Why drilling for fossil fuels is not expected to fix our energy crisis

The government's plan to fix our energy crisis with renewed oil and gas exploration is risky. What if it doesn't work?

Six months ago, Taranaki businessman John Burling received an abrupt call: his gas company was increasing prices by 40 percent.

Burling, who owns the Taranaki-based Carac Group engineering and manufacturing company, was floored. "What do you mean? How do I pass it on?'"

The reply was stark. "There's a shortage of gas, so that's going to be the new price."

Overnight, Carac Group had to cut powder coating plant operations from five days to four, shelving expansion plans and curtailing production due to the energy-intensive gas-fired ovens.

Across the country, many businesses are facing the same gas woes.

"The untold story here is that there's a very large number of smaller industrial businesses that rely on gas and frankly they're gonna struggle to stay afloat," says Barney Irvine, executive director of the Northern Infrastructure Forum. "A lot of these businesses are feeling very desperate and pretty lost."

New Zealand's natural gas is drawn from wells in Taranaki, on the North Island's wild west coast. Around 290,000 households use gas for cooking and heating; in business, it is burned at dairy factories, fertiliser plants and in manufacturing. It's also used to produce electricity when there's not enough power generated from wind, water or the sun.

Until recently, gas was reliable, even when other energy sources were scarce. But now, our wells are old and in decline, and our gas supply is dwindling, fast.

Data released by the Ministry of Business, Innovation and Employment (MBIE) in June reveals gas production has almost halved in the last ten years. Supply in February 2024 was the lowest since the 1980s. Gas reserves - the estimated available gas in the deep, underground reservoirs - have also fallen sharply, down 27 percent in the year to January. Forecasts say there is barely enough gas left in our existing oil and gas fields to last the decade, and even that is an optimistic guess.

Demand now outstrips supply, forcing some businesses to struggle for gas, others onto 'demand management' plans requiring production shutdowns to support the electricity grid, and some to close operations entirely.

"In my opinion gas supply is currently our most pressing energy security issue," says energy commentator Larry Blair. "The scale of the problem is huge, and we don't have any readily available alternatives to turn to."

To combat the shortfall, the government has repealed the former Labour government's 2018 ban on new offshore oil and gas exploration permits. The policy aims to 'future-proof' the natural gas industry and reduce reliance on imported coal during dry years when hydro dams are low.

The bill, spearheaded by Resources Minister Shane Jones, passed in the House last week. Coupled with a $200m co-investment in gas exploration, Jones says the policy will signal to international petrochemical companies New Zealand is "open for business".

"It's to send a message that we will invest with you if it's appropriate as the Crown, but more importantly, there is a long-term future in New Zealand in terms of how we power our economy by using gas or coal."

Industry has celebrated the law change. John Carnegie, chief executive of Energy Resources Aotearoa called the bill a "pragmatic and necessary step to help rebuild investor confidence."

Will it fix the problem?

Jones and the Prime Minister, Christopher Luxon, have blamed the 2018 exploration ban for the current state of the gas market.

"The basic problem is that we don't have enough gas thanks to Labour screwing the scrum by banning oil and gas," Luxon told Morning Report last month.

Jones has said the ban, which was implemented to address climate change, was "the most destructive decision in the history of New Zealand's industry."

But experts, including the government's own officials, warned the ban was not the main driver behind a lack of investment in gas or New Zealand's high energy prices - and won't be a magic fix for them either.

Global investment in speculative drilling for oil and gas has been declining since 2014, when the oil price crashed. Since then, oil companies have focused on high-ranking, lower-cost petroleum provinces, putting New Zealand at a "geographical and geological disadvantage" due to its isolation and relatively unexplored status, officials wrote in a Cabinet paper last year.

Records show that even before 2018, most of the major oil companies had given up their exploration permits and left New Zealand, citing "bad data", high technical risk or better opportunities elsewhere.

"Clearly the ban was an important nail in the coffin," says Green Party MP Steve Abel, who worked on Greenpeace's oil and gas campaign. "But the government also should have been well aware of the obvious evidence that gas was running out and no one was interested in drilling for more, even though a lot of oil majors came and had a look."

Whether those companies can be lured back will largely depend on whether we have enough big buyers to make it worth their while. New Zealand has a closed gas market, meaning there are no exports. Instead, local supply must meet local demand.

Historically, developing new gas fields has relied on big contracts from major users like methanol producer Methanex. But if demand from those large industrial users drops, it poses a risk that the remaining, smaller users might not be able to purchase enough gas to support new investment. Currently, demand is dropping rapidly - advice from officials on the $200m investment shows overall gas use has fallen by about a third since 2020, as companies close because of high prices, or decarbonise in the face of climate change.

"At this point, the market is collapsing faster than we can put new reserves back into it," Larry Blair says. There is also the lingering damage by the ban to the country's reputation as a safe place to invest, and the very real risk that the policy could be re-reversed with a change of government. "The problem I see for people looking at New Zealand is there's no confidence that there's a sustainable market there in the long term."

With such strong headwinds, experts say the $200m is unlikely to suddenly make it commercially viable to take a big gamble on entirely new discoveries, particularly when New Zealand hasn't found new gas in a new place for two decades or longer. It's more likely the money will be used to fossick around in our existing fields, trying to retrieve what's left.

The government knows this. Its own advice has acknowledged the plan's flaws and its low certainty of success. "Investments may not all be successful. The risk of failed drilling is high in our mature fields. In the last five years around $1.8 billion has been invested in drilling 58 wells, and this investment has not managed to maintain or increase our gas reserves," MBIE's advice to Jones in March this year said.

Even if the analysts are wrong, there is still the matter of timing. Data shows a new gas field could take a decade, or longer, to find, develop, and bring online.

"There will be nothing left to power by then," says Consumer NZ chief executive Jon Duffy.

"Why are we doubling down on expanding what is clearly an industry in decline? In my view we are taking an absolute wrong turn."

'No Plan A' to address the energy supply crunch

Critics like Duffy say more needs to be done now to bring down gas and electricity prices and shore up energy supply.

Last month, an influential collection of energy users and advocacy groups called on Luxon to urgently fix the "broken" energy sector, which they said was crippling industry and leaving families freezing during winter.

"Regional employers are shutting their doors, with hundreds of jobs and decades of investment lost," it said. "Families and communities are being left behind."

Luxon is also under pressure from climate advocates, who have said the bill is "tipping oil on the climate crisis fire." A government Climate Implications of Policy Assessment (CIPA) estimated that reversing the ban would lead to a "substantial increase in emissions" of approximately 14.2 million tonnes of carbon by 2035, primarily from prolonged gas usage in electricity, commercial, and industrial sectors.

Drilling for gas would make it harder for New Zealand to meet climate change targets, but could also undermine its obligations under the Paris Agreement, risk trade deals and breach international law, critics said.

"From a climate change point of view, which everyone should be worried about, we can't afford to burn the existing fossil fuels that have already been discovered on the planet," said Greenpeace executive director Russel Norman. "But also, potentially, you are facing liabilities from other countries who are negatively affected by you burning more and more fossil fuels and destabilizing the climate. So it's grossly irresponsible."

Jones recently said he considers climate change "largely moral hysteria." He said the recent judgment from the International Court of Justice (ICJ) would not halt legitimate New Zealand industries.

"Some people might try to use it, exploit it to undermine industry, undermine investment, stop manufacturing … but we will not allow our sovereignty to be compromised," Jones said.

Instead, he has pitched gas as a "transition fuel" to reduce dependency on Indonesian coal to "keep the lights on". The government also plans to double geothermal energy.

Plans to transition away from gas itself were shelved when the coalition was elected, alongside a plan to help fossil fuel workers retrain in low-emissions industries. While there are renewable energy projects in the pipeline it's not expected to be enough to fill the gap, especially as more companies decarbonise.

In the same open letter sent last month, the group of concerned organisations called for the government to intervene in the market so more renewables could be built at pace.

"Unlock investment in low-cost, renewable generation," it said. "Investment in new generation is being delayed, sustaining high prices, and contributing to the energy supply crisis we now face."

Commentators say unless we can secure more energy soon, industry closures will begin to pile up as businesses run out of options.

"I don't see a plan B for a lot of industries in New Zealand," says Blair. "That's the brutal reality of it."

Consumer's Jon Duffy says he doesn't think there's a plan at all. "There's no Plan A. What we are really missing is a national energy strategy."

Meanwhile, for industries like John Burling's, there are no good answers. His increased gas bill led to higher costs for running the gas-fired ovens, but Burling was unable to pass these on to customers. "It was a bit of a no-win really," Burling says. He's yet to find an alternative to his gas-fired ovens, and in any case, electricity would be even more expensive than gas.

Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.