Sunday, June 13, 2004

Energy: why Lomu won't save us

If you've been paying attention to the news, or my occasional posts on energy policy, you'll know that the biggest medium-term problem we face in that area is Maui running out. In a year or two, the last few GigaJoules will be extracted, and we'll have to rely on other sources. Unfortunately, because Maui gas was so ridiculously cheap, it discouraged exploration, so we don't have many other sources. We're already seeing the consequences of this - Methanex (the people who turn natural gas into fertiliser and industrial chemicals) have been bid out of the market, and electricity prices are already rising in anticipation of the generators having to pay more for the gas they burn.

But according to the Sunday Star-Times, there's some hope: explorers in the Great South Basin (the area around Stewart Island) are chasing some pretty good prospects - including "a prospect potentially so big it has been named Lomu". They're also paying a lot of attention to the "Toroa" prospect, which is estimated to hold twice as much gas as Maui.

This is great, except for one small problem: it's all in the wrong place. Our gas power plants, and gas infrastructure, is all in the North Island. And because there's no gas or gas infrastructure in the South Island (no, the "landfill gas" system in Christchurch doesn't count), there's not much of a market for it there.

So, we either have to move the gas to a market, or move the market to the gas. Either is likely to be expensive.

Moving the gas to the market will mean shipping it around in LNG tankers. This apparently adds a substantial amount to the cost (almost doubling it, according to one estimate I've seen), but allows us to use our existing gas and electricity infrastructure. The fields being explored are all a fair way offshore anyway, and so tankers may be cheaper than an undersea pipeline. And once the stuff is on a boat, it doesn't matter so much how far it goes.

Moving the market to the gas is a much bigger prospect. This would involve building a pipeline infrastructure and powerplants in the South Island. It would also involve having to seriously upgrade the national grid (particularly the Cook Strait Cable), and shift the generation balance even further in favour of the South. OTOH, think of the jobs! Invercargill would become a gas boomtown (so I guess they'd be in favour of it).

But I'm foolishly talking as if we actually have a decision here. We don't. We've devolved power in this area to the market, which means that it's really up to people like Genesis, Contact, NGC and Methenx. And this means that we have a problem, because either option involves enormous upfront capital investment (the latter far more than the former), without which nothing at all will happen. It's a chicken-and-egg problem, and if they don't solve it, we all lose.

Worse, even if we do solve the infrastructure problem, Lomu won't save us anyway. Either way, we'll be paying more for gas and electricity, whether because of transport or infrastructure costs. This applies no matter how much gas we find in the South Island. The only way we can escape our medium-term energy problem is by finding more gas in the North Island - and I haven't heard much good news on that front. While there are areas worth exploring off Northland and the Wairarapa, I haven't heard of anybody looking there. If it is planning to offer incentives for oil and gas exploration (as mentioned in several post-budget speeches), then the government must ensure that that exploration happens in these areas, where the gas can actually be used, rather than at the arse-end of the South Island.