Dairy processor Fonterra says it needs greater confidence in the cost and availability of future gas supplies if it is going to reduce its coal burn on the North Island.

While the company’s near-term focus is on reducing emissions from its coal-fired plants in the South Island, the firm had been looking to gas as a fuel replacement at the three North Island plants that still use coal.

Tony Oosten, an energy manager at Fonterra, says the supply interruptions from the Pohokura gas field last year were a complication the company really didn’t need.

He told delegates at the Downstream energy conference in Auckland yesterday that the firm’s capital is not unlimited. It wants to focus coal reduction efforts on the South Island, and then have gas available beyond 2030 to reduce North Island coal use.

If gas is not going to be available at an affordable cost, Fonterra needs to know soon in case it has to instead keep those coal-fired plants operating longer.

“That’s not a solution we would want to be doing,” Oosten said in a panel discussion on gas supply at the conference.

“It’s cost visibility that we need to be able to make a judgement on how urgently we have to redirect the capital.”

Electrification of transport and industry are key components of the government’s strategy for meeting the country’s emission reduction targets. But conversion of heavy industry – like steel-making and milk drying that rely on high-temperature processing – is expected to take longer and may remain reliant on gas or coal for some applications for many years to come.

Fonterra, the country’s biggest dairy processor, has set itself a goal of net zero carbon emissions by 2050 and plans to build no further coal-fired plant from 2030. It is currently trialling a coal and wood chip blend at its Brightwater plant near Nelson and is preparing to convert its Stirling cheese plant near Balclutha from coal to electricity.

Oosten said Fonterra sees gas as an important transition fuel. It will build more, higher value plant with technology such as high-efficiency heat pumps and other forms of electrification but it still needs a heat supply at its existing plants.

Visibility of future gas supply and cost will help the company determine how its spreads its capital spending in coming decades, he said.

The Labour-led government last year banned new offshore exploration and halted onshore exploration outside Taranaki. It is also seeking an end to gas-use in the electricity sector by 2035, despite advice from the sector, and the Interim Climate Change Committee, that the change will be too costly and may damage the viability of a gas sector that industry still relies on.

That said, Nova Energy is currently building a gas-fired peaking plant near New Plymouth. Its parent company, Todd Energy, is also expanding the onshore Mangahewa gas field and is planning a drilling campaign at the Kapuni field in southern Taranaki. It bought out partner Shell in 2017.

OMV, which last year acquired Shell’s interests in the Maui and Pohokura field, is also planning two in-fill drilling campaigns to keep Maui operating into the late 2020s.

Earlier in the conference, Gas Industry Company chief executive Andy Knight said the declining production from Maui meant the industry had less flexibility to meet peak demand.

While there would be sufficient gas for new peaking plants, replacing coal or potentially using gas to make hydrogen, it will cost more than in the past.

“The overbuild of capacity, which has provided cheap back-up to hydro and wind generation, is no longer available at a low cost,” he said.

Mike Fuge, chief executive of Refining NZ, said his company had been fortunate to have other fuel options when supplies from Pohokura were reduced late last year by a faulty valve on the field’s offshore platform.

But he said that outage had shaken users’ confidence in the gas industry. That was coupled with the “perfect storm” of political uncertainty created by the government’s exploration ban last year.

He said investors are trying to guess whether the current government will last one term or three terms; whether the offshore ban will be followed by an onshore exploration ban; and whether an already thinly stretched gas industry can sustain the fundamental maintenance capability to ensure ongoing security of supply.

Fuge said there is a fundamental need for greater collaboration, cooperation and disclosure in the sector to restore confidence.

Without investment, potential contingent – or Kapuni 2C – reserves at Kapuni won’t be developed. Without confidence in gas supplies, firms won’t have fuel to back up variable renewables. His company also needs gas if it is to expand hydrogen production.

“It comes back to that fundamental thing: confidence,” Fuge told delegates.

“That’s what scares investors away. That’s what will determine whether investors come in for Kapuni 2C or stay out. That’s what will determine whether investors come in to keep Maui alive, or simply stay away.”

Fuge said that investment is going to be critical not just for current activities, but also for ensuring the country has gas during its transition to a lower-carbon economy.

“Gas is an essential part of the equation, and it is going to be pretty vital, at the right price, for the next 25 to 30 years.”

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