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Oil And Gas Exploration Ban Reversal – Expert Q&A

Published: Thu 11 Jul 2024 01:46 PM
The government intends to reverse the ban on oil and gas exploration beyond onshore Taranaki.
The SMC asked experts to comment on the history and current state of oil and gas exploration around Aotearoa, and how removing the offshore ban might affect applications for new permits.
Associate Professor David Dempsey, Civil and Natural Resources Engineering, University of Canterbury, comments:
What long-term contracts, timelines, and other commitments are in effect?
“The first type of long-term contract is a permit. These are issued by government under the Crown Minerals Act 1991 and grant a right to the permit owner to engage in certain oil and gas activities. There are two main permit types: exploration and mining (resource development and production). The exploration permit allows companies to explore an area for a commercial resource and, if one is discovered, provides a right to apply and be granted a mining permit. The mining permit grants the owner exclusivity to the resource and assurances they can develop and extract from it for a long time. The latter is important, as the cost to develop an oil and gas resource can exceed a billion dollars – an investment this large can take decades to recover.”
“The second type of long-term contract is a gas offtake agreement. These are signed by mining permit holders (being resource developers) and large users who want assurance of future gas supply. The largest user in New Zealand is Methanex who convert natural gas into methanol for export – they have supply agreements out to 2029. Methanex account for about 45% of our total gas use – carbon emissions are not realised (nor counted against NZ’s inventory) until the exported methanol is used in the overseas jurisdiction it is exported to. Other gas users include Ballance (producing ammonia for fertiliser), peak and strategic power generators (Huntly), industrial heat users, and transmission and storage providers (FirstGas, now Clarus). There is a spot market for gas, so not all users rely on long-term contracts.
“Many gas users have been decarbonizing their operations, e.g., replacing natural gas for heating with electricity or bioenergy, with prior governments co-funding some of this work. Petrochemical processes (methanol and ammonia) can also be decarbonised, e.g., via hydrogen of CO2 feedstocks produced by renewable means. Such decarbonisation efforts tend to have long timelines for asset procurement (e.g., electrolysers, boilers) and cost recovery.”
Roughly how many consents were granted during the ban and how might the removal change this number?
“Greymouth Gas Turangi Ltd were granted an offshore exploration permit during the ban period following a successful High Court legal challenge, however, this permit was applied for prior to the ban taking effect.
“In the decade prior to the ban, there were 49 exploration permits granted, many of these in offshore basins around New Zealand. The last offshore mining permits were granted in 2004/05. There have been four onshore exploration permits issued since the offshore ban came into effect (to Greymouth, Todd Energy and Riverside). It is difficult to predict how removing the offshore ban will affect applications for new exploration permits. Companies wanting to finance a new resource over the several decades it takes to explore, develop and extract, will be carefully weighing the political risk of future changes in exploration and mining laws.
“Companies will also be considering what future demand for natural gas looks like. For instance, were Methanex to exit their NZ operations, this would reduce demand for future gas offtake agreements. Other ongoing decabonisation efforts are also likely to curtail future demand.”
How difficult was it to introduce a ban in the first place?
“The law change was fairly swift following the initial announcement. An urgent briefing from MBIE shortly after the announcement highlighted some legal risks around infringing existing rights and downstream impacts on climate policy goals.”
What are the current global trends in oil and gas exploration and how does NZ compare following the new government directives?
“Much of the conventional oil and gas exploration is now occurring around the Atlantic margin, e.g., offshore West Africa, Brazil.
“Globally, fossil fuel investments have mostly recovered to pre-pandemic levels, but growth is being outpaced by clean energy. Nevertheless, a half a trillion dollars of investment went into new oil and gas supply in 2023.
“Oil and gas trends continue to be affected by geopolitical factors. For instance, the Russia-Ukraine war has lead to a reduced European reliance on Russian gas and a pivot to investments in Liquefied Natural Gas (LNG) import infrastructure, granting access to American supplies.”
Conflict of interest: “I have previously worked under contract for the energy industry. I receive funding from the MBIE to undertake research on underground storage of hydrogen in depleted natural gas fields.”
Professor Barry Barton, Faculty of Law, University of Waikato, comments:
“Geology is a key reason why overseas companies are cool on investing in oil and gas exploration in New Zealand. We should not expect a rush of companies to come to New Zealand because of these policy changes. Certainly the ‘ban’ prevents exploration except in onshore Taranaki, but apart from that NZ’s policy settings are quite attractive by international standards. Geologically NZ has turned out to have more gas resources than oil. Commercially, the NZ market is a small and isolated one where a company would struggle to commercialize a large gas find.
“The decline in gas reserves is largely due to difficulties with production from existing fields. However it has not been so severe as to prevent Methanex from operating; it consumes large quantities of produced gas.
“Some use of natural gas in NZ’s energy system is not completely incompatible with our climate goals, but it should be for niche uses. It should not be used for baseload electricity generation or low-temperature applications where heat pumps would work better.
“The change in the purpose of the Act will make a preference for oil and gas and mining activity that may not always lead to good results; an even-handed ‘management’ approach is quite enough to encourage industry while making it clear that the government will consider what is best for the country overall.
“The decommissioning regime could well do with a review; there are ways to take and maintain financial assurance that do not over-burden companies. However the Tui field abandonment showed that NZ had left itself completely vulnerable to company failure or sharp practice. It is essential that full financial assurance be taken so that decommissioning is ‘user pays’ and not thrust onto the taxpayer. More work is needed to ensure that decommissioning is done to a high standard.
“The proposal for Tier 3 minerals to set up a new regime for small-scale gold mining operations needs close scrutiny. Small operations can be a source of multiple compliance problems.”
No conflicts of interest.
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