LNG binned? New terminal looks doubtful, ministers consider options amid skyrocketing gas costs

A final decision on the terminal and builder has yet to be made.

Bidders shortlisted by the Ministry of Business, Innovation and Employment are submitting proposals for the Government to make a final decision and sign a contract with the chosen bidder. That process continues, with a decision on who, if anyone, is selected to build the project due before mid-year. The project is expected to be operational in 2027 or early 2028, although if it survives this, it may be delayed.

However, the final decision, multiple ministers privately admit, may be to walk away from the project entirely, given the high prices.

Supporters of the scheme believe the Government could “look through” today’s high prices, given they may eventually come down, but some accept that the devastation wrought to Middle Eastern gas fields will mean prices remain volatile for some time, even if the war ends. Some futures contracts for LNG suggest prices could fall, however, as new sources of supply come online later this decade.

When asked about ministers’ cold feet, Energy Minister Simon Watts toldthe Herald and Newstalk ZB“the Government agreed to proceed with delivering an LNG import facility to mitigate the acute dry year risks and enhance security of energy supply“.

However, he added “we are still in the procurement process and are also closely monitoring the conflict in the Middle East and the impacts on oil and gas supply and prices”.

The LNG terminal was meant to reduce prices for New Zealand electricity users, but it cannot do that with the currently high LNG price. Those prices are likely to stay elevated for some time after the war, as Qatar’s Ras Laffan facility, source of 20% of the world’s LNG, has been badly damaged in strikes and may take time to repair, with reports saying it may be partly offline for three to five years, significantly curtailing global supply.

When the Government first explored the idea, markets were anticipating an oversupply of LNG in 2026, pushing down prices. The damage to Ras Laffan has changed this expectation.

The debate around the project is primarily within the National Party. The Act Party didn’t much like it to begin with and nor did NZ First, who preferred an idea, recommended in last year’s Frontier Economics electricity market review, that the Crown take responsibility for fossil fuel assets, forming a new company with them. LNG was the compromise position supported by National.

On February 9, Watts and Prime Minister Christopher Luxon announced the Government would contract the construction of an LNG import terminal to lower electricity prices. It would be funded by a levy on power companies, dubbed a “gas tax” by critics.

The purpose of the terminal was to act as effective insurance against dry-year risk; when New Zealand’s largely renewable generation doesn’t perform, thanks to low hydro-lake levels or little wind, power companies could, on occasion, burn some LNG to generate electricity.

Reducing the risk of a power crunch in a dry year is meant to reduce wholesale prices overall because the energy companies would not need to use higher prices to guard against this risk.

The proposal appeared to work initially, with futures pricing for electricity – meaning electricity set to be delivered after the terminal was built – declining. Observers were sceptical the entire decline could be put down to the LNG proposal, but said it was probably having a downwards effect on prices.

Announcing the terminal in February, Watts made the idea sound like a done deal.

“[I’ve] got to be really clear, Cabinet has made a definitive decision to build an LNG terminal, we’re not going back to Cabinet for a follow-up conversation, that decision has been made – it’s been delegated to relevant ministers and we’re going to get on and make this happen,” he said.

Now, however, ministers are privately reassuring people that they can back out of the project if it looks uneconomic. Papers agreeing next steps have not yet been circulated among ministers, but some have privately considered that if and when a paper to pause or axe the deal comes up, they would support it.

They have options. Despite the commonly cited $1 billion figure for the new terminal, there are proposals for cheaper options, which run into the low hundreds of millions of dollars.

It is also possible that should some of New Zealand’s existing gas users close, that could free up domestic gas use. There have been report’s Taranaki’s Methanex is weighing closure.

Wholesale electricity prices in New Zealand have been elevated for most of the 2020s, after staying relatively steady in the 2010s.

Politicians have blamed everything from the part-privatisation of the gentailers to the offshore oil and gas exploration ban, the 100% renewable generation target, the Lake Onslow Scheme and uncertainty over the future of the Tiwai Point aluminium smelter.

The Opposition, which has been against the plan from the get-go, is not surprised the Government was getting cold feet.

“I would be hugely worried if there weren’t members of Cabinet questioning whether to go ahead with the proposal,” Labour’s energy spokeswoman Megan Woods told Newstalk ZB.

“We’ve said from the outset, LNG connects us to global volatile gas markets,” she said.

Green Party co-leader Chlöe Swarbrick said the Greens believed “you don’t make cheap electricity on cheap overseas imports”.

“It’s been a daft idea from the outset,” she said, and the Greens preferred investment in distributed renewables.