What an irony it would be if, after nine years of a government pushing uneconomic investment in wind power, it was followed by an equally uncommercial push by the current government to establish a bigger oil and gas industry in New Zealand.

The slew of high quality reports released with last week’s speech from Energy Minister Gerry Brownlee on “unlocking our petroleum potential” is a happy hunting-ground for those with big imaginations and worthy ambitions for a wealthier New Zealand.

With mineral resources now at the centre of the government’s economic agenda for the first time since Think Big, one vision of the future could look like this:

1/ The Government is serious about trying to “catch Australia”, and Prime Minister John Key wants action as well as better economic policy settings.  Key is still a bit of a purist and is unlikely to be drawn too far into grand gestures that don’t make economic sense, but he definitely has a bias for action, as does Brownlee, in spades.

2/ This government is not squeamish about burning fossil fuels. It has already killed off the previous administration’s commitment to making New Zealand carbon-neutral and removed the ban on thermal generation investment.  It reasons that if New Zealand doesn’t burn its own oil and gas, the country will just import it from somewhere else.  Because of that, it sees no contradiction between talking up hydrocarbons in the same week as trying to sell its emissions trading scheme to a sceptical public.

3/ Wind generation is being exposed as commercially unattractive.  If it’s not the additional costs created by the latest decision from the Environment Court on Meridian’s Project Hayes, then it’s simply the fact that wholesale power prices need to be well north of $100 per megawatt hour to make wind pay for itself.  Yet in the last month, average wholesale electricity prices in the North Island were $39 per MWh, while they were less than half that, at $15 per MWh, in the South Island.  Granted, those prices are unusually low – even hydro and gas-fired power stations struggle to make money at those levels.  But they are indicative of how far from commercial viability most of the recently built wind farms are, and just what a deep hole Meridian has dug for itself by investing so heavily in wind.  If it hasn’t already quietly written down the value of its showcase West Wind project behind Wellington, it must only be a matter of time before it does.

4/ If wind is off the table, that makes new gas-fired generation more likely over the next 10 years or so, once geothermal projects – currently the most attractive development option – start drying up.  But new gas-fired generation will only happen if there’s enough natural gas available to run new plants.  While Todd Energy may insist there is plenty of gas through to the late 2020′s, none of the major gas users – especially Contact and Genesis Energy – can see what Todd says it can see.

5/ However, one way to ensure local gas supplies are secured and contributing to security of electricity supply is to encourage more gas exploration.  That’s where the report commissioned from the Aberdeen University Petroleum Economics Consultancy, released by Brownlee this week, makes intriguing reading.  It gives credit to the previous government for developing a highly competitive royalties regime, which may well have contributed to a recent surge in exploration, but says that discoveries of gas without oil – common for New Zealand – tend not to be economic.  However, if “special fiscal terms” – in other words, tax breaks – were applied for gas-only finds, more might be developed.  This could be a starter if Brownlee and Key are determined enough for security, trade balance, and wealth creation reasons to want more gas fields to be developed.  If such tax breaks are not instituted, no amount of seismic analysis or laying out of welcome mats is likely to see New Zealand’s offshore hydrocarbon potential actively explored anytime soon.  The proof of that is the tacit abandonment by Exxon Mobil (and Todd) of their permits to explore in the Great South Basin by seeking farm-in partners rather than pursuing it themselves.

6/ So, imagine the government’s decided it will incentivise gas exploration and development through the tax system.  Does it then take the next step proposed by local brokers McDouall Stuart in their report to Brownlee, also released this week?  That report goes 90% of the way to recommending the establishment of a new state-owned enterprise, perhaps underpinned by Genesis Energy’s 31% stake in the Kupe gasfield, which is about to start production, and which McDouall Stuart values at $600 million.

Such an SOE could be part-privatised to attract appropriate partners and skills, and would “involve a New Zealand exploration campaign targeting known producing regions”.  It all sounds terribly exciting and McDouall Stuart suggests that the SOE structure, especially with a private equity component, would be qualitatively different from a National Oil Company, like long-dead Petrocorp or the state-owned oil companies that are a common in oil-rich developing countries.

Where McDouall Stuart is cheerleading, however, others are sceptical, and for two good reasons.

Firstly, the SOE model is increasingly visibly flawed.  The commercial disciplines on SOE boards are very different from the pressures on private company boards.  There is no better proof of that than the steady decline in return on capital visible both Genesis and Meridian over the last few years – Genesis because it felt obliged to run its Huntly power station unprofitably in the national interest, and Meridian because it became so bound up in its laudable but uncommercial renewables-or-bust adventure.

That’s the trouble with big political ideas that masquerade as commercial projects.  It’s too easy for them to lose their way and become wealth-destroying white elephants that end up owing their existence to nothing better than “it seemed like a good idea at the time”.  That potential is all the greater in the high risk business of oil exploration.

Boring as it may be to concentrate on getting the fundamental economic policy settings right, it is still the best thing governments can do before getting out of the way and letting markets do what they do best – fostering wealth creation or delivering the bad news more quickly than any government will ever do that things are turning to custard.

Gerry Brownlee is, by all accounts, highly focused on the folly of Meridian’s renewables push.  It would not only be ironic, but tragic, for the taxpayer if his government were to replace a bad case of wind with an even bigger dose of oil fever.

(BusinessWire)

As a cub reporter on the Manukau Courier back in 1983, it was my duty to report the monthly deliberations of the Papatoetoe City Council.

It was election time and, to be frank, there was bugger all happening.  A report of mine quoted a mayoral candidate as saying “there are no serious issues.”  To deal with this absence of news and liven things up, a sub-editor dropped the “no” in that sentence and made the piece much racier.

Something similar happened to the headline on my searing investigation into instability on the slopes above one of the area’s many well-appointed and uncontroversial sportsgrounds.

“Reserve Bank Unstable”, the headline squawked.

Thankfully, this was before the kiwi dollar was floated. Had a forex dealer been reading the Manukau Courier that day, there wasn’t much they could have done about this advice from an unexpected source of weakness at the country’s central bank.

That headline sprang to mind this week at the briefing for the Reserve Bank’s six-monthly Financial Stability Report, if only because one of the surprises about New Zealand’s emergence from the global credit crunch is the new-respect for Australasia’s relatively sound financial system.

This despite the fact that both Australia and New Zealand continue to live shamelessly on the savings of others, running current account deficits between 7 and 9% of gross domestic product, with little sign of sustained improvement.

While nowhere near Icelandic levels of imminent danger, this part of the world remains seriously indebted.  But it finds itself sheltered by a combination of a good name and the fact that, by and large, Australian banks didn’t participate in the risk proliferation that took down some of the biggest names in U.S., European and Japanese banking over the past year.

As a result, the kiwi dollar – insignificant in world terms otherwise – is consistently one of the top 10 traded global currencies, attracting liquidity whenever the U.S. economy looks even slightly better. When that happens, hot money starts looking for higher returns offshore.

Ignore, for the moment, the oddity that the currency of the worst-indebted developed nation, the U.S., becomes a magnet for funds whenever its economy looks worse. You know the incentives are screwed up when you flee to the source of your woes. If it was a marriage, it would be seeking counselling.

The impact, for New Zealand particularly, of a floating currency is a wildly gyrating, fundamental impediment to understanding a business trying to grow in the world market which, by the way, is the only place to grow to any real size.

Forget for a moment that we should rejoice in this liquidity as a global currency.  The NZX would kill for that kind of volume.  Trading today at around $43 million is desultory stuff, especially as Kathmandu began trading today, and was celebrated at NZX’s HQ.

The electricity market, too, looks in vain for liquidity, but appears unlikely ever to achieve it, raising the question of whether it’s possible to create a true “market” on New Zealand’s weak, and stringy, renewables-dominated national electricity system.

To return to the currency, the RBNZ’s problem is that its tools for reacting to the huge forces at play in global money are so limited.  That’s why some of the new language coming out of the RBNZ this week is so interesting. The search is on here, and everywhere that’s smart about it, for new tools.

With the dust clearing on the global financial meltdown, we began to get glimpses of the much more restricted world in which banks will be operating in the future.  A world in which the central bank not only monitors banks, but starts telling them how to behave.

There are different risks in this, like what if the central banks of the world are wrong and we have a different sort of credit crunch because the world economy stops growing so fast?

But there is no doubt that we are moving back to a world where banking will be more regulated.

How will that play out here?

For a start, monetary policy will get some new “mates”, as National’s most purist of finance ministers, Ruth Richardson, used to say.

The RBNZ’s governor and deputy governor, Alan Bollard and Grant Spencer, outlined more new thinking in their report and in testimony to the finance expenditure select committee this week than for many a long year.

For a start, the RBNZ will force more prudent lending practice from trading banks over the course of economic cycles. When times are good, they will have to put more aside for when things turn bad, as they generally do at some stage. And when times are tough, the banks shouldn’t be so inclined to stamp so hard on the brakes.

Ironically, if these rules had been in place before now, there would have been more conservative lending to the dairy sector mid-decade, when prices rocketed on historic high Fonterra payouts. And in current circumstances, the banks would have been better prepared for a sudden deterioration in credit conditions.

In particular, what the RBNZ is describing should take some of the weight off the Official Cash Rate as the sole tool for setting monetary conditions. The identification of stricter liquidity ratio rules as an automatic economic stabilisation tool marks a significant shift in central bank activism to force more prudent behaviour from the banking sector in the wake of the global credit crunch.

In practical terms, the new approach will skew banks to back their lending with longer-term funding arrangements.

“There is potential to use liquidity ratios as an economic stabiliser. The idea of dynamic provisioning through the cycle could potentially support the OCR,” said deputy governor Spencer. “Our main lesson from the crisis was to produce a policy in that area of weakness.”

However, the OCR would remain “the only way we have to change (monetary) conditions,” Bollard told the select committee. “The background is that liquidity ratio policies could have beneficial impacts over the cycle. It’s new territory and it’s something a number of countries are looking at,” he said.
“We mustn’t over-promise on this,” Bollard said, “but we are keen to look at core funding’s capacity to contribute to monetary policy.” Bollard says the moves are “not welcomed” by trading banks, but they are feeling the same pressure internationally. The financial stability report says such intervention should “reduce the cyclicality of the overall financial system.”

“In the New Zealand context, with a large proportion of imported capital, the Reserve Bank believes the fluctuating attitude of international lenders has contributed to excessive exchange rate cyclicality.

“The new liquidity rules restrict the proportion of loans that can be funded through short term wholesale borrowing. This will force future rapid increases in demand to be funded mostly through long term wholesale debt, raising funding costs and likely moderating credit growth.

“In the downturn, this pre-existing long term funding helps maintain investor confidence and reduces the extent to which the bank will need to access (potentially troubled wholesale funding markets, reducing any funding squeeze.”

It’s true that the foreign/Australian-owned trading banks operating in New Zealand played jiggery pokery with the tax system and are one by one being found to be tax avoiders.

And they were flayed this week by an Opposition inquiry for pocketing millions in fattened margins last year, despite being found by the RBNZ in its report the next day to have suffered margin reduction in recent months owing in large part to heavy competition for longer-dated retail deposits. And perhaps owing a little to the politics of being seen to compete.

(BusinessWire)

When everyone from Rodney Hide to the Listener start asking “where’s the plan, John?” is there something for Prime Minister John Key to worry about?

Quite the contrary, Key should be quite happy about such speculation. He does have a plan, and the more he is looked to for leadership, the more he is able to put it in place.  Where Key is clever is that he is seducing old opponents into acquiescence, if not agreement, on thorny old issues.

What’s more, in the thin atmosphere of New Zealand political politics, this week’s “what plan?” theme drives National into the arms of Act, where its leader Rodney Hide waits, after making it all a bit obvious by accusing Key of doing nothing, and where Key is willing to be.

Yet Hide’s slip is just the sort of haughty palaver you’d expect from an extrovert politician among a group of strangers, unaware that one is a reporter from Christchurch’s daily paper, The Press.  Anyone who’s worked as personal staff to a Minister knows the caricatures they adopt to advance the cause.

That doesn’t mean there’s no plan, but it does chime with a sense that the Government risks becoming a soft photo opportunity, riding on the PM’s undoubted likeability, and not doing much of anything else.

The counter view is that people who make it look easy get a lot done.

So where’s the plan?

Where to start?  First, Key instinctively understands the importance of trust.  He has gone out of his way this week to mean it about not touching superannuation eligibility, almost because it forces the electorate to focus on fixing other problems instead of going on in circles on this one.

The biggest scary problem is arguably health spending, if almost half of us are going to be codgers by 2050.

By asking to be trusted on superannuation, Key is seeking to build political capital to do hard-ish things elsewhere.

What hard-ish things elsewhere?  Start with turning Auckland into a super-city.  Remember the hysteria earlier in the year about how unachievable and disruptive it would be?  Well, maybe I’m wrong and it’s going to explode, but it looks from here in Wellington like enough Aucklanders see the point of the whole place having coherent local government. It will happen with hiccups but not tears before bedtime. Hopefully.

Then there’s the tax review.  Something needs to happen and, especially if Australia introduces a land tax, we’re going to want to look at big tax reforms, which leads on to the kind of trans-Tasman integration envisaged in the all-but-ignored Single Economic Market agreement with Canberra earlier this year.

Then there’s the electricity task force, which may yet deliver the political theatre required by a Government wanting to show its voters that it can feel their pain too.  On that note, Key must have been delighted that the Remuneration Authority decided MPs shouldn’t get a pay rise.  Since most people think Key decides such things, he gets the kudos for looking humble.  And as Act’s former leader, Richard Prebble, said earlier this week: “The symbolism’s important.”

Key going cattle class to Europe with his family while a single Minister sat up the front in first class is a powerful signal, and one that will be all the more powerful if, next year, Air New Zealand makes flatbed sleeping possible in cattle class: what a victory for the impecunious Antipodean to sleep as flat as the average business class customer on those interminable flights to other parts.

For a nation with a small band of global entrepreneurs who struggle to build businesses and cope with the vagaries of constant international travel, decent sleep is an important Air New Zealand contribution to national productivity.   Perhaps it will drive wealth creation here if the concept sweeps the world on a New Zealand patent.

Next there’s the Capital Markets Development Taskforce, a Labour creation that has taken the opportunity afforded by an action-prone new administration to get on with the important business of creating wealth.

To that end, science and innovation policies are under serious review in a way that can’t yet really be seen.  There are serious efforts behind the scenes to take an unusual moment of political opportunity for taking action on some simple, widely accepted policy goals.  “Catching Australia” is already in the bag.  “Being smart about how smart we are” is available as a next goal.

Hence the focus on innovation policy that is about to emerge, and which is highly dependent on the influence of the Prime Minister’s Chief Science Adviser, Professor Peter Gluckman, and which has potential to put New Zealand’s science effort on a more wealth-generating basis.

Key is also showing remarkable fiscal restraint at this stage. The Government can hardly be blamed for being sidetracked by the global credit crunch. New Zealand itself has weathered that storm, it seems, not too badly.

However, the rosy uplands of endless Budget surpluses have disappeared overnight and there is only $1.1 billion a year in new spending available for the foreseeable future.  That’s a drop in the bucket compared to the $4 billion and $5 billion annual, forever increases that occurred in the earlier 2000′s under Labour.

There will be difficult choices about what to spend that money on.  Will it be prisons and hospitals for chronic preventable diseases, or investment in new things that make us able to have fewer unhealthy people and criminals?

Innovation policy – which is the sexy way of saying science, research and technology investment – is on the boil.

If Key can get it right, and the 2010 Budget seems to be his target, he might just crack a new route to national enthusiasm for the idea of getting rich.

(BusinessWire)