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Address to the Downstream Energy Conference


Hon Steven Joyce
Minister for Economic Development

5 March 2014

Address to the Downstream Energy Conference

I’m pleased to here today in place of my colleague Simon Bridges, who is in Toronto for the 2014 Prospectors & Developers Association of Canada conference – a major event in the international minerals exploration calendar.

Simon will be promoting New Zealand, especially the platinum minerals exploration tender for parts of the South Island.

I take a keen interest in the energy and resources portfolio, because it’s a vital contributor to many of the Government’s objectives – building jobs and growth through the Business Growth Agenda, economic development in our regions, and science and innovation.

Economic Context

Let me start by talking a bit about the economy.

There’s obviously still fragility in the global economy that could put New Zealand’s progress at risk, but the signs are increasingly that we are at a turning point in our recent economic history.

The economy grew at 3.5 per cent in the year to September last year and the OECD is predicting we will grow at 3.6 per cent this year – which would put us in the top six in the world.

Some commentators have predicted a growth rate even larger than that.

Unemployment, once predicted to hit 10 per cent during the GFC, is currently 6.0 per cent, down from 7.2 per cent a year ago.

In the past year alone 66,000 more New Zealanders have got jobs. This was the largest annual increase in employment since 2006.

Our unemployment rate is now the same as Australia’s, which never entered recession and has grown consistently for over 20 years now.

Our participation rate is actually much higher than Australia’s – and our female labour force participation rate is the highest since records began.

Australia’s unemployment rate, adjusted for its much lower participation rate, would actually be higher than New Zealand’s.
Growth in the economy has initially been driven by high prices for our export markets, a catch-up in housing supply and the Christchurch rebuild.
This momentum is now turning into a broader-based recovery where consumer and business confidence has lifted, employment is rising across the board and wages on average are increasing ahead of the cost of living.
The Government is on track to return to surplus in 2014/15.

Business Growth Agenda
The Government is taking a long-term view about the health of our economy. Each of the initial drivers of growth will peak over the next few years.
The Government will continue to focus on lifting New Zealand’s underlying growth rate so that beyond the peak of this economic cycle, incomes continue to rise and new jobs continue to be created.
Our task is to take the opportunity of a reasonable growth outlook to deepen investment, upgrade skills, intensify and diversify our export base and rethink the next stage of gaining competitiveness.

This is what the Government’s Business Growth Agenda is all about.

The BGA is a comprehensive and integrated programme of work to help New Zealand build a productive and competitive economy that delivers more jobs and higher growth for New Zealanders.

It contains around 350 initiatives on the six key inputs that businesses need to succeed, grow and add jobs: export markets, capital markets, innovation, skilled and safe workplaces, natural resources, and infrastructure.

Energy and Resources in the Business Growth Agenda: Petroleum

Energy and resources are an important part of the BGA.

This Government has always believed that New Zealand should responsibly develop its abundant natural resources for the benefit on all New Zealanders.

We have a rich endowment of minerals spread right across country.

Our petroleum resources are potentially immense.

It’s been great to see one of the biggest petroleum exploration campaigns in New Zealand’s history this summer.

Multiple offshore rigs are here for the 2013/14 drilling season, major field development and extension programmes are underway and there has been a strong uplift in exploration activity in some of our frontier basins

The results of Block Offer 2013, announced in December, show New Zealand is now firmly on the map as a key destination for oil and gas explorers.

The 10 exploration permits awarded involve a committed work programme expenditure of around NZ $62 million. If that work is successful, it could lead to further expenditure of up to $720 million within five years.

Three new international players have entered New Zealand’s oil and gas scene. Major international companies like Statoil from Norway bring a wealth of technical expertise, as well as best practice approaches to health and safety and environmental issues.

The appearance of a world class company like Statoil doesn’t just happen. It’s the result of a steady programme of work over the last five years, which has included

investment in seismic research
reshaping the Blocks Offer process,
reforming the Crown Minerals Act; and
promoting New Zealand to investors.

We’ve also made big changes to health, safety and environmental regulations, with particular focus on operations that have the highest technical and geological complexity.

This has included introducing comprehensive regulation of our Exclusive Economic Zone.

A few days ago my colleague Amy Adams announced that exploratory drilling for oil and gas will be classified as a non-notified discretionary activity in the EEZ.

The opposition is all over the place on this issue.

The reality is that before any production drilling can take place – as opposed to exploratory drilling - a full public hearing must be held.

So New Zealanders will get a chance to participate and have their say, but it doesn’t make sense to have a long-drawn out process for an exploratory well.

The Greens and their fellow travellers merely want to relitigate these decisions every chance they can get – stymieing economic development in the process – as they’ve managed to do with the Denniston mine on the West Coast.

It’s worth remembering that under the last government, 36 wells were drilled in the EEZ between 1999 and 2008 with no legislation in place to protect the environment.

There was no environmental oversight and no public involvement in the exploratory drilling process. Just a signature from the Minister of Energy.

It’s taken a National-led Government to finally legislate and establish a framework in this area. The opposition are once again being lions in opposition when they were lambs in government.

Development of our energy resources has huge potential for our regions.

All the oil and gas production in New Zealand so far has come from just one of our 18 basins. Taranaki now has the highest GDP per capita of any region in New Zealand, as well as high employment.

The East Coast Oil and Gas Development Study recently highlighted the significant potential in the East Coast region. Several companies have permits in the area, and TAG Oil recently confirmed the presence of petroleum-bearing rock at its Ngapaeruru-1 well, east of Dannevirke.

It’s very early days and we will have to see how this plays out, but it’s encouraging to see investment diversifying into other regions besides Taranaki.

If any one of our other 17 petroleum basins has anything like the success of Taranaki, it would be an economic game-changer for our nation.

Energy and Resources in the Business Growth Agenda: Infrastructure

I’d now like to talk about the Government’s approach to electricity.

When we took office in 2008, it was clear that significant improvements needed to be made to our electricity sector.

Prices were rising rapidly. They rose 72% between 1999 and 2008.

New Zealanders had been asked to save power during winter in four of the last eight years.

And there were serious concerns over security of supply.

Let me contrast that with today.

You will all know that 2012 was one of the driest years on record. I suspect 99% of New Zealanders wouldn’t know that. It went totally unnoticed, because of the reforms implemented by this government.

Operators have been responding to the right market signals and conserved water during the winter.

Since 2010, if a consumer conservation campaign is required, retailers have had to pay compensation to consumers.

New Zealand’s system is now more secure.

In recent years we’ve made some much needed and overdue investment in transmission assets, particularly the $672 million upgrade of the high voltage direct current link between the North and South Island electricity markets.

This project increased the capacity and reliability of the link, and provides greater flexibility for generators in both islands to compete on price and deliver the most efficient generation.

And the Government’s reforms have also delivered in terms of pricing for consumers.

Since 2008, price increases have halved.

New Zealand’s residential electricity prices now sit around the average when compared to other OECD countries.

The retail market is more competitive now than it has ever been. This has led to electricity retailers jostling to retain customers, and win new ones. They are doing this through sharp pricing and innovative service offerings.

Customers are seeing a fundamental change in the offerings and discounts available to them, such as price freezes, online discounts, bonus point offers, and real time consumption monitoring.

This has been triggered by the 2010 reforms and by Electricity Authority initiatives such as the “What’s My Number” campaign, to encourage customers to shop around for the best deal.

In 2013, 20 per cent of consumers switched retailers – nearly 400,000 consumers.

Next on the list for the Electricity Authority is finding more ways to improve information for consumers, and making it easier for new suppliers and retailers to enter the market. Nine parties are in discussions with the EA about entering the retail market.

In terms of generation, the effective wholesale market we now have for electricity generation means the right number of new plants are being built to meet demand

A more liquid forward hedge market is sending longer term signals to investors on what the market is prepared to pay for electricity going forward.

These market signals have seen renewables increase their share of the generation mix – to 74 per cent for the year ended 30 September 2013, making New Zealand fourth highest in the OECD.

The increased use of renewables, driven mainly by new geothermal and wind, is happening because investors see the opportunity, without any need for government incentives or subsidies.

There is competition between generators to find the best option for the next new power station. By the best I mean the cheapest and in the right place and at the right time. This means a lot of potential options get developed with only the most economic being built. The result has been new sources of geothermal have been developed and the best wind sites are being built.

This is good news for the economy and the environment. These new investments in wind and geothermal plant have been steadily pushing thermal plants out of the market.

For example, the 30-year-old Huntly power station has halved its coal-burning generation capacity over the past two years. Contact Energy announced recently that it was reviewing the options for its Taranaki Combined Cycle gas turbine plant at Stratford, while Mighty River Power is considering the future of its Southdown gas-fired plant.

It’s also good news for taxpayers and consumers. This market-based approach to electricity generation shifts the risks of investment to the investors. There are strong commercial incentives for companies to get their investment decisions right. If investors get it wrong, they must bear the financial consequences of that decision, rather than taxpayers or consumers.

More fundamentally, the reforms have facilitated new entrants into the market who are retail only, and don’t own generation plant. As with the telecommunications markets, it’s these sorts of small players who really shake up markets in the long run.

To my mind, there is no question that these changes that promote real competition have translated into better outcomes for New Zealand. We have ample generation capacity, with more ready to build when needed, our transmission assets are in much better shape, and our electricity prices stack up well internationally.

NZ Power

The opposition parties want to put all of this progress at risk and wind New Zealand’s electricity system back to the 1970s through their NZ Power policy.

NZ Power is an expensive, time-consuming and complex “solution” in search of a problem.

Actually, to call it a “policy” is to elevate it to something it is not.

Essentially it was a hastily thrown together press release designed to wipe millions of dollars of value from companies about to be listed under the mixed ownership model.

It is politically motivated and economically irresponsible.

There is basically no international precedent for the opposition’s ideas. Few countries have a single buyer system and, where they do, this has generally been introduced as a stepping stone to more competition.

Only the province of Ontario in Canada has a similar system and retail prices there have gone up faster than in New Zealand, despite falling demand for electricity. Retail prices in Ontario have in fact gone up almost 50 per cent since 2008.

Implementing NZ Power would require overturning almost every existing arrangement in the electricity sector, and the reality is that power prices would almost certainly rise under NZ Power, not fall.

That’s without even factoring in the $500 per year the opposition want to lump onto households’ electricity and fuel bills through their Emissions Trading Scheme.

Generation doesn’t just suddenly become any cheaper under a regulated return model. In fact it’s more likely to be more expensive, as there are weaker incentives to find low-cost new generation and investors will factor in the risk of dealing with an expropriating government.

No credible expert has said that NZ Power would lower power prices.

In fact the alleged inspiration for the policy, Professor Frank Wolak, has rubbished it.

With all investment decisions made by a single entity (or worse, politicians), the consequences of any misjudgement would be massively magnified. And it would be consumers and taxpayers who bear the brunt of that misjudgement.

There would be a real risk of either under-investment in generation, leading to black-outs; over-investment in generation, which increases prices for consumers; or poor-quality investments, perhaps because of political considerations.

Some of you here will remember the supply shortages, black-outs and poor investments that were a feature of the centrally-controlled electricity system in the past.

We don’t need to go back to those days.

The problems with the policy are undoubtedly why it was rejected by the previous government in 2006. It deserves to be again.

Conclusion

In conclusion, I talked earlier in my speech about taking advantage of our petroleum and minerals endowment, and that’s important.

But actually we need to take advantage of all of our opportunities for economic development.

That means exploring our energy potential in geothermal, hydro, wind, and other sources as well.

It also means exploring all opportunities to encourage investment and growth in this country.

There are plenty of armchair critics and opposition politicians who start the growth debate by ruling out industries or energy sources they don’t like

But we don’t have that luxury as a country. Delivering higher growth, more jobs and higher incomes for Kiwi families demands we explore all our opportunities. That’s what this Government is doing.

From food to ICT, to energy and resources, to high-tech manufacturing, to forestry and so on, it’s about encouraging investment, managing the risks, and growing competitive industries. That is what will make this country successful not just this year or next year but well into the future.

ENDS

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