THE NEW ZEALAND GAS STORY The state and performance of the New Zealand gas industry SIXTH EDITION | DECEMBER 2017 Message from the Chief Executive Gas Industry Co is pleased to publish this sixth edition of the New Zealand Gas Story. It includes developments in the policy, regulatory and operational framework of the industry since the previous edition was published in July 2017. The New Zealand gas industry continues to make a significant contribution to New Zealand’s energy supply and is performing well against Government policy and consumer expectations. However, as Gas Industry Co has been signalling for some time, the role of gas in New Zealand has been changing. This has particularly been driven by three interrelated factors: development of new energy technologies and associated consumer preferences; low upstream investment in a low oil price environment over recent years, with resulting impacts on gas reserves; and developing responses to climate change. The key additional factor which will drive further change is the developing policies of the new Labour- led Coalition Government. Climate change policies included in the new Government’s list of priorities will undoubtedly be a significant influence on upstream and other investment. Coalition agreements provide for introducing a Zero Carbon Act and an independent Climate Commission, based on the recommendations of the Parliamentary Commissioner for the Environment, and for gradual inclusion of the agriculture sector in the Emissions Trading Scheme. The Labour/Greens Agreement includes requesting the Climate Commission to plan the transition to 100 percent renewable electricity by 2035 in a normal hydrological year. For the moment, gas contributes around 22 percent of New Zealand’s primary energy, and provides over 277,000 New Zealand homes and businesses with secure and affordable energy. Additionally, there are around 150,000 LPG consumers served by 45kg or larger bottles and by South Island pipeline networks. For residential consumers, economical gas-fired water and space heating can have a carbon footprint similar to a house with standard resistance water heating and a heat pump. The range of business and community gas users is broad, and includes hospitals, aged care facilities and schools. For industrial consumers, natural gas provides a reliable supply of process heat in its own right, while potentially displacing coal and fuel oils, and offering a competitive alternative where renewable fuels are unavailable or impractical. Natural gas also has a critical role in providing cost-effective electricity supply security. It supports renewable electricity generation, especially when hydro lake levels are low. There are, however, a number of factors that will influence the extent to which natural gas can fulfil its contribution – not the least the availability of the raw product. And given New Zealand’s isolation from world gas markets through an absence liquefied natural gas (LNG) importation capabilities or cross border pipelines, this country is totally reliant on indigenous reserves. Low international oil prices continue to suppress upstream exploration investment, although there are signs those prices are recovering. In the meantime, we have seen some significant oil and gas reserves ownership changes as some large, long-standing participants rationalise their international investment and operational portfolios. Perhaps fortunately, in light of this significantly reduced activity, New Zealand’s gas reserves position has remained reasonably stable thanks to work on existing fields and reserves re-evaluations. Although natural gas production in 2016 was around 200PJ, P2 natural gas reserves at 1 January 2017 amounted to 2,009PJ, compared with 2,062PJ a year earlier. However, greater market demand has shortened our supply horizon, based on the 2016 reserves/production ratio, to around 10 years, down from around 10.5 years in the previous year. As noted in last year’s edition of The New Zealand Gas Story, the 2016 gas supply/demand assessment1 commissioned by Gas industry Co foreshadows that, in the absence of significant reserves increases from new or existing resources, the market can expect a tightening of supply, and potentially higher gas prices, in the next four or five years. Other uncertainties remain: future oil prices and the consequent extent of exploration effort; future CO2 prices, and the consequent impact on gas demand – particularly the extent to which coal- and gas-fired power stations are displaced by renewables; the future of the electricity-intensive Tiwai aluminium smelter, and the consequent impact on power generation demand, and therefore the level of thermal support, should the smelter close; future international gas and petrochemical prices, as well as New Zealand’s gas reserves position, and the bearing these have on the extent of future methanol production in New Zealand; and population and GDP growth. From a governance perspective, the gas industry continues to operate efficiently on the solid platform of fit-for-purpose arrangements developed since the introduction of the co-regulatory regime for the downstream gas sector in 2004. The industry is addressing a range of initiatives, with a particular focus on the development of a single gas transmission access code, now that the two previously separately-owned transmission pipeline systems are under the single ownership of First Gas. This process is progressing very satisfactorily with the objective of having a new code in place by October 2018, to replace the currently separate access arrangements. The industry continues to pilot a day-after-delivery (D+1) reconciliation scheme with implementation envisaged once the new transmission access code is in place. Both of these initiatives are expected to further improve gas market efficiencies. The industry’s performance metrics also remain strong: market arrangements facilitate efficient consumer switching between retailers. About 4,000 gas consumers switch gas supplier each month, representing an annual churn of about 17 percent of gas consumers. Gas customers can switch retailers for many reasons, but this high level of activity in the gas retail market suggests that customers find changing retailer easy and can put pressure on retailers to offer competitive terms and pricing. Switching rates have been over 176 percent for more than two years. the amount of time taken to complete a consumer switch has shortened significantly. Over 75 percent of customer switches are now completed within three business days of the switch being requested by the new retailer. the gas market is generally competitive with over 99 percent of gas customers connected to a gas gate where seven or more retailers trade. 1 Long-Term Gas Supply and Demand Scenarios – 2016 Update, Concept Consulting average annual unaccounted-for gas (UFG) stands at about 0.8 percent (compared with about 2 percent in 2009). In summary, the gas industry in New Zealand continues to meet consumer expectations and to broadly meet its obligations under the Government’s policy objectives and outcomes for the sector. There are multiple challenges – not the least the growing emphasis on climate change management and the implications this has for natural gas’s role as the future unfolds. For now gas provides secure, affordable, and relatively low-carbon energy to New Zealand homes and businesses. The gas industry is keen to play its part in the development of policies as New Zealand and the world transition to a low-carbon future. Steve Bielby Chief Executive Gas Industry Company About the New Zealand Gas Story The New Zealand Gas Story was first published in February 2013. It has two purposes - one legislative; the other market-based. As the ‘industry body’ under Part 4A of the Gas Act 1992, Gas Industry Co is required to report to the Minister2 on the state and performance of the gas industry. In the past, Gas Industry Co and the Government have issued occasional substantive reviews by external consultants3. In the era of websites and e-communication, Gas Industry Co publishes regular updates on market performance4. With The New Zealand Gas Story, we have developed a web-based report, which can be readily updated and added to over time. This is useful for keeping abreast of an industry that is constantly evolving, and where disclosure requirements introduced in 2013 sees staged releases of information during the year. The second, market-based driver for this Report was a request from industry participants for Gas Industry Co to ‘stitch together’ the full story of gas in New Zealand, to assist knowledge and understanding of gas and its role in the New Zealand economy and society. This has become a formal part of Gas Industry Co’s corporate strategy. The industry is complex and multi-faceted, from the time in which investors enter the upstream exploration market through to where gas is used by one of over 277,000 consumers. This Report is intended to provide a reference for industry stakeholders who may only be familiar with the parts of the gas story that are closest to them. Gas Industry Co also hopes the Report will help inform stakeholders’ planning and decision-making processes. While the Report is produced by Gas Industry Co, it is not only about Gas Industry Co and its work. Rather, it is a discussion of the broad gas industry in New Zealand, and as such: extends beyond Gas Industry Co’s formal jurisdiction, which essentially covers industry governance arrangements from the point at which gas is processed and injected into the transmission system. There is a range of other private and public players participating in or reporting on the industry. provides signposts to work being undertaken separately by other parties. Readers should follow those for the inevitably changing detail of that work. has scope to update, expand and improve its contents iteratively over time. Gas Industry Co welcomes ongoing feedback. The Report benefits from drafting and review by a range of external stakeholders, but Gas Industry Co retains authorship responsibility and reserves the right to moderate and/or edit any contributions.