Gas and the wider energy market: an MED perspective

1. Gas and the wider energy market:an MED perspective David Smol Deputy Secretary Ministry of Economic Development 2004 New Zealand Petroleum Conference 7-10 March 2004 Hyatt Regency Hotel, Auckland

2. Agenda • Sustainable energy policy and MED’s role • Gas and sustainable development • The role of gas in the wider energy market • Facilitating exploration and production • Access to market • LNG • Concluding comments

3. Sustainable energy policy and MED’s role • Resources and Networks Branch within MED advises the Minister of Energy on energy policy and related matters • Crown Minerals Group within MED administers the Crown’s petroleum and minerals estates • RNB and CMG work closely together to ensure petroleum matters are considered within the overall energy policy context • RNB chairs cross-departmental groups for short-term policy co-ordination and development of longer-term thinking. Relevant agencies include: • MfE (inc. CCO), MoT, Treasury, DPMC, EECA, EC • Other agencies have input on specific issues e.g. IRD

4. Energy and sustainable development • Energy is an essential part of the infrastructural foundation that underpins societal well-being and economic development • Key energy sector outcomes for NZ include: • energy security • competitive energy prices • environmental sustainability: • mitigate local environmental effects • support path to a lower carbon future • fairness to consumers • There is some potential for tension between these outcomes

5. Gas has a key role for NZ in delivering on a sustainable energy future • Gas is an important input to power generation (and electricity security of supply) • Gas has lower carbon emissions than alternative thermal fuels for power generation • Gas development and use has relatively limited local environmental effects • Direct use of gas can enhance efficiency of energy use • Indigenous gas can be price competitive with alternatives • and can potentially support some economic activity (e.g. petrochemicals) that would not otherwise occur in NZ

6. Energy demand continues to grow, and most projections have gas remaining an important element in the supply mix, but….

7. … known reserves are reducing, and Maui depletion will add complexity to market operation

8. Future demand for gas will depend on reliability of supply and price • Petrochemical demand for gas is price sensitive • Electricity demand for gas depends on relative economics of different generation technologies; value will be higher for existing plant • Reticulated load is likely to grow slowly

9. Regulatory risk Access to market Future gas price Royalty, Tax, Permit Conditions Rate of exploration and development Supply/demand, carbon tax (?) Assessment of prospectivity Access to Information Energy policy: facilitating timely exploration for & development of gas

10. Finding and developing more gas: is the market working? • The increasing demand for gas is widely recognised • Forward gas prices, although not particularly transparent, are clearly rising • The relatively small market and the impact of large fields (notably Maui) makes smooth transitions through time fairly difficult to achieve • this challenge would increase if demand fell significantly as a result of methanol production in NZ ceasing • Exploration activity focused on gas is increasing • Government, with industry, is moving to implement robust and transparent arrangements for access to market

11. Optimising the settings for exploration • To attract exploration for oil and gas, NZ must be competitive with other jurisdictions • NZ generally scores well on sovereign risk and as a country in which to do business • Acreage allocation regime is straightforward • International surveys suggest NZ has a competitive fiscal regime, although officials are reviewing the case for any adjustments • Prospectivity and price are key drivers of upstream economics

12. Access to market • With the depletion of Maui, and supply from a growing number of smaller fields, gas market arrangements will become more complex • Government policy is aimed at ensuring robust and transparent rules for access to pipes, balancing, reconciliation etc • Gas Industry Steering Group has expressed a preference for co-regulation - a combination of statute-based and self regulation • Officials are working through the detail of options with the industry • Commerce Commission is investigating whether there is a case for network price control

13. LNG is one possible solution to the emerging primary energy gap • Market participants have initiated a feasibility study • LNG is unlikely to be a first-best solution for NZ because of the relatively high cost and inflexibility • but, LNG is a possible ‘back-stop’ that would ensure security of supply: establishing the option seems a good idea • Officials are seeking to address any policy issues that might arise through time

14. Concluding comments • Gas has an important role to play if NZ is to achieve energy security, competitive prices and environmental sustainability • The prospects for gas exploration and development have improved considerably as the supply/demand balance has changed • Government is looking to remove any undue barriers to timely exploration and development of indigenous gas