The ban on new offshore gas exploration has made it harder for fertiliser cooperative Ballance Agri-Nutrients to settle on the future for its plant at Kapuni, which is New Zealand's only ammonia-urea facility.
Knowing “how much gas is out there is important for our long-term investment decisions,” Kapuni site manager Glenn Johnson told BusinessDesk. “When we start to look at 20- or 30-year investment type projects, it (the ban) has made things a lot murkier,” he said.
The oil and gas industry was surprised when the government last month ended new offshore exploration permits and triggered claims the ban will make firms reconsider current and future plans. Ministers claim the ban won't stifle existing investment and is simply the start of a 30-year transition away from fossil fuels in pursuit of a net zero emissions economy by 2050.
Ballance produces about a third of New Zealand’s total urea needs at the Kapuni site, using natural gas from the nearby Maui gas field as a feedstock. Urea is the most widely used fertiliser for dairy farms and is also used to produce resins for wood manufacturing. The plant produced a record 277,224 tonnes of urea in the year to May 2017, according to the latest annual report. Imports totalled 640,512 tonnes in 2017.
The fertiliser cooperative originally planned to rebuild the plant but backtracked when a cornerstone investment partner pulled out in August 2016. The project was tipped to cost around $1 billion. In its latest report, Ballance said while future redevelopment wasn't completely off the cards, a staged investment would be more prudent.
On a possible rebuild, Johnson said “we have not ruled that out at all” but the government’s announcement certainly “challenges it.” Ballance is still in talks with international investors and “international investors are asking us questions about what does it (the ban) mean for reserves," he said.
Johnson said Ballance is asking itself the same questions: “We can’t afford to invest in a project that doesn’t have a feedstock in 15 years time, that wouldn’t stack up.”
Before to the government's announcement "we were very clear on where things were tracking. We are now back to consulting with our gas suppliers and the government," he said.
In a note to clients, Woodward Partners energy analyst John Kidd said the government's announcement does "impact the long-term outlook for gas supply that Ballance would require to support any future rebuild and expansion of its existing ammonia-urea plant at Kapuni."
Even if a rebuild doesn't eventuate, Ballance expects to spend about $300 million over the next decade to keep the existing plant running, Johnson said.
"Obviously what we want is clarity," he said. The government's announcement created uncertainty around the reserve development plans gas suppliers may or may not implement in the wake of the announcements, and also around climate change policies, Johnson said.
On climate change policies, he said producing urea at Ballance's plant is more efficient than importing it, "because I don't have to transport it thousands of miles across the ocean to get it to New Zealand."
Building a new plant would have a greater impact, reducing emissions by 20-to-30 percent, he said. Those are the "exact outcomes" required as New Zealand aims to be carbon neutral by 2050, he said.
"If I have certainty around reserves and I have clarity around what the climate change policies are, I can commit to investment, which will further reduce and improve our efficiencies and reduce the amount of carbon emissions we have," he said.