New Zealand’s decision to ban future offshore oil and gas exploration has generated plenty of consternation for not only the energy industry, but the residents of New Zealand as the opposition party condemned the decision as “economic vandalism”. The future of oil and gas production in New Zealand since the government’s announcement has seen both sides of the coin, with industry commentators noting continued activity in the industry with planned and active projects continuing, but still wary of the plight of the industry if there are no further discoveries within the lifetimes of ongoing permits. In a move by the Labour Prime Minister Jacinda Ardern, to address climate change and honour her pledge of reducing the country’s net greenhouse gas emissions to zero by 2050, New Zealand becomes one of the world’s first countries to ban future offshore oil and gas exploration earning her the backing of environmental campaigners globally. France, Belize and Costa Rica are also primed to ban fossil fuel exploration and production; however, none are considered as notable energy producers.
Since the announcement in April, material released under the Official Information Act has generated skepticism over the decision with the government’s own experts reporting the ban a lose-lose for both the economy and environment. The Petroleum Exploration and Production Association of New Zealand (PEPANZ) CEO Cameron Madgwick has been scathing of the decision stating that the ‘surprise’ decision hadn’t come with any consultation and there were better ways of achieving environmental goals of lower emissions and sustainability without, what he believes, costing the economy.New Zealand’s aspirations to become a lower emission country have been labelled bold and ambitious with many fearing that the repercussions of such a decision will actually lead to higher global emissions as the shortage of future oil and gas supplies will likely not meet the demand for New Zealand’s industry needs and the country will be forced to turn to imported coal. The uncertainty throughout the sector is pushing investors to look elsewhere, creating stress on the future of employment with the impacts of the ban just becoming evident. A billion-dollar, emissions-reducing rebuild of the Kapuni plant has been shelved citing the uncertainty of the industry. Ms. Jacinda Adern remains steadfast in her decision under her Labour rule that it is a change in direction, after the nine years of conservative leadership which favoured the fossil fuel industry, for New Zealand. “We’re protecting existing industry and protecting future generations from climate change.” Ms. Ardern said.
With research currently underway, due to be completed in late August, commissioned from the New Zealand Institute of Economic Research (NZIER) to explore the economic and environmental impacts of ending offshore exploration PEPANZ CEO Cameron Madgwick asserted, “Ideally the Government would have done this work before making a decision. As an industry we share their goals of lowering emissions and sustainably growing the economy, but an end to exploration doesn’t seem the right way to achieve this.”
New Zealand’s ban doesn’t mean the end of the industry with 22 out of 31 offshore existing exploration permits for exploration and extraction allowed to proceed to their full term, while the remaining permits onshore are unaffected by any decisions for the next three years and are due for review in 2020. Any oil and gas discoveries from the firms currently holding these licenses offshore can still lead to a mining permit for up to forty years, meaning the policy change protects current production employment within the industry for several decades.
New Zealand from a global perspective is a relatively small oil and gas producer, with the majority of its production extracted from the five offshore fields of Maui, Pohokura, Kupe, Maari and Tui in the Taranaki Basin. The Taranaki Basin is only one of 17 sedimentary basins, with New Zealand largely under-explored for possible commercial quantities of oil and gas in the world’s fourth largest maritime exclusive economic zone.
The timing of the announcement from the Prime Minister is of particular curiosity as the international interest in New Zealand rebounds after the effects of low oil prices were highlighted with only one exploration block awarded from the 2016 New Zealand Tender Round and one from the 2017 New Zealand Tender Round in comparison to 10 in 2014. However, with the oil price recovery, interest from several international companies has seen a resurgence of industry activity. New Zealand Oil and Gas, despite their misgivings at the lack of notice regarding the Labour government decision, are prepared to continue with their current projects and in a statement, informed the public that its financial position will not be affected immediately by the ban. The recent Sapura Energy farm-in to several offshore blocks and OMV’s bid to acquire Shell’s upstream assets displays the potential investments New Zealand stood to gain with reports that oil and gas exploration and production companies spent NZ$ 8.7 billion between 2011-2016. According to PEPANZ the country, on average, produces 175 Bcfg, 15 MMbo and 1.5 million barrels of LPG a year; contributing NZ$ 2.5 billion to New Zealand’s Gross Domestic Product (GDP).
Going forward New Zealand has released a proposed 2018 New Zealand Tender Round limited to the area in the onshore acreage of the oil-rich Taranaki region, which has done little to appease the region with the mayor of the Plymouth city, Neil Holdom, labeling it “a kick in the guts for the future of the Taranaki economy”. He has since also been quoted as saying: “What I heard from a number of companies was deals scheduled to be looked at by boards have been pulled.” With few details able to be elaborated on, but “we’re talking, in some cases, about tens of millions of dollars.” In what the region sees as a positive deal, keeping their hopes alive, methanol exporter Methanex surprised the Ministry of Business, Innovation and Employment by signing an agreement to continue to operate until 2029 after reports suggested without a new discovery the Vancouver-headquartered company would abscond.
The long-term future of New Zealand’s oil and gas production, with the increased pressure of the offshore exploration ban, appears bleak with its present trajectory, as many of New Zealand’s fields reach the end of their economic lives. Austrian- headquartered OMV’s pending acquisition of Shell’s assets emphasizes the point, citing in its application to the Commerce Commission that despite the increase in its market share it would gain if the application is approved, those shares would drop off over time as the reserves of the Shell assets decline. Currently OMV holds a 26% partnership in Pohokura, one of the largest gas-condensate fields in New Zealand, and a 10% share in Maui. The Maui Field is expected to be depleted by 2023 barring the possibility of a new discovery within the production license PMP 381012 and the Pohokura Field, which supplies approximately 40% of the national gas market, is set to decrease its production over the next few years. Similarly, PMP 38158 which holds the Tui, Amokura and Pateke oil fields operated by Tamarind is set to enter its Phase 3 drilling project in a significant step to prolong the life of the Tui Field beyond 2019.
Despite the foreboding interpretations of New Zealand’s oil and gas future, the industry endures, with plenty of current continued activity and news of further planned projects emerging from the major players already invested in New Zealand. With the increase in oil price that appears, cautiously, to be stabilizing, the next few years in New Zealand will undoubtedly be noteworthy.