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David Parker: Address to NZ Petroleum Conference

Hon David Parker
Minister of Energy

11 March 2008

Speech notes

Petroleum and the New Zealand Energy Strategy
Address to the NZ Petroleum Conference
10.20am, 11 March 2008, Sky City Convention Centre, Auckland

1. SLIDE (Introduction)

Thank you. I’m pleased to join you here today.

I’d like to talk to you about the New Zealand Energy Strategy which we released last October, and what it means for the petroleum industry.

2. SLIDE (Climate change solutions)

It is important to recognise that the Energy Strategy is part of our broader agenda for economic transformation and environmental sustainability.

We have never lost sight of the need to ensure security of energy supply.

We are also mindful that we must respond in a competitive way to the global imperatives of climate change and to fast-changing international markets.

The importance of our clean, green image to our primary exports and in-bound tourism cannot be underestimated.

Our economic transformation must be environmentally, socially and economically sustainable, and our energy sector must be a part of this transformation.

We have set a clear direction for the nation to respond to climate change, and we are pursuing actions across all sectors.

Before Christmas we introduced legislation into Parliament for the Emissions Trading Scheme, or ETS, which establishes the framework for pricing all greenhouse gas emissions.

It is a comprehensive scheme which will, over time, include all sectors of the economy, including the energy sector, and all types of greenhouse gases.

3. SLIDE (90% renewables target)

Through the New Zealand Energy Strategy we have provided a clear direction for the energy industry.

The strategy signals a shift of infrastructure investment away from fossil fuel-based electricity generation to renewable energy options.

As you will know, we have set a target to reach 90 per cent of electricity generation from renewable sources by 2025.

For the petroleum sector this does not mean it is all ‘doom and gloom’ as I have heard from some industry players. There is still considerable opportunity for your business, and the relative economics of gas against coal will improve under the ETS.

4. SLIDE (Renewables future makes economic sense)

Having a high renewables target makes economic sense.

This graph shows the expected costs for new electricity generation from various sources.

In practice, the 90 percent target means we have to build about 175 MW of renewable generation capacity each year, taking into account load factors. This year we’re building 300 MW, and there are many other significant projects in the planning, especially for geothermal and wind.

We know, from recent investment by major companies in wind and geothermal generation, that many of these projects are already competitive with fossil fuel alternatives.

The graph assumes a medium-term emissions price of $25 per tonne of CO2 emissions, and a gas price of $9 per gigajoule.

It shows that there are substantial additional quantities of new geothermal and wind generation that are competitive with fossil fuel alternatives.

5. SLIDE (Role of fossil fuel generation)

Our view is that all new electricity generation should be renewable, except to the extent needed to ensure security of supply.

However fossil fuels, especially gas, will continue to have a critical role for some time to come.

They provide security, versatility and stability in the delivery of electricity.

Our recent successes in stimulating gas and oil exploration will help to ensure that we can use our indigenous resources, rather than imports.

6. SLIDE (carbon capture and storage (CCS))

The government however does not favour substantial increases in the use of gas (or coal) for electricity generation until technologies such as Carbon Capture and Storage (or CCS) can provide low emissions supplies of energy from existing and new fossil-fuel electricity generation.

Our lignite coal deposits are a world-scale economic opportunity that could make us self-sufficient in terms of transport fuel for many years – some say several hundred years.

The significant CO2 emissions from use of lignite or gas could be offset to a considerable degree by CCS or other emerging innovative ways to capture and lock up CO2.

CCS technology, on the other hand, still poses a number of questions.

There is much research underway internationally, as well as within New Zealand, and we and the industry are closely observing, and where appropriate, driving developments.

However I would like to sound a note of caution. There is a degree of wishful thinking and exaggeration around how close clean-coal technology really is.

CCS technology is as yet neither economically nor technically proven at commercial scale.

Big players such as Britain, the EU and the US have all recently shied away from the large investments needed to prove and scale up pure CCS technology.

The Chair of the World Energy Council two weeks ago in this same venue made the point the investment in scale CCS has until now been as an aid to oil recovery – using CO2 to increase field pressure to improve oil yields. Quite different in economics to CCS unrelated to oil production.

Nevertheless, in my view, the world will need CCS, and there is continuing research underway internationally. Australia is leading some of it. The government is closely monitoring developments.

Many participants in New Zealand’s energy industry think the costs of CCS will be substantial. New Zealand is likely to be an adopter of these technologies, not a major developer.

A policy group, representing a number of government departments, has been considering relevant legislation, such as the Crown Minerals Act and the Resource Management Act.

It is identifying gaps and priorities for legislative action as part of a coordinated CCS policy approach.

A combined government and industry CCS research group has contracted research into our geological capacity to store CO2, and officials are in regular contact with their Australian counterparts.

We are considering applying for membership to the Carbon Sequestration Leadership Forum, an international collaborative body with 22 member states.

We will continue to monitor international developments, while maintaining a focus on issues of particular relevance or uniqueness to us – such as risk assessment in areas of seismic activity.

7. SLIDE (10-year restriction on new baseload thermal)

The Emissions Trading Scheme, as you know, was introduced to Parliament before Christmas, and passed it’s first reading 119 votes to 2.

The Bill includes provisions to amend the Electricity Act to limit new baseload fossil fuel generation over the next ten years.

It creates a 10-year restriction on the construction of fossil fuel thermal generation above 10 MW whose fuel source contains more than 20 percent fossil fuels.

Exemptions to the restriction will be allowed under specific criteria.

The Emissions Trading Scheme by itself would not have precluded growth in fossil fuelled thermal.

For instance, if gas prices were dropped to marginally below the cost of renewables, because of our size it would only have taken a handful of new gas plants to take us down a largely non-renewable path.

This path would have higher emissions, and would not cause a significant drop in electricity prices.

We consider that investment in a major new fossil-fuelled plant during the next 10 years would not be consistent with our vision of transitioning to sustainable low emissions energy.

Indeed our energy modelling predicts that there is sufficient cost-competitive renewable energy generation so that no extra baseload fossil-fuelled thermal generation would be needed for 20 years.

The pricing of emissions, together with the renewables preference, will give a strong signal to investors that they should build renewables rather than more gas or coal-fired stations.

8. SLIDE (Emissions Trading Scheme)

The proposed restriction on major new fossil-fueled thermal generation complements our proposed emissions trading scheme.

We have implemented a range of programmes to encourage households and businesses to act in more environmentally responsible ways, and reduce emissions. But in addition to these programmes, we need a broad price-based measure to bring about the behavioural changes needed across the economy.

For this reason, the government has proposed the emissions trading scheme. The scheme allows the market to seek the lowest-cost ways of achieving the emissions objective.

Emissions trading is emerging internationally as a favoured measure among developed countries.

Our approach, while tailored to New Zealand’s particular needs, is in line with that of other countries developing or using such schemes, and demonstrates our commitment to be part of the global climate change solution.

Very simply, the ETS will make it more expensive to behave in ways that increase emissions, and make it relatively cheaper to behave in ways that don’t. Increases in emissions will cost, and deceases are rewarded.

Price changes will influence investment decisions, and the purchase decisions of producers and consumers across the economy, driving emission reductions and the expansion of more environmentally friendly alternatives.

The scheme will include every sector of the economy, starting with forestry in 2008 and followed by liquid fossil fuels – primarily transport – in 2009, stationary energy and industrial processes in 2010, and agriculture, waste and other sectors in 2013.

It will be linked internationally to other Kyoto trading markets.
It will mean an increase in the costs of products such as petrol and electricity, but we will help households, businesses and industry sectors adapt to cost increases.

It will be introduced gradually, allowing for smooth adjustments across the economy, and we are continuing to engage with the wider community on how to make the scheme as fair and effective as possible.

9. SLIDE (Price of carbon)

This slide shows the various estimates that have been made on the possible future cost of carbon.
I want to show this to demonstrate that the price of carbon is unlikely to rise to the levels that some in the industry fear.

10. SLIDE (Demand for Kyoto units)

Equally, fears that demand for units will outstrip supply and create a surge in prices are unfounded.

An estimate from the World Bank in May last year was that demand for Kyoto units in the first commitment period would reach around 2 billion tonnes.

11. SLIDE (Supply of Kyoto units)

Their estimate for global supply is just over 7 billion tonnes with AAUs or approximately 1.7 billion tonnes without AAUs.

• More Recent Updates (IETA, Point Carbon)
– EU ETS is the major player in the international carbon market -775 million tonnes CO2 traded in first half of 2007, worth $NZ 22 billion
– The Clean Development Mechanism (CDM) is the major project-based mechanism. Trade in CDM units is estimated at 372 million tonnes in the first half of 2007, worth $NZ 8 billion
– Supply of CDM credits is expected to exceed 2 billion tonnes during 2008-2012
– Secondary CDM market (low risk of non-delivery) growing rapidly
– Relatively stable prices for European Union Allowances and Certified Emission Reductions (CERS) (though sensitive to policy announcements)
– In the EU ETS, over-the-counter (broker assisted) transactions dominate the market (approx. 70%). Exchanges/trading platforms account for just under 30% of transactions.
– No reported prices for trade in AAUs

12. SLIDE (More Gas Discoveries Needed)

As I have said, there is still going to be a demand for gas for supplies for domestic, industrial, and also for the existing gas fired power generation needs.

In the short to medium term New Zealand's energy future is reasonably secure.

We have the Pohokura field, which is less than a third the size of Maui, and the Kupe field is planned to be producing sometime in 2009.

According to the data the government has access to, sometime between 2017 and 2025 the gas market is going to have a gas shortfall of around 50 to 100 petajoules of domestic demand per annum. This is normal – it's neither untoward nor unexpected.

I understand from reports this morning that one industry estimate is more optimistic, and says that existing fields will last longer, until around 2030.

Should new gas supplies be found outside the Taranaki basin, the issue of moment then becomes infrastructure. We are currently somewhat limited to the Taranaki region simply because that is where gas resources have been seriously explored for and developed with existing processing and pipelines facilities.

The government’s current Onshore Taranaki Blocks Offer is therefore structured to maximise the chances of new gas being brought to market in a timely manner to meet the current expected shortfall. I encourage you all to realise the potential opportunities that this block’s offer affords.

The option of importing LNG to meet domestic gas demand is not favoured, but is open to gas users as a risk and price management option. We want to avoid linking New Zealand’s electricity market to international oil and gas price movements. As so much of New Zealand is under explored and prospective, it is logical we look to meet the demand for indigenous sources.

13. SLIDE (Realising the Potential of New Zealand’s Petroleum estate)

New Zealand potentially has oil and gas resources of large scale.

Fossil energy will continue to be part of global supply chain for some time to come. From a climate change perspective, natural gas has a significant role to play internationally to reduce the impact of coal fired energy.

New Zealand is now well positioned in the global industry of petroleum exploration and development activities, benefiting from sustained commodity prices.

I note just recently the U.S. House of Representatives has approved a renewables tax credit that would see $18 billion of subsidies for big oil companies cut and channelled instead into renewable-energy resources.

The increased value of petroleum products has improved the profitability of oil companies internationally, and the case for subsidies and incentives is weaker as a consequence.

We consider that finding oil and world-class gas deposits is good thing for this country.

Increased petroleum exports can significantly improve New Zealand's trade balance, while increased returns from royalties and taxes can be applied for the benefit of all New Zealanders.

The Tui and Maari oil fields indicate a good future for the industry. Both these offshore shelf developments involve a wave of technological firsts for New Zealand, and are of national and regional importance to New Zealand.

The Tui Project production wells are the most prolific wells completed in New Zealand. Since mid-November last year, AWE and their partners report production has stabilised around the maximum sustainable FPSO flowrate of 50,000 barrels of oil per day. Congratulations to the field developers. Already Tui is not just profitable for its developers but will improve our trade balance by offsetting imported oil, and increase security of supply.

Together the major offshore Taranaki projects - Tui, Maari, Kupe and Pohokura - will reach peak production by about 2010 and bring 140 million barrels of new reserves into the market. New Zealand’s total oil production will then be at a record level not seen since the heyday of Maui. These projects will also provide a boost to the regional economy through employment and demand for services.

To realise these benefits, this government is actively encouraging petroleum exploration and development.

Following the Maui reserves write-down in 2003, we took steps to accelerate the prospecting for oil and gas in New Zealand. This included an initiative to provide Crown Minerals with 15 million dollars to acquire data, which was then offered freely to explorers to promote and encourage exploration.

Crown Minerals’ acquisition of data has made possible block promotion in petroleum basins that have previously languished – Great South Basin; offshore East Coast, and the Northland basins.

14. SLIDE (Great South Basin exploration)

The Great South Basin is one of our largest petroleum basins, covering approximately 500,000 square kilometres, and is only very lightly explored.

The remoteness of the basin and the extreme weather, sea and water depths makes exploration in this basin a very high risk and costly activity.

To improve the understanding of the geology and prospectivity of the area, we commissioned an extensive seismic survey of the northern section of the basin.

This was followed by a competitive tender process which resulted in the likes of PTTEP, OMV, Mitsui, ExxonMobil and local companies winning exploration rights across parts of the GSB.

All together, the quantity of work proposed to be carried out in the first five years of exploration in the Great South Basin totals approximately 1.2 billion dollars, which is double the current total level of exploration expenditure over all of the country.

It is encouraging that within eight months of awarding the permits, a considerable quantity of seismic surveying has been completed which reinforces the benefits of attracting large, well-resourced exploration companies to New Zealand.

New Zealand’s new petroleum potential is not however confined to the GSB. The most recent government-funded seismic survey across part of the offshore Raukumara sub-basin has revealed a new petroleum basin which appears to be of material size and prospective for oil. The government expects to be in a position to announce a Blocks Offer over this acreage in the third quarter of this year.

Assuming exploration successes in New Zealand’s sedimentary basins, the rewards will contribute to the long-term stability and security of our energy supply and will potentially provide a major boost for the New Zealand’s economy.

Other government initiatives to promote exploration have included adjustments to tax provisions, reductions in royalty rates for new discoveries made before the end of 2009, and additional funding to promote investment in New Zealand.

15. SLIDE [Final comments]

We will continue to work with industry to create a sustainable energy future that provides for continuing security of supply, while taking advantage of New Zealand’s untapped hydrocarbon assets and our richness in renewable electricity sources.

New Zealand has a number of things to recommend it to explorers:
• New Zealand is geo-politically safe
• Much of New Zealand remains unexplored
• Our data acquisition programme has uncovered more exciting opportunities for exploration

Given all that, and the global context of higher oil prices and increased demand from developing countries, and notwithstanding your disappointment about our strong preference for renewable electricity, this country is a desirable place to look for oil and gas.

Thank you for your invitation to come here. I trust you will continue to have an interesting and rewarding conference.


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