Friday 25th May 2018
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Government ministers are peddling a range of "incorrect or misleading" arguments about the impact of its ban on issuing new licences for offshore oil and gas exploration, says leading oil and gas sector analyst John Kidd in a note for clients of investment advisory house Woodward Partners.
Released on the same day as Prime Minister Jacinda Ardern held meetings with oil and gas industry representatives in the energy-rich Taranaki province, Kidd homes in on what he says is inadequate understanding of the role of the Methanex methanol production plants north of New Plymouth, the impact of major changes in demand to the economics of oil and gas field development, and misunderstandings about the likelihood of further offshore discoveries in areas where permits already exist.
Ardern issued a statement saying the government "hears loud and clear that the Taranaki region and the energy sector need certainty, stability and encouragement as we move towards a clean energy future" and supported proposals from the region to hold a 'Just Transitions Summit' in coming months as part of a collaborative approach.
However, Kidd said he expected a dump of government papers on June 1 that would show "little due diligence and preparatory analysis was undertaken before the decision", announced on April 12, to end the granting of any future offshore oil and gas exploration licences.
BusinessDesk has requested Cabinet papers relating to the decision, with Energy Minister Megan Woods's seeking a one month extension to June 18, while Climate Change Minister James Shaw has responded to an Official Information Request on analysis from the Ministry for the Environment with a two sentence answer saying he had received a verbal briefing from officials.
It is understood that offers of analysis for ministers from the Ministry of Business Innovation and Employment on the impact of the decision were declined in favour of advice on how to implement such a ban, which the government sees as an act of political leadership to signal determination to act on climate change while not causing immediate shocks to parts of the economy and the communities that depend on oil and gas sector work.
However, Kidd suggests ministers have a poor understanding of the way the industry plans for the future, in particular the relationship between the size of demand for oil and gas from a local field and the cost and viability of their extraction.
Citing the Methanex methanol production plants at Motonui and Waitara, which use some 40 percent of all natural gas produced annually in New Zealand, Kidd said that "if Methanex exited New Zealand, then the economics of Taranaki exploration and production would suffer both immediately and significantly".
"The likely result would be that remaining gas users would be asked to pay much higher prices to cover loss of Methanex to the system and the funding coverage of producer cost bases that Methanex provides," he said, noting that the low-profile Canadian-owned plants - built during the late 1970s Think Big era of the Muldoon government - have an economic impact similar in size to the Tiwai Point aluminium smelter, whose occasional threats of closure have proven politically potent.
Kidd warned also that investors in the sector were likely now to be placing a higher 'sovereign risk' rating on New Zealand, with predominantly onshore producer TAG Oil already announcing it will seek new development opportunities outside New Zealand.
Claims by Woods that a 10-to-15 percent chance of finding oil and gas in offshore areas already covered by exploration licences meant that up to 15,000 square kilometres of acreage could end up being developed, more than current totals, were also mistaken, said Kidd.
"Success in oil and gas exploration is not a function of drilling out an acreage superset on the (false) assumption that an assumed percentage of that superset will yield production. Exploration and production investors take an infinitely more scientific approach than what the minister is suggesting."
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