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.