Demand for natural gas likely to surge

A decade ago, it would have been a calamity for Contact Energy to have as little natural gas contracted for the next five years as it declared in its annual profit results this week.

Back then, gas-fired, baseload power stations were the mainstay of the Contact fleet, and much of the company's corporate energy focused on where new gas would come from.

In the mid-2000s, the concern became so acute that in concert with Genesis Energy, Contact seriously considered options for importing liquefied natural gas.

Yet, almost as their "Gasbridge" joint venture was gaining traction, the world changed, with a major shift towards geothermal and wind generation in response to the spike in gas prices.

So much so, in fact, that geothermal output exceeded gas-fired power production for the first time last year, according to Edison Investment Research, which has just published its first yearbook giving an exhaustive review of the New Zealand petroleum sector.

While several new gasfields came to market since - most notably Kupe and Pohokura - gas prices stayed high at about $7.50 per gigajoule.

Now, however, gas production is on a tear, linked to recent increases in oil output. For the first time in at least half a decade, a buyer's market is emerging for the small club of five major industrial gas users in New Zealand - Contact, Genesis Energy, Vector, Methanex and Ballance AgriNutrients.

Add to this mix five years in which there has been virtually no growth in electricity demand, thanks to global and local recessions, and Contact chief executive Dennis Barnes can see no case for his company to build new generation, gas-fired or renewable, for at least four or five years.

In fact, just as they come to market for part-privatisation, electricity companies are facing stagnant demand and, by the standards of the electricity industry, unprecedented competition for retail customers. As a result, all can be expected to try to squeeze costs and delay new capital spending, since these are now the only routes to improved profitability.

That's also why Meridian says its next most attractive development after the Mill Creek windfarm in the Ohariu Valley, where first earth was turned this week, is in New South Wales.

Despite this, electricity tariffs will continue to rise, but mostly because of galloping increases in the charges passed through by the monopolies that control the wires: the national grid operator Transpower and local electricity networks. If anything, the profitability of retail customers is going backwards for power retailers at the moment, no matter how much the public sees them as price gougers.

Back at Contact, much recent effort has gone into increasing gas-fired power stations' ability to ramp production up and down in response to fluctuating demand - something they weren't designed to do in an ideal world.

And Barnes says Contact may yet convert its combined cycle gas turbine units in Stratford and Otahuhu to run less efficiently as "open cycle" plant, used to fill in the gaps when the weather fails to provide enough wind or rain for windfarms and hydro-electricity.

At the same time, Contact and other major gas users are looking forward to exploiting the continuing gas-price slump.

Edison says gas prices have softened quickly in the past 12 to 18 months, with further real terms declines likely, which will see industrial and commercial gas prices fall in coming months. That's why Barnes, who has only 3 petajoules of gas contracted in three years' time, compared with 44PJ this year, is radiating confidence he will be able to get the gas he needs at much lower prices than Contact was forced to agree to in the mid-2000s.

Also striding into this mix is Methanex, owner of global-scale methanol production units at Motunui and Waitara. Both plants are likely to be out of mothballs and at full production by late next year, with Edison estimating gas prices at about $5 per GJ, which makes the investment case for Methanex "compelling".

Edison researchers John Kidd and Simon Wilson also see Methanex's growing gas demand as underpinning petroleum exploration in the next two years, which "presents as being at the early stages of a potentially sizeable uplift in reserves and deliverability".

As many as 28 offshore wells and 60 onshore wells are either committed or planned to be drilled in the next two years, costing perhaps $2.3 billion, Edison estimates.

That is likely to include politically risky deep-water exploration happening in the lead-up to the next election, but, as Edison notes, there are big economic gains on offer as well. "Since 2008/09, the Crown has received more cash as royalty payments from upstream oil and gas producers than it has received as ordinary dividends from its entire SOE portfolio."

Think about it.

Fairfax Media