THE NEW ZEALAND GAS STORY – SUPPLYING THE DOMESTIC MARKET STEVE BIELBY CHIEF EXECUTIVE, GAS INDUSTRY CO

DATE:

7 March 2016

Gas Industry Company

Optimising gas’s contribution to NZ Government

• Co-regulation of downstream gas sector - modelled on former NSW regime

Wholesale

• Industry/Government partnership • Overall NZ strategic view

Transmission

Retail

GIC Distribution Consumers

Processing

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What I’ll be covering… • Key features of the NZ market • Markets and issues – a closer look at:

,role of gas-fired electricity generation ,price trends ,transmission access • How NZ’s gas future is shaping

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Key features of the NZ market

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…we’re an isolated island nation

New Zealand is totally self-reliant for natural gas – no LNG import capability or cross-border pipelines

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Significant features of the NZ gas market …we effectively export more than half of our gas as methanol and other export commodities

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Significant features of the NZ gas market …natural gas is available only in the North Island

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Significant features of the NZ gas market 78% of gas is used as a transition energy for electricity and petrochemicals 250,000 households use just 3.2% Petrochemica l Process Gas 19.7%

Commercial 4.3%

Petrochemica l Feedstock 29.2%

Residential, 3.2%

Electricity Generation 29.0%

Industrial 14.6%

Source: 2015 Energy in New Zealand

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Significant features of the NZ electricity market …and we have 80% renewable electricity generation, aiming for 90% Electricity Generation - Australia

Electricity Generation - New Zealand Hydro Geothermal

80 %

Wind Bio Energy Gas Coal %

-10

10

30

50

70

Coal Gas Oil Other Hydro Wind Solar Bagasse/Wood Biogas %

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13 %

0

20

40

60

80

9

Gas’s contribution to NZ primary energy supply around 23% 40

%

Maui heyday

35 30

Maui wind down – new fields come on stream

25 20 15 10 Maui on stream

5 0 1975

1980

1985

Source: 2015 Energy in New Zealand

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1990

1995

2000

2005

2010

10

15 fields produce gas – all in Taranaki

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Gas has enabled development of a substantial petrochemical industry Motunui methanol

Waitara Valley methanol

Kapuni ammonia/urea

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Natural gas underpins electricity supply… Southdown

Whangarei

Otahuhu

Huntly

Auckland Morrinsville

Hamilton

Te Rapa Cogen

Tauranga Cambridge

Whakatane Rotorua

New PlymouthNew Plymouth

Taupo

McKee Peaker KAPUNI Hawera

Kapuni Cogen MAUI

Opotiki

Gisborne

Hastings

Wanganui Palmerston

Levin

Taranaki North (TCC)

Pahiatua

Fonterra Cogen Wellington

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Stratford Peaker

Lower Hutt

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and a nationwide LPG industry..

LPG depot Auckland

LPG depot, New Plymouth

LPG depot Christchurch Reticulate d LPG networks

LPG depot Dunedin

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NZ has a healthy downstream consumer market Customer choice •

99% of customers have a choice of at least 8 retailers

Competition •

Customer churn rate robust at around 19% p.a.

•

Average switching time down around 6 business days

•

Market concentration has reduced in all regions

Efficiency •

Annual unaccounted-for gas (UFG) reduced by 60% to 1% of injected volumes

Compliance/Standards •

High level compliance across all rules/regulations; ‘substantial’ alignment with retail contract benchmarks and distribution contract principles

Transparency •

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Key market data published and reported widely

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Gas use trends are changing over time 150

P J

100 50 0 1990

1995

2000

2005

2010

Electricity Generation Petrol Production Petrochemical Feedstock/Process Industrial Commercial Source: 2015 Energy in New Zealand

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Gas reserves are relatively stable • 1,036PJ - 2,642PJ range since 2005

3000 2500

• Currently 2,328PJ – supply horizon around 10 years

2000

• Unconventional gas reserves not firm enough to be included

500

14

P J

12 10 8

1500 6 1000

4 2 0

0 2005

2006

2007

2008

2009

2010

Remaining Reserves (P50)

2011

2012

2013

2014

Supply Horizon

Source: Energy in New Zealand

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Maintaining/growing upstream investment in the current oil price environment

• NZ operates a Block offers regime • Recent grantees include Shell, OMV, Anadarko, Chevron, India Oil & Natural Gas Corporation, Statoil (Norway) • Low oil price affecting investment • 2015 round still attracts major players but terms/commitments reduced

2015 & 2016 Block Offer regions

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Range of Supply and Demand Scenarios

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Markets and issues

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Common issues for Australia and NZ

• Adapting to market change • Addressing natural monopolies • Consumer protection • Role of gas-fired generation • Step changes in prices • Fair and efficient access to transmission services

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But have common issues

• Adapting to market change • Controlling natural monopoly behaviour • Consumer protection • Role of gas-fired generation • Step changes in prices • Fair and efficient access to transmission services

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A closer look at – the role of gas-fired generation

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Electricity generation market is finding its own path • 90% renewable goal • Low Government intervention, direction or subsidies • Independent Crown Entity (Electricity Authority) runs electricity market

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The overall generation mix is changing 90 80

Hydro

70 60 50 % 40

Gas

30 20

Coal

Geothermal

10 0 1990

1995

2000

Wind

2005

2010

2014

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Moving away from baseload thermal generation Closed Southdown 140MW

Auckland = (540MW) Whangarei

Otahuh u 400MW Auckland Morrinsville

Hamilton

Tauranga

Waikato = 998MW

Fonterra Te Rapa Cogen - 45MW

Huntly 953M W

Cambridge

Whakatane Rotorua

Opotik i

Taupo

New Plymouth

Taranaki = 772MW

Fonterra Cogen, Hawera – 70MW

Gisborne

Kapuni Treatment Plant MAUI Cogen – 25MW Wanganui

KAPUNI Hawera

Taranaki CC - 377MW Palmerston North

Levin

Wellington

Stratford Hastings Peaker - – 200MW

McKee Peaker100MW

Pahiatua Lower Hutt

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… towards efficient, modern peaker plants Closed Southdown 140MW

Auckland = (540MW) Whangarei

Otahuh u 400MW Auckland Morrinsville

Hamilton

Tauranga

Waikato = 998MW

Fonterra Te Rapa Cogen - 45MW

Huntly 953M W

Cambridge

Whakatane Rotorua

Opotik i

Taupo

New Plymouth

Taranaki = 772MW

Fonterra Cogen, Hawera – 70MW

Gisborne

Kapuni Treatment Plant MAUI Cogen – 25MW Wanganui

KAPUNI Hawera

Taranaki CC - 377MW Palmerston North

Levin

Wellington

Stratford Hastings Peaker - – 200MW

McKee Peaker100MW

???

Pahiatua Lower Hutt

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A closer look at – price trends

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NZ has survived a steep rise in gas prices • Driven by transition to new fields • Comparison with CSG/LNG experience for domestic Australian market

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A new wholesale gas platform has improved price transparency and prices have fallen back to $5-6/GJ • Price range of $3.50 - $8.00/GJ • VWAP of $5.50/GJ • ASX futures contract

10$/GJ 8 6 4 2 0 2013

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2015

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LPG pricing went through a similar transition

• Now driven by export link for new LPG supplies

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80,000

2.03

2

$/kg (excluding GST)

• Market absorbed and has continued to grow

2.5

1.5

1.76 1.28

1.78

1.93 1.91 2.00 2.00 2.00 70,000 60,000

1.48

50,000 40,000

1

30,000 20,000

0.5

Annual Sales (kmt)

• Driven by import link to Saudi Aramco Contract Price

10,000 0

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Residential Price 45kg Cylinder

Demand

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A closer look at – transmission access

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Two pipelines, two different access codes • Maui = common carriage

Vector System

• Vector = contract carriage

Maui

Whan gare i

• ‘Evolutionary convergence’ of the two codes sought

C

• Industry given the first opportunity to lead change

Auckland

Hun tly Po we r Station

Roto waro CS C

Hamilton

Po kuru CS

Tau rang a

C

Roto rua

• In parallel GIC developing regulatory counterfactual

C

Ka werau CS Mah oenui CS C C Mokau CS

Taupo

Poho kura Pro duction Sta tion New Plymouth

Gisborne

Turangi Pro duction Sta tion McKee Pro duction Sta tion

Oaon ui Product io n Station Ka puni Trea tment Station Kupe Productio n Station

Rimu Prod uctio n Station

Napier Hastin gs

Wang anui Kaitoki CS C

Pa lmerst on North

Lower Hutt Wellin gton

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Lessons from Gas Industry Co’s transmission code work • Situations can quickly change – eg: Auckland gas-fired power station closures free up pipeline capacity • Reinforces logic of principlesbased approach, rather than trying to pick winners or market swings • Readiness for future step change in supply/demand

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How NZ’s gas future is shaping

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Future gas scenarios/challenges a key GIC focus

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How exploration success might unfold • North and South Islands are different worlds • South Island a blank slate • no natural gas • no infrastructure • transformational market development opportunities

• North Island market is mature • infrastructure well established, highly reliable • substantial recent demand growth attributable to one player (Methanex) • but market concentration, reduced demand

• Possible LNG exports vs overall benefits to NZ. Floating production technologies may mean gas won’t land in NZ • LNG carries price shock risk through move to export price parity Gas Industry Co

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Demand options for new gas discoveries • New gas discoveries may exceed the current domestic market’s ability to absorb them, but there are options:

LNG exports for discoveries 3,000 - 4,000PJ and over

Transport fuels – LNG, methanol blends

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Methanol and ammonia/urea manufacture for fields not large enough for LNG export

Electricity generation using modern peaker technologies

Direct use – industrial, commercial, residential

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NZ is also facing headwinds • Oil price downturn affecting investment • Gas in strong competition with electricity and other fuels • 90% renewable generation goal • Gas networks affected by new distributed generation • Energy demand has been flat in NZ, but showing signs of uplift • Dealing with the carbon challenge

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But the NZ gas market is healthy and prospects are good… • Gas still making a major contribution to the New Zealand economy and energy mix • Providing consumers with a competitive energy choice • Healthy downstream NZ market underpinned by co-regulation • Its role is changing, but it remains a good story • New Zealand is an attractive exploration destination • Homes will be found for new gas

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Read all about it – The NZ Gas Story

Available at www.gasindustry.co.nz

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