedstocks The New Zealand Government has entered Motor 1% into government-to-government agreements Gasoline 23% with Australia and the United Kingdom and has concluded formal treaties with the Netherlands and Japan to enable stocks held in those countries to count towards New Zealand's IEA obligations. In an IEA coordinated emergency action, these stocks held outside of the country may be released onto the global market. If needed domestically, the stocks can be purchased and transported directly or swapped with stock held closer to New Zealand in order to reduce transport costs and delivery time.
The ticketed public stocks held in other countries are normally a mix of crude oil and gasoline. In 2009, two-thirds of New Zealand’s ticketed stocks held abroad were crude oil stocks. The gasoline stocks that are ticketed have high fuel specifications in order to be importable into New Zealand in the event of a crisis
Monitoring and Non-compliance
As New Zealand has no compulsory stockholding requirements, there is no monitoring of individual company compliance. The government relies on accurate data from the oil companies in order to assess whether or not the total level of stocks in the country are sufficient to meet the IEA stockholding obligation. New Zealand authorities assure the accuracy of the company reporting by undertaking audits
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of the information supplied. The IEA Act allows the Minister of Economic Development to direct any petroleum-supplying company to keep books, accounts, and records, and to furnish returns and information as requested. Any company which fails to comply with these directions commits an offence against the Act and is liable, on summary conviction, to a fine.
Stock Drawdown and Timeframe
All oil stocks held in the territory of New Zealand are company stocks held for operational and commercial purposes. The legal powers for the drawdown of oil stocks are contained within the wide powers of the PDR Act.
The procedure for the release of emergency stocks in New Zealand is decided by the Minister of Energy in consultation with colleagues, and is expected to take 4 to 10 days. However, depending on where the stock is required, it is estimated to take 15 to 45 days for physical delivery of stocks to the market, after the stockdraw decision has been made.
Oil companies that are affected by an emergency have initial responsibility for responding to an oil supply disruption. The oil emergency response strategy of drawing on industry stocks would be activated only 1) if required to fulfil New Zealand’s obligations to the IEA, or 2) if petroleum supplies to New Zealand are materially disrupted and government involvement is necessary to rectify the situation and/or minimise the impact.
Financing and Fees
All industry stockholding costs are recouped by oil companies through their normal operations. The public stock ticket reservations are financed through the government’s general budget.
3. Other Measures 3.1 Demand Restraint
The transport sector makes up the vast majority of oil consumption in New Zealand, representing 83% in 2007, the latest year for which demand by sector is available. Most of the remaining portion is attributed to industry (11%). Thus, the likely most effective demand restraint measures would be targeted at the use of transport fuels.
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Oil Consumption by Sector2 100% Transformation/Energy 90% 80% Residential 70% Commercial/Agriculture/Other 60% 50% Industry 40% Transport 30% 6% 1% 13% 20%
share of total oil consumption oil total of share 10% 0% 80% 2008
Source: Oil Information, IEA
In a supply disruption, New Zealand would conduct a comprehensive public information campaign encouraging consumers to take a series of voluntary measures to conserve oil. These would include telecommuting, using public transport, car-pooling and staggering start times to relieve highway congestion. The New Zealand authorities estimate that these measures could reduce the number of trips by approximately 10%, producing a 3.5% (5 kb/d) overall reduction in oil products consumption.
The country’s demand restraint campaign would also include a detailed promotion of eco-driving, encouraging drivers to use their vehicles as efficiently as possible. This includes voluntary speed reductions, avoiding rush hour traffic, using the vehicle’s vents or opening windows for ventilation instead of using air-conditioning, not carrying excess weight and avoiding cold starts by combining several errands into one trip. It would also involve checking the tuning of the car’s engine, the condition of its air filters and the inflation of its tires. Authorities estimate that these measures would reduce oil consumption by approximately 3% for cars and freight vehicles, resulting in an overall reduction of 2% (3 kb/d).
The public information campaign would also target industrial and agricultural users of oil, encouraging them to conserve in different ways. It is estimated that these sectors could achieve a savings of 5% of their consumption, equating to an overall oil savings of 0.5% (0.8 kb/d).
For such “light-handed” measures, no legal powers are required. Legal powers made available through the PDR Act also make it possible to impose more restrictive and “heavy-handed” demand restraint measures, should these be considered necessary. Rationing is the most complex and substantive response mechanism available to government, and there are two types of rationing schemes: Quantity Rationing and Allocation Rationing.
3.2 Fuel Switching
New Zealand uses very little oil to generate power or heat, and as a result is not very susceptible to oil shortages in this regard. In 2007 no electricity was generated with oil. Most of New Zealand’s thermal power and heat generation relies on coal and gas.
There is only one oil-fired power station in New Zealand (Whirinaki), and this is kept in reserve in case of security of supply concerns. It is worth noting that a 2009 review of the electricity market in New
2 Total Consumption (including refinery consumption), does not include international marine bunkers.
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Zealand has proposed, inter alia, that Whirinaki be relocated or even removed to place more risk and hence responsibility on electricity generators. A dual HFO/gas fired power plant in New Plymouth is no longer in operation.
The scope for petroleum savings from fuel switching is thus very limited (very few cars or other fuel- using assets are able to switch to alternative fuels).
3.3 Surge Oil Production
In an oil supply disruption in New Zealand, fuel surging would be considered as an option, but would not be able to be brought on line within 30 days. Surging would only produce an estimated extra 1-2% of usual oil production, while causing the usual damage to oil wells, and would take several months to be introduced (in addition to the time it would take for Government to undertake the required consultations). Moreover, there are legislative barriers that would need to be overcome in order to introduce surge production at such short notice. Because of these costs and barriers, it is therefore not considered that there is much capacity for surge production to take place in New Zealand. Nevertheless, it would be considered as an option at the time of an oil supply disruption, in consultation with the oil production industry, including the New Zealand Refining Company (NZRC).
As of early 2010, the potential for surging production in New Zealand is minimal, but the measure could become more valuable if a large (Maui-sized) oil field were discovered. It is difficult to determine the extent to which production could be increased in advance, as it will depend on the geology of the field and the amount of spare capacity maintained.
3.4 Relaxing Fuel Specifications
Specification relaxation refers to the Crown’s ability to alter current fuel specifications requirements through passing emergency regulations under the Energy (Fuels, Levies and References) Act 1989.
Relaxing fuel specifications has the potential to assist in responding to an oil supply disruption by: • increasing the likelihood of refined products from offshore being acceptable for sale in New Zealand; • providing greater scope for the New Zealand Refining Company (“NZRC”) to process alternative crude oils (perhaps domestically-sourced) into refined products; • enabling NZRC to increase output (by a small margin) by relaxing specifications that constrain the use of some refinery components; • enabling fuel that meets the specifications in one region of New Zealand to be supplied into another region where it would normally be non-compliant.
As the specifications that would be relevant and the extent to which they might have to be relaxed would vary greatly across different scenarios, it is not possible to determine in advance what specifications should be relaxed in an emergency. Furthermore, the specifications (and vehicles/engines) are likely to continue to evolve over time and so flexibility of response is desirable.
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4. Natural Gas 4.1 Market Features and Key Issues
Gas production and reserves
There are 14 natural gas fields and wells in the Taranaki region, with production dominated by the Pohokura field (40.6%) and the Maui field (29.8%). New gas supplies that have been brought to the market or are nearing production are Pohokura, Turangi, further Maui gas and, in December 2009, the Kupe Gas Project. Of note, all gas production at the Tui oil field is flared offshore.
The development of the “Coal Bed Methane” (CBM)3 industry in New Zealand fits the government’s objectives of promoting the development of petroleum and mineral resources to achieve economic growth, and promotes benefits such as an improvement in the security of supply through a diversified energy source. The CBM industry in New Zealand is in its infancy, and production is negligible. However, as of early 2010, there are 17 permits granted which include the exploration of CBM, and one permit granted solely for commercial mining of CBM.
New Zealand also has large reserves of gas hydrates located off the east coast of the North Island and situated relatively close to the shore. Preliminary studies are extremely promising, with estimated volumes standing in the trillions of cubic feet. However, economically viable technology is not yet available for the exploitation of these reserves.
Gas demand
Gas demand has declined by some 33% since its peak in 2001, and stood at nearly 4 bcm in 2008, down from 4.3 bcm in 2007. Demand is dominated by energy transformation (57% of total gas demand). Industrial demand accounts for a third of total demand. As part of industrial demand, petrochemical demand is strong, although it has declined from its peak of 2.5 bcm in 2000 (where it exceeded total gas demand for energy transformation), to account for 731 mcm in 2008; the petrochemical industry has proved to be quite flexible in the face of decreases in domestic production, in effect acting as a price- taker.
Gas demand in the residential and commercial sectors has steadily declined in recent years. Annual residential gas demand has declined 41% between 2001 and 2008, from 183 mcm to 109 mcm, while commercial gas demand has declined 75% over the same period, from 341 mcm to 85 mcm. In the case of commercial gas demand, there may be some reclassification between customer classes, as industrial gas demand has risen 43%, or 293 mcm, over the same period. In the case of residential demand, however, there does appear to be a continuing trend of diminishing demand.
Gas demand peaks in the winter months, which can extend from May through September, and troughs in summer from November through February. Peak demand on the Maui pipeline is a good proxy for peak demand, as over 85% of gas flows along the Maui pipeline. Four fields have an interconnection into the Maui pipeline (i.e. Maui, Pohokura, McKee/Mangahewa and Turangi fields). On the Maui pipeline, the peak daily gas demand in 2007 was 9.9 mcm on 27 June, while in 2008 it was 11.1 mcm on 12 August 2008. The minimum daily gas demand on the Maui pipeline in 2007 was 4.6 mcm on 11 February and in 2008 it was 7.1 mcm on 10 February. In 2007, monthly demand peaked on the Maui
3 This is known as “Coal Seam Gas” in New Zealand.
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pipeline at 291 mcm in May, while in 2008 it peaked at 338 mcm in August. Monthly demand reached a low of 149 mcm in February 2007 and 219 mcm in February 2008.
The large Maui field has historically been very flexible in terms of production flows, and could thus be modulated in order to meet fluctuating demand. However, with the decline in production rates, the Maui field is progressively losing its flexibility. This has made the New Zealand gas market tighter at moments of peak demand, and has created an urgent need for the construction of gas storage capacity in New Zealand.
Natural Gas Consumption by Sector 7,000
6,000 Transformation 5,000 Energy 4,000 Dist. losses 3,000 Residential 2,000
million cubicmetres Commercial/other 1,000 Industry - Transport
Source: Natural Gas Information, IEA
Gas import dependency
All gas supply in New Zealand is domestically produced in the Taranaki region. New Zealand does not have an LNG import terminal or pipeline connections to other countries, and is therefore entirely reliant on domestic production for its gas needs.
An LNG import terminal has been considered at Port Taranaki, to import around half of New Zealand’s total annual gas requirements (around 2 bcm). However, new gas supplies have been brought to the market or are nearing production, and the project has been postponed indefinitely.
In the long term, there will be a growing disparity between supply and demand (tentatively reaching over 3 bcm in 2030), which highlights the urgent need for greater diversity of supply – possibly additional gas fields to be found and developed – or for a LNG terminal to be built.
Gas company operations
The main upstream producers are Shell, Todd Energy, Origin Energy, Greymouth Petroleum, OMV New Zealand, and TAG Oil New Zealand Limited.
Vector runs the Kapuni Gas Treatment Plant, but it receives the raw gas from Shell and Todd.
The biggest distribution and retail companies are Contact Energy, Genesis, Vector, Mighty River Power, Novagas, Powerco and Gasnet.
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4.2 Natural Gas Supply Infrastructure
Ports and Pipelines
As stated above, New Zealand does not have an LNG import terminal, and so is entirely reliant on domestic production for its gas needs. The potential for imported LNG gained impetus with the formation of Gasbridge, a 50/50 joint venture between Contact Energy and Genesis Energy, in 2003. Conceptual design, environmental assessments and technical studies for an LNG terminal have been undertaken. Since the inception of Gasbridge, new gas supplies have been brought to the market or are nearing production: namely, Pohokura, Turangi, further Maui gas and, in 4Q 2009/1Q 2010, the Kupe Gas Project. In July of 2009, the joint venture partners of Gasbridge decided not to progress the Port Taranaki LNG facility at this time. However, this option remains available and can be revisited, if and when gas supply and demand indicates the need for a backstop LNG option.
Gas Infrastructure Map
New Zealand’s North Island has a network of over 3 400 km of high-pressure gas transmission pipelines (including Maui Development Ltd’s pipeline). Connected to these are more than 11 600 km of intermediate-, medium-, and low-pressure gas distribution pipeline networks connected to the high- pressure system.
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As of early 2010, all gas enters the transmission system in the Taranaki region from both offshore and onshore production. The Maui and Pohokura fields are the largest producers and are connected to the Maui pipeline. Other producers are connected to the Maui or Vector pipelines at various locations around Taranaki. The Maui and Vector systems are interconnected within Taranaki at the Frankley Road interchange.
The Maui pipeline runs from Oaonui and dominates capacity north as far as Rotowaro (near the Huntly power plant), although the smaller Vector pipeline runs in parallel. The transmission pipelines north of Rotowaro (through Auckland and up to the refinery), east into the Bay of Plenty and Gisborne, and south of Taranaki (to Wellington and east to Hastings) are all part of the Vector system and are small pipelines relative to the Maui pipeline, typically in the 100 to 300 mm diameter range.
Due to its significantly larger size, balancing across the system is conducted on the Maui pipeline. The Maui pipeline is owned by Maui Development Limited, which is, in turn, owned by Shell (83.75%), OMV (10%) and Todd 6.25%). MDL is a bare nominee company which holds the Maui assets on behalf of the Maui Mining Companies (who have the same shareholding structure as shown for MDL).
As of 2010, there is no gas production or pipelines on the South Island, and no pipeline linking the two islands.
Storage
As of early 2010, New Zealand does not have any underground gas storage. There is one gas storage facility that is in the process of being developed at the depleted onshore Tariki/Ahuroa gas field. The storage facility will be owned by Contact Energy but managed by Origin Energy, which has a 51% shareholding in Contact Energy. Gas started to be injected in December 2008 and Contact Energy plans to have the gas storage facility operational by mid-2010. Exact quantities of gas that will need to be injected and future flow rates are uncertain. At a minimum, the Ahuroa storage facility will require 142 mcm of gas injected and it will have a daily deliverability of 2.5 mcm from three wells. At its maximum, the storage facility could have 420 mcm of gas injected, with a daily deliverability of 7.7 mcm from five wells.
4.3 Emergency Policy for Natural Gas
As a result of the decline of the large, highly flexible Maui field, increasing quantities of gas are being sourced from new, smaller and less flexible fields. This fundamental change required the introduction of new arrangements across the gas sector value chain. Given the litigious nature of the industry and the risk of hold-outs, in 2003, gas industry participants asked the government for industry self-regulation, backed up by the force of law. The establishment (in December, 2004) of a regulatory body called Gas Industry Company (GIC) sought to combine the benefits of industry self-governance with Ministerial oversight to ensure delivery of public policy objectives. GIC (as a private industry body) was provided access to the Government’s coercive legal powers in exchange for a level of accountability and control. The government believed that it was efficient to let the industry get on with the necessary regulation without the government having to put the resource into (or to take the risk of) designing gas governance regulations and rules itself. As such, both government and industry are intended to be like-minded partners working for the development of a competitive, well functioning gas market.
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The Gas (Critical Contingency Management) Regulations 2008 set the framework within which New Zealand gas emergencies are managed. The Administration has entrusted the implementation of the country’s emergency policy to a private company, Vector, under terms specified in the Regulations. In line with its responsibilities for decision-making in a crisis, Vector has developed a robust set of protocols and guidelines (approved by the GIC) by which industry must abide in an emergency. Vector runs training sessions for industry participants and tests communication exercises to ensure that the appropriate people are informed and contactable in an emergency.
The Administration retains control at a policy level for emergencies, in that it sets the prescribed limits within which Vector can operate as the Critical Contingency Operator. The Minister can accept or reject recommendations from GIC on a wide range of issues, which notably include emergency policy relating to gas transmission and distribution. The Minister has never rejected a GIC recommendation on the basis of policy grounds.
There are no government-mandated requirements on grid owners, system operators or industry participants to hold minimum reserves of natural gas. However, these participants, particularly the system operators, are required to maintain operating pressure in the reticulated network and therefore grid owners, system operators or industry participants will hold a certain amount of 'reserve gas' as line pack in this respect.
In the event of a critical contingency, a key component of the Critical Contingency Management regulations is to begin load curtailment. Load is curtailed according to curtailment bands set out in the Gas Governance (Critical Contingency Management) Regulations 2008.
In recent years, the largest consumer of gas in New Zealand has been the electricity sector (57% in 2008). Electricity retailers will be one of the first users to have their gas curtailed in an emergency. It is therefore important that the electricity sector is able to cope with any disruption of gas.
Strategic Gas Stocks and Drawdown
New Zealand does not possess strategic gas stocks. There are no government-imposed requirements for any market participant to hold any minimum level of stocks.
As of early 2010, there is no gas storage in New Zealand, and there is no means of importing gas supplies from abroad. As such, in a gas supply crisis, all emergency measures will seek to control supplies and reduce demand for gas.
Interruptible customers
There are three customers with interruptible load that would be affected prior to a critical contingency being called. These are the New Zealand Refining Company, the Tariki/Ahuroa gas storage facility under construction, and a portion of demand at the Southdown OCGT. Collectively, these facilities consumed 10 170 mcm in 2008, although only 2 350 mcm was interruptible in 2008, and the Tariki/Ahuroa gas storage facility only began injecting quantities in December 2008.
The Administration indicated that in the event of a serious natural gas crisis, the first customers that would be cut off would be the Huntly power plant (which has fuel-switching abilities to coal) and the Methanex industrial plant (a swing producer of methanol for the Asia-Pacific region).
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Fuel Switching
The most significant fuel switching in recent years has occurred at the New Plymouth and Huntly power plants. However, New Plymouth was decommissioned in January 2009, while the four old units at Huntly have moved progressively from gas to coal. Collectively, the two plants took 174 mcm of gas in 2008, down from 980 mcm in 2002.
New Zealand’s largest electricity generator, the 1000 MW Huntly power station, is duel fuel – i.e. it can run on both coal and natural gas. In a situation where a gas disruption occurred, Huntly power station could be run solely on coal. The Huntly power station has a stockpile of coal on site which it can draw from, if needed. This stockpiled coal – as well as domestic coal and imports from Indonesia – could technically supply this plant in the short-, medium- and long-term. Although there are no environmental regulations that would prevent this action occurring, there might be a financial implication when the
Emissions Trading Scheme (ETS) is formally implemented in 2010 – as coal emits twice as much CO2 as gas does. This could result in making it uneconomical to run the Huntly power station on coal.
If a shortage of gas were to threaten electricity supply, then the fast start, 165 MW peaking plant Whirinaki, which runs on gasoil, could be used. This plant does not operate in normal times. Of note, it is the only plant that has a government obligation to hold stocks (of gasoil).
20 INTERNATIONAL ENERGY AGENCY
The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its mandate is two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply and to advise member countries on sound energy policy. The IEA carries out a comprehensive programme of energy co-operation among 28 advanced economies, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency aims to: n Secure member countries’ access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions. n Promote sustainable energy policies that spur economic growth and environmental protection in a global context – particularly in terms of reducing greenhouse-gas emissions that contribute to climate change. n Improve transparency of international markets through collection and analysis of energy data. n Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy efficiency and development and deployment of low-carbon technologies. n Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international organisations and other stakeholders. IEA member countries: Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea (Republic of) Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain © OECD/IEA, 2010 Sweden International Energy Agency Switzerland 9 rue de la Fédération 75739 Paris Cedex 15, France Turkey United Kingdom Please note that this publication United States is subject to specific restrictions that limit its use and distribution. The European Commission The terms and conditions are available also participates in online at www.iea.org/about/copyright.asp the work of the IEA.