Comment

Rod Oram: Shedding light on the gas sector’s claims

Rod Oram systematically dismantles the economic and environmental claims New Zealand's gas sector makes as it doubles down on on its promises that it can help cut carbon emissions

Countries prosper when they play to their comparative advantages. In our case, natural gas is absolutely not one of them.

Yet, our gas sector keeps doubling down on its claims it can help us and other countries drastically cut carbon emissions in the decades ahead, while deriving great GDP benefits along the way. None of those claims stack up on economic or environmental grounds.

'We have the right geology', is the sector’s main claim. Seismic surveys of large areas of the deep oceans around New Zealand indicate the potential for enormous hydrocarbon reserves, it says.

Thus encouraged, the previous National government made oil and gas exploration one of its key economic development strategies. It went to great lengths to support exploration by international and local companies. Initially, that generated a substantial rise in activity. But many of the companies soon lost interest.

“[P]roduction has been in decline over the last seven‐to‐eight years with no substantial new discoveries. Oil and gas exploration has collapsed to $10 million in 2015 from $300 million in 2010 due to international market changes,” concludes the latest economic development strategy by Taranaki, the sector’s home.

Notably, Shell, the fourth-largest gas producer in the world, has quit New Zealand after selling its last gas assets here at a much lower price than it had hoped for. It says it is focusing on finding mega fields on and offshore in, or close to, existing production provinces of the world, thus ending its 100-year involvement here.

Even if our geology did hold a mega find, the cost of developing it would be prohibitive, particularly if it was in our deep and stormy Southern Ocean. It would have to compete against the glut of cheap gas in the world, while additional new low-cost, more easily accessible finds keep being identified abroad.

Our existing land and inshore fields produce expensive gas compared with the many other sources around the world, according to annual data compiled by our government. In 2016, our business users paid an average of US$26.60 per gigajoule, whereas Australia’s cost was US$15.60 and the US’s US$9.20.

We can help ourselves and help the world by playing to our comparative advantages in agriculture and renewable energy.

Moreover, given its vast reserves and fracking, the US is becoming a massive gas exporter, competing against long established Middle East and Asian suppliers. Likewise, Australia is on track by year-end to become the world’s largest exporter of liquefied natural gas, overtaking Qatar. These, and many other countries, have great competitive advantages over us in natural gas.

Thankfully, though, the un-bankability of our deep offshore geology has averted a potential ecological disaster. While the odds are long of an exploration or production well failing far out at sea, the sector here has never convincingly explained how it would cope if one did.

As the Deepwater Horizon disaster in the Gulf of Mexico proved in 2010, a massive and speedy response is vital. Most important of all was the quick drilling of relief wells to take the pressure off the failed well so it could be capped. Including the clean-up of the three-month oil spill, some 3,000 ships were involved.

But in our case, a relief drill ship might be as far away as Singapore. Finding enough clean-up ships would be even harder, and our waters are far rougher than the Gulf of Mexico’s.

Yet we should be seeking to protect our oceans, which are one of our greatest comparative advantages. Our Exclusive Economic Zone is the fourth largest in the world, and among the richest in endemic species; and our fisheries management practices, for all their flaws which we have to fix soon, is considered one of the best in the world.

Our gas sector’s next argument is we can help other countries reduce their climate-changing carbon emissions by shipping them our gas, because it burns more cleanly than their coal or even some other sources of gas such as coal-bed methane. But this argument is a complete non-starter. They wouldn’t buy our gas because it would be more expensive than gas from the likes of Australia, the Middle East and the US.

Next, the sector argues it can help reduce our emissions at home. The example it gives most often is gas displacing coal as the heat source for milk driers. Fonterra, for example, dries one-third of its milk by burning coal, mostly in the South Island where there is no gas reticulation, and some in the North Island away from the gas pipeline network.

The particular example NZ Oil and Gas uses is Fonterra’s plant at Clandeboye, north east of Timaru. It could supply the plant with 3 petajoules of gas a year if it found gas in its Barque prospect 60km to the southeast and piped it ashore.

But that gas would only halve Fonterra’s emissions from burning coal, and only some eight to 10 years from now at the earliest should Barque eventuate. Instead, Fonterra could move faster to zero emission by switching to biomass, such as wood waste from forest harvesting.

Scion, the Crown Research Institute, estimates that such biomass could displace over time some 60 percent of all coal burnt currently here, not just for milk driers. The Bioenergy Association, which commissioned the study, says there are no technical or economic impediments, only the task of building a supply network, says Brian Cox, its executive director. Moreover, the higher the carbon price goes in the Emissions Trading Scheme, the more economically advantageous biomass is over gas.

Gas faces another economic impediment: the high cost of building pipelines around the South Island to far dispersed industrial users. Biomass is already established as a heat source in Dunedin and is slowly spreading. Also, within a few decades other heat sources such as zero-emissions electricity will likely become superior to gas on economic grounds too. Similarly, Westpac’s recent research showed gas declining from 15 percent of our electricity generation in 2015 to 1.5 percent or zero by 2050.

NZOG identified two other potential users for Barque gas. First, Ravensdown says it could build a fertiliser plant using 14 petajoules a year. But this ignores the fact that the use of such artificial fertilisers worldwide is the main source of nitrate leaching, which is by far the largest human breach of the nine biological-chemical-physical boundaries of the planet. Over the life of such a plant, agriculture here and worldwide will have to make a massive shift to more ecological-friendly farming systems and fertilisers.

Second, if the price was low enough, Methanex and Coogee say they could use some 121 petajoules of gas a year to make methanol for export. But methanol, a simple alcohol used in many industrial and energy processes and products, is an utter commodity. So, bottom line, the overwhelming use of Barque gas would be for such a low value commodity, which would have to compete against cheap-gas methanol elsewhere.

Nonetheless, the economic analysis of Barque NZOG commissioned from MartinJenkins, a consulting firm, seems alluring at first glance. Over the near 50-year life of the field, it would generate some $15 billion in GDP and $32 billion in taxes and royalties to the government, not to mention creating 2,000 local jobs once it was up and running.

But long before the field was exhausted in 2070, New Zealand and the world would have transitioned to a very low carbon economy. Technology, energy and business will be very, very different. Along the way, Taranaki and every other part of the country, will have abundant jobs and economic opportunities from the transition.

They do not need to become more dependent on fossil fuels while the world is trying to become less so; and anyway, investing in gas projects would draw scare resources such as capital, materials and construction workers away from projects that are more advantageous economically and environmentally.

Instead, we can help ourselves and help the world by playing to our comparative advantages in agriculture and renewable energy.

Is Barque viable? NZOG has to decide by next April whether to drill its first exploration well, and then start drilling before late 2020. If not, it has to return the exploration permit to the government.

Barque’s history is instructive. It is part of the much larger Clipper prospect off the east coast of the South Island. BP drilled the one, and so far only, exploration well in Clipper in 1984. It was a triumph for the technology of the day, finding gas 4,000m under the seabed. But it was never developed because of the lack of a market, not to mention the technological and economic hurdles to doing so.

The technology’s moved on a lot, making NZOG’s task easier today: drilling in 800m of water to a target zone 2,500m-3,000m below the seabed. But the market and economics seem as elusive as ever.

Handily for NZOG, though, it will drill another onshore well in Taranaki later this year. That makes perfect economic and environmental sense. If it is successful it will add to gas reserves that will be readily burnt or processed by existing users in the North Island, and it will add to NZOG’s profits in the near to medium term.

That’s an excellent example of the modest, useful and welcome role gas will play in our transition to a low carbon economy over the next few decades; and the proven geology of Taranaki will keep us supplied. But that’s a far cry from the unrealistic claims, economic and environmental, our gas sector makes for itself.