By Alexandra Cain

The Kiwi energy sector remains in limbo, hostage to government inertia on long-term plans for the country’s liquefied natural gas industry that is unlikely to be resolved in an election year.

Liquefied natural gas (LNG) is seen as an important element in the country’s transition to renewable energy–backed electrification. Meanwhile, the natural gas market’s evisceration continues to power deindustrialisation forces.

A 2018 ban on gas exploration saw the start of a massive downturn in the Aotearoa New Zealand gas sector that is only now being curtailed. This year, the war in Iran has put energy security in even sharper focus, pressuring the government to make a decision about the future of the LNG sector.

Until there is certainty about LNG, the Kiwi gas sector will likely continue its decline. Right now, New Zealand doesn’t produce enough energy to meet its needs – a difficult position to be in with energy markets in turmoil.

‘We are finding out the hard way what happens when [you are] operating a net-short energy system that is heavily reliant on fuel coming into the country from other parts of the world. When the price those other parts of the world charge for that fuel nearly doubles, it is extremely painful,’ says John Kidd, Director and Head of Research at energy research house Enerlytica.

The gas sector has always been vulnerable in New Zealand, one of the only OECD countries without a direct gas connection to another country. But the 2018 ban was the catalyst for serious supply and demand imbalance, with the market now producing 100 petajoules a year, down from 200 petajoules a year ago.

‘When indigenous supply halves, local demand must do the same because we don’t have any ability to get more gas into the system,’ says Kidd.

The contracting market is thanks to shrinking demand from power generators and big commercial users like dairy co-op Fonterra. A huge blow has been methanol producer Methanex’s withdrawal from the market. The business used to take around 45 per cent of New Zealand’s gas supply. The nation was once one of the world’s major methanol suppliers.

‘Deindustrialisation is a term that gets used a lot when describing what’s been happening. That’s fair, because a number of large energy users have either exited [the market] or have reduced the size of their operations in New Zealand,’ says Kidd.

The ban on gas exploration aside, it’s understood that Austrian energy business OMV has invested many hundreds of millions of dollars in New Zealand to bring gas to market from old and existing fields. While many wells have been drilled by OMV and others since 2018, this has largely been unsuccessful. A promising new discovery, Toutouwai, made by OMV in 2020 in the Taranaki Basin, remains undeveloped.

‘In nearly every other market in the world, that discovery would have been appraised and probably developed. But OMV has since surrendered the permit because it cannot find a partner to share project risk with,’ says Kidd.

International oil companies have also left New Zealand, in large part because of the ban.

‘The gas market now is smaller, tighter and more volatile than it used to be,’ says Energy Resources Aotearoa CEO John Carnegie.

The corollary is operators are working hard to get as much as they can from existing fields.

‘That’s something few see and fewer appreciate because, of course, that buys us time, but it doesn’t reverse the overall decline. As gas supply tightens, that affects the electricity market, because gas has traditionally provided flexible generation when hydro, wind and solar have been ramping up. That’s why it’s not just an oil and gas sector issue; it’s an electricity price issue, it’s an industrial jobs issue, and it’s an economic resilience issue,’ says Carnegie. This is where LNG comes in.

‘I think people are confused by how LNG might fit into the New Zealand energy system. The government has suggested that it will be targeted towards electricity generation to provide dry-year security, but I think, if adopted, it would have a much wider role in the market than just for [power generation]. We’ll see where things go,’ says Kidd.

The government has announced a commitment to establish an LNG import facility. But with an election later in 2026, it is unlikely there will be any real movement on this before then, which is frustrating for a sector that relies on long-term planning.

‘Having LNG in the system would help support a long transition while everybody works for the same objective, which is to get away from fossil fuels,’ says Kidd.

Any new LNG infrastructure would likely be funded by an institutional investor or a specialist fund, underwritten by a capacity charge.

With Methanex exiting the market, the Maui field will cease production at the end of the year, which means demand to underwrite new gas supply, and also flexibility, will leave the market.

‘That increases our risk of having to use gas as it’s produced, rather than being able to flex it into different periods. As a generator, we want to maximise the value of the gas we use. So, ideally, we want to save it for winter and for when gas generation is more needed. With fewer participants in the market, that becomes more challenging,’ says Genesis General Manager, Fuel Strategy, Angela Ogier.

Genesis is working with the Tariki JV, owned by NZ Energy Corp and L&M Energy, on assessing new gas storage, among other options.

‘We are working with suppliers who are trying to see what they can give us in terms of flexibility. That’s sensible as it maximises the value of gas production for New Zealand,’ Ogier says.

There has also been a relaxation on the 2028 ban, and the door is now ajar for new exploration. A gas security fund should help bring near-term gas supply forward, including additional drilling, production upgrades and more storage.

‘The upshot of all of that is we are seeing some early new permit interest by small players. That’s what the restart of an industry looks like,’ says Carnegie.