Gas Supply and Demand Scenarios 2012 - 2027 March 2013 update including Maui pipeline analysis Concept Consulting Group Limited Level 6, Featherston House 119-123 Featherston St PO Box 10-045, Wellington, NZ www.concept.co.nz 179083179079.1 Concept Consulting Group Concept Consulting Group (Concept) is a New Zealand-based consultancy specialising in energy-related issues. Since establishment in 1999, Concept has advised clients in New Zealand, Australia, Ireland, Singapore and the United States. These clients have included energy businesses, governments, international agencies and regulators. Concept has undertaken a wide range of assignments, including market development, market analysis, technical evaluations, regulatory and policy analysis, and project management. The firm’s directors all have extensive backgrounds in executive management positions with energy companies in New Zealand, and the consulting team collectively offers practical hands-on experience across a wide range of disciplines. Preparation of this report This report was prepared by Simon Coates, David Hunt and David Weaver. Disclaimer Concept Consulting Group believes the information and opinions expressed in this report to be accurate and complete at the time of writing. However, Concept and its staff shall not, and do not, accept any liability for errors or omissions in this report or for any consequences of reliance on its content, conclusions or any material, correspondence of any form or discussions arising out of or associated with its preparation. GAS SUPPLY AND DEMAND SCENARIOS 2012 - 2027 2 Contents Executive Summary / Key messages ........................................................................................................ 5 1 Introduction ................................................................................................................................. 10 2 Gas supply and price scenarios .................................................................................................... 11 2.1 Historical gas supply ........................................................................................................................... 12 2.2 Potential sources of gas supply in New Zealand ................................................................................ 15 2.3 Conventional gas reserves – Taranaki basin ....................................................................................... 15 2.4 Conventional gas reserves - ex-Taranaki basin ................................................................................... 19 2.5 Unconventional gas ............................................................................................................................ 23 2.5.1 Shale resources .......................................................................................................... 25 2.5.2 Coal seam gas ............................................................................................................. 26 2.5.3 Underground coal gasification ................................................................................... 26 2.5.4 Unconventional gas sources - implications for gas market ........................................ 26 2.6 Potential for gas importation ............................................................................................................. 27 2.7 Gas supply and price scenarios ........................................................................................................... 30 2.8 How quickly might these scenarios unfold? ....................................................................................... 32 2.9 Cost of swing ...................................................................................................................................... 34 3 Gas demand scenarios ................................................................................................................. 35 3.1 Historical annual gas demand ............................................................................................................ 35 3.2 Petrochemical sector .......................................................................................................................... 37 3.2.1 Methanol production ................................................................................................. 38 3.2.2 Ammonia urea production ......................................................................................... 43 3.2.3 Potential implications for gas transmission investment ............................................ 44 3.2.4 Summary of petrochemical demand for different price scenarios ............................ 44 3.3 Power generation ............................................................................................................................... 45 3.3.1 Baseload generation development ............................................................................ 45 3.3.2 Peaking generation .................................................................................................... 49 3.3.3 Pattern of operation from existing plant ................................................................... 52 3.3.4 Overall projections of gas demand from the power generation sector..................... 55 3.4 Industrial, commercial and residential – annual demand .................................................................. 58 3.4.1 Summary projections ................................................................................................. 80 3.5 Overall projections of gas demand for New Zealand ......................................................................... 81 4 Peak demand scenarios and pipeline investment ....................................................................... 84 4.1 Peak demand drivers .......................................................................................................................... 85 4.2 Interruptibility .................................................................................................................................... 93 Appendix A. Description of statistical model ................................................................................... 105 Appendix B. Assumptions relating to industrial & commercial boilers ............................................ 120 Appendix C. Glossary ........................................................................................................................ 123 Appendix D. Maui Pipeline Addendum ............................................................................................ 128 GAS SUPPLY AND DEMAND SCENARIOS 2012 - 2027 3 Introduction .............................................................................................................................................. 128 Description of approach ........................................................................................................................... 128 Results ....................................................................................................................................................... 132 GAS SUPPLY AND DEMAND SCENARIOS 2012 - 2027 4 Executive Summary / Key messages This report considers possible futures for gas in New Zealand, and identifies the key drivers and issues which are likely to affect how the supply and demand for gas is likely to develop over the next 15 years. March 2013 Update This March 2013 update includes a new Appendix D, which specifically considers potential gas demand on the Maui pipeline north of the Mokau compressor. All the rest of this March 2013 updated report is identical to the original 2012 report. The associated spreadsheet tool and database have also been re- released with the new analysis relating to the Maui pipeline1. Gas supply New Zealand’s current gas supply position is stronger than it has been for many years driven by the highest level of exploration effort seen for a long time, which in turn has been underpinned by high oil prices. Although exploration effort is predominantly focussed on oil, the fact that gas and oil are typically found together means that high oil exploration effort translates into increased likelihood of new gas reserves being found. NZ has transitioned from the Maui-era which had a high dependence on a single declining offshore field. It now draws supply from an increasingly diverse range of onshore and offshore fields New Zealand’s future gas outlook has also strengthened markedly. There are now sufficient reserves to last through to the mid-2020s based on current rates of use, and since the early-to-mid 2000’s gas finds have been occurring at an annual rate which is generally equal to or greater than annual consumption levels. The petrochemical and power generation sectors play a valuable ‘shock-absorber’ role in varying their consumption to match the prevailing supply position. This is of value to both upstream producers and downstream gas consumers: Upstream producers have increased confidence that if they find gas they will have a market to buy it, thereby making New Zealand a more attractive place to search for hydrocarbons; Downstream gas consumers benefit both from increased likelihood that hydrocarbon exploration effort will focus on New Zealand, and from the fact that if reserves should fall then the petrochemical and power generation sectors will scale back their consumption to enable gas to go to higher value industrial, commercial and residential energy uses. This