THE NEW ZEALAND GAS STORY The State and Performance of the New Zealand Gas Industry 2nd Edition - December 2013 186219.4 186219.4 Message from the Chief Executive Gas Industry Co is pleased to publish the second edition of the New Zealand Gas Story. This Report includes significant developments in the policy, regulatory and operational framework of the industry since the first edition was published in February 2013. Gas remains an essential component of New Zealand’s energy supply, and since February we have seen a number of important developments in the gas market, including: significant growth in gas use, with annual gas consumption heading back over 200PJ for the first time since 2002; changes in major uses of gas reflected in rapid restoration of methanol production, partially offset by reduced gas-fired electricity generation; the emergence of two separate wholesale gas spot market platforms, indicating a further maturing of the market; and the commencement of a new pricing and information disclosure regime applying to some gas industry participants, introduced by the Commerce Commission under Part 4A of the Commerce Act 1986. At the same time, expectations for new upstream investment and regulation augers well for ongoing future supply, and existing gas infrastructure is likely to be adequate for the market’s needs until a significant new find triggers the next step-change. Internationally, gas continues to help countries reduce their reliance on more harmful fossil fuels and to transition to a cleaner, more environmentally sustainable energy future. The Report generally continues to paint a picture of an industry that is in good health and on track in terms of consumer needs and Government policy objectives for the sector. The New Zealand Gas Story 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 Minister1 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 consultants2. In the era of websites and e-communication, Gas Industry Co publishes regular updates on market performance3. With the New Zealand Gas Story, we have developed a new model for 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 new disclosure requirements will see staged releases of information over the course of a 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 strategy. 1 The Minister is defined in the Gas Act as the Minister with responsibility for administration of the Gas Act. As at the date of this report, the ministerial warrant for Gas Industry Co was held by the Minister of Energy and Resources. On occasion, decisions in respect of the gas industry have been made under delegation by the Associate Minister of Energy and the Acting Minister of Energy. See www.beehive.govt.nz/portfolio/Energy-and-Resources for up to date information on the Ministerial portfolio. 2 ACIL Consulting: Review of the New Zealand Gas Sector. A Report to the Ministry of Economic Development, October 2001; Allen Consulting Group: The New Zealand Gas Industry in 2006. Review of its state and performance – Final Report to the Gas Industry Company, 15 November 2006 3 www.gasindustry.co.nz 186219.4 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 more than 260,000 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. A few things follow from the above: the report 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 involved in the industry chain. In a number of areas the Report provides a reference to the work of those other players rather than seeking to express the best or only view from a Gas Industry Co perspective4. in identifying particular current issues, the Report similarly provides signposts to work being undertaken separately by Gas Industry Co or other players, and readers should follow those for the inevitably changing detail of that work. there is scope to update, expand and improve the Report iteratively over time. Gas Industry Co welcomes ongoing feedback. The report has already benefited from drafting and review by a range of external stakeholders, but authorship responsibility rests with Gas Industry Co. Overall, the New Zealand Gas Story describes the industry’s development over 40 years. It is small by global standards, but plays a major and often unrecognised strategic role in New Zealand’s energy supply mix and economic activity. Compared with other countries, New Zealand is lucky that our forebears had the vision and tenacity to invest in developing a domestic industry, and many New Zealanders have now come to rely on gas supply for their homes and businesses, and to support electricity generation. The New Zealand Gas Story is about optimising the contribution of gas to New Zealand, both in terms of a legacy of assets and investment, and also the potential arising recently from a remarkable global resurgence in gas exploration and use. Gas is being looked at in a new way, both to help address climate issues and drive economic growth in leading economies. In that context, New Zealand’s gas story has some unique features and some distance to travel – we continue to be an isolated domestic market (apart from some importing and exporting of LPG) and we have barely scratched the surface of the development of ‘unconventional gas’, which is the focus of much new overseas development. These recent developments have not come without controversy, with concerns about issues such as ‘fracking’ and environmental sustainability still being addressed. The Report identifies a range of areas where New Zealand’s regime is fit for purpose, and others where there are significant issues and intensive ongoing efforts to find solutions. The Government is leading a focus on upstream investment and development, including through a Petroleum Action Plan and a restructured New Zealand Petroleum and Minerals administration. This is part of the Government’s core economic development policies and has included a revision of Crown Minerals legislation and royalty regimes. The industry also has an important part to play in health and safety arrangements and environmental management controls, including recent legislative reinforcements for the Exclusive Economic Zone (EEZ). 4 For example, upstream exploration and production activity is also discussed in Gas Supply and Demand Scenarios 2012-2027, Concept Consulting Group, December 2012 (available at http://gasindustry.co.nz/sites/default/files/consultations/254/gas_supply_and_demand_study_v2.pdf) as well as in the subscription-only 2012 New Zealand Petroleum Sector Yearbook produced by Edison Investment Research. Further detailed information is available through the Ministry of Business, Innovation and Employment (MBIE – formerly the Ministry of Economic Development) at www.mbie.govt.nz 186219.4 The supply side of the gas market has blossomed from a reliance on a couple of large fields to current supply from 15 fields. These remain concentrated in the Taranaki region. Transmission and other infrastructure, some of it funded by Government, from the 1970s faces questions in terms of capacity and a renewed focus on ensuring ongoing high levels of reliability. An overseas comparison with many aspects of the sector would find that it is tailored to the particular characteristics of the industry in New Zealand, and without some formal arrangements commonly found in elsewhere. To some extent, this is appropriate, given the industry’s small size and the way it has developed over many years. At the same time, the industry in many respects has had to become more sophisticated, and will have to go further, including to meet the demands of modern consumers and investors. Currently, relatively flat global and domestic economies have seen a fall-off in traditional energy demand growth. However, the developments discussed above in relation to a growing global role for gas and higher upstream investment levels in New Zealand raise the prospect of increased supply in the near future. Initially this offers the prospect of returning to the levels of supply and demand seen when the Maui gas field was in its heyday in the mid-2000s, with potential to increase beyond that. The industry generally is aware of its issues and is proactively addressing them. Unique issues for New Zealand include whether any significant new gas finds will be exported and, if so, whether this may bring international gas price parity to the domestic market. Important immediate focus areas for the industry therefore are to ensure it is ready for the opportunities and challenges of the next significant gas find and, in increasingly competitive energy markets, to make sure that its proposition for gas consumers remains compelling. Gas Industry Co hopes that through fostering a broad understanding of gas, its place in the economy; and the industry’s history, structure and performance, this Report will help inform stakeholders’ planning and decision- making processes. Steve Bielby Chief Executive Gas Industry Company Disclaimer In preparing this Report, Gas Industry Co has relied on information it holds, or has accessed through publicly available sources.