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Hodgson: New Zealand gas industry – after Maui

Pete Hodgson Speech: The New Zealand gas industry – after Maui

[Address to the Gas Association of New Zealand AGM, Sheraton Hotel, Auckland]

Thank you for inviting me to speak to your AGM. I trust the Utilicon Conference is going well.

Today I would like talk about our new environment. About how the Maui redetermination has given new emphasis to the need for change, reinforcing the fact that gas is critical not only for direct users, but for New Zealand's electricity supply security.

We have long known that the Maui field is coming to the end of its economic life. And we are all aware that the industry must evolve to meet the challenges of relying on production from an increased number of smaller gas fields.

This includes requiring more sophisticated pro-competitive market arrangements, including improved arrangements for gas balancing and reconciliation.

In response to this need, the Government has conducted a review of the gas sector and produced a policy statement on its future development. The final version of this statement was gazetted last week. It has also been transmitted to the Commerce Commission as a statement of economic policy under section 26 of the Commerce Act.

The Government’s objective is to ensure that gas is delivered to existing and new customers in an efficient, fair, reliable, and environmentally sustainable manner. The Policy Statement sets out our expectations for better gas wholesale market arrangements and industry governance structures, including developing open access arrangements to the Maui pipelines.

As you know, the policy statement was developed in close consultation with the industry. I have been very pleased with the quality of the industry's response and its willingness to engage constructively.

I am particularly pleased that the industry has anticipated the invitation in the GPS to establish a new governance structure and decision-making process. The Gas Governance Establishment Group has already given me its first report on progress towards meeting the objectives of the GPS, particularly on open access arrangements for the Maui pipeline.

The report sets out the broad issues and tasks well. I look forward to hearing in due course about more progress on these important issues for the industry.

The result of the Maui redetermination has made this work more urgent. The independent expert's finding suggests the field now has around 350 PJ of gas remaining that can be economically recovered at the Maui contract price. This is significantly less than previous expectations.

The low estimate has increased the demand for gas from other fields. It has further highlighted the need for open access to the Maui pipeline, and for exploration and new gas field development.

Previously it was expected that production from new gas fields would be required for electricity generation by around 2006. With the Maui redetermination, this timeframe has come forward a year.

The tightness of gas supply means that all industries relying on gas need to adjust to a new supply environment.

And the implications of the redetermination don’t end there.

Gas is critical for the security of our electricity supply.

Thermal generation, which is dominated by gas-fired plants, is a vital part of New Zealand's electricity system. It represents just under 40 percent of overall electricity generation capacity. With over 60 percent of New Zealand's generation based on hydro, thermal generation continues to be important as a dry-year reserve.

The pleasant weather of the last few months has unfortunately resulted in relatively low hydro lake levels. Demand for gas fired plant to make up for lower hydro generation further highlights the need for robust gas industry arrangements — not just for direct gas users, but for the electricity industry and NZ's interests as a whole.

I am concerned about the recent Maui gas outages. I have written to the organisations involved asking them to review why processes did not work as well as they might and urged them to consider mechanisms that might improve those processes. In the case of the National Gas Contingency Outage Plan Committee I have urged the gas industry to progress urgently its contingency plan for Maui outages.

Add to this, electricity demand is forecast to grow at least 2 percent a year, with the last two months up to six per cent higher than in comparative months last year.

Without new generation, supply will be insufficient, even taking into account significant improvement in energy efficiency and demand management. But new thermal generation plants are unlikely to be built where there is no certainty about the availability of gas. Other forms of generation might not be built where there is no certainty around relative fuel prices. The whole gas industry must now be considered in this new environment.

So: Where to from here? As I see it there are three streams of work.

We need to move towards a sustainable energy future.

We need to find more gas.

And we need to develop and operate the gas market so it meets the nation's needs more effectively and efficiently. I'll cover each of these in turn.

In the move towards a sustainable energy future the National Energy Efficiency and Conservation Strategy (NEECS) and demand management will be crucial. The Strategy will move New Zealand towards a future where renewables will be a greater part of the electricity generation mix.

I am proud of the Strategy, which sets a target of an additional 30 PJ of energy from renewable sources by 2012. This target is a challenge, but an achievable one. It is about double the amount of renewable energy that we would expect to come on stream under business-as-usual. At the same time, greater demand side participation should ensure that energy is used more efficiently. The Strategy targets an improvement of at least 20 percent in energy efficiency by 2012.

Even with these initiatives, however, gas will continue to be an important fuel for electricity — so we need to find more.

This Government actively seeks investment in petroleum exploration and the development of new gas fields.

The Crown Minerals Act and the Minerals Programme for Petroleum set out clear policies and procedures to facilitate exploration and development, including an internationally competitive and attractive royalty regime.

This has been very successful.

On average $180-$200 million a year is being spent on exploration and appraisal. Exploration is expected to increase on the back of a successful onshore and near-shore Taranaki bidding round last year.

A recent survey shows New Zealand has moved up the rankings to 14th most attractive country in the world for petroleum exploration investment. In 1999 we were in 36th place.

This ranking is based on three factors — exploration and production activity, political and commercial stability, and the fiscal regime’s impact on the exploration industry.
I think the improvement shows we are making the right decisions and can look forward to continued interest and investment in New Zealand.

Pohokura is an exciting development, but you will be aware of the complications. The Joint Venture parties are seeking Commerce Commission approval for joint marketing, saying that if they cannot joint market then the field cannot be developed until much later.

Timely marketing and production from the Pohokura field is important for New Zealand’s energy supply. It is not clear how much Pohokura gas will be used for electricity generation. But a clear indication of where the gas will be used will allow key investment decisions to be made.

That brings me to area where the ball is in your court – the development of the gas market, through the implementation of the Government Policy Statement on the gas industry.

Decisions on gas safety, security and delivery must be made, and they must to be made with an eye on the effect on the wholesale price of electricity.

To do this it is critical that the industry develop the mechanisms to make the right decisions which fit within the realities of this new environment.

The GPS clearly sets out the arrangements the Government expects to be put in place.

I want to say at the outset, though I hope not threateningly, that the Government expects much faster progress on the gas GPS than we have had on the electricity industry GPS.

Unlike electricity, I have not sought a legislative backstop from Parliament. This is because I don't think I will need one – and early indications suggest that is the right call. Please don't give me reason to change my mind.

For the gas production and wholesale markets, the arrangements required by the gas GPS include the development of protocols for wholesale gas trading, the development of a secondary market for trading excess and shortfall quantities of gas, and the development of capacity trading arrangements.

Transmission and distribution network requirements include the opening up of the Maui pipeline. To support this the GPS requires the establishment of consistent standards and protocols across all distribution pipelines, so that gas market participants can access distribution pipelines on reasonable terms and conditions. Gas flow measurement arrangements are also critical, to enable effective control and management of gas.

The importance of good residential customer relations should not be underestimated. The residential gas market is the “public face” of the industry and consumers will be quick to call for regulatory control if they believe they are not getting a fair deal.

I place very strong emphasis on the GPS requirements in the retail area. The industry must minimise barriers to customers switching supplier, put in place an effective customer complaints process and develop a model consumer contract.

The work on opening up access to the Maui pipeline, which as you know is already under way, must be stepped up.

It is critical that we find durable open access arrangements for all potential pipeline users. The Maui Mining Companies have developed an open access proposal and I understand that industry feedback is being facilitated by the Gas Industry Pipeline Access Group.

I urge the parties to work together to bed down open access arrangements quickly. This work is particularly vital now that we will be relying on production from an increased number of smaller gas fields.

In closing, let me stress again that the gas industry cannot consider its future in isolation from New Zealand's overall energy security. The development of the industry is critical not just for direct gas users, but for the nation's electricity supply as well. We can conserve gas and find new sources, but we also need to ensure the market operates in the most effective and productive way. For this to occur, the governance arrangements set out in the GPS need to be put in place without delay. It is time for you to run with the ball.

Thank you for your time.

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