Reverse ban of new petroleum exploration permits
The Crown Minerals Amendment Bill (Bill) passed its first reading this week, and has been referred to Select Committee for consideration under urgency. Public submissions are due by 11.59pm on Tuesday 1 October 2024, providing only four days for public input into the Bill.
The Bill proposes to amend the Crown Minerals Act 1991 (CMA) to repeal the ban on new petroleum exploration permits outside of onshore Taranaki (a region in New Zealand). Resources Minister, Shane Jones sees the Bill as delivering on the Government's promise to take urgent action to address energy security and affordability. The policy follows quickly after the recent soaring wholesale electricity prices experienced in August.
To meet the Government's timeline of passing legislation by the end of 2024, the Select Committee stage has been condensed and will report back to Parliament on the Bill by 31 October 2024.
Background on the ban
The ban on new offshore exploration was imposed in 2018 by the then Labour-led Government (with the support of NZ First) to assist New Zealand's shift away from fossil fuels and transition to a low-carbon economy in line with international climate commitments. Prior to the election of the National-ACT-NZ First Coalition Government in 2023, all three parties campaigned on the reversal of the ban. On the formation of the new Coalition Government, these commitments were reflected in both the National-NZ First and National-ACT coalition agreements. Through its reversal of the ban, the Coalition Government aims to promote oil and gas exploration and production to enable a supply of natural gas as a transition fuel and address energy security issues in New Zealand.
The Government's commitment to the promotion of natural gas production was reinforced by the recent decline in natural gas production, which dropped by 12.5% in 2023 and 27.8% for the first three months of 2024. This resulted in the spot market price of gas increasing from below $10 per gigajoule (GJ) to above $55/GJ in August,1 and methanol manufacturer Methanex (normally the consumer of about 45% of New Zealand's natural gas) suspending its production until the end of October. While the spot market price of gas plummeted again to around $7/GJ once Methanex suspended its production and following heavy rain that refilled hydro lakes,2 Methanex's suspension of activities costs the economy, as a significant exporter and employer in the Taranaki region.3 These recent events have helped to drive the Government's emphasis on finding solutions to address energy security that do not require the suspension or reduction of economic activities or give rise to a significant cost, such as the importation of liquefied natural gas.4
Other key changes to the Bill
In additional to the reversal of the 2018 exploration ban, other key changes include:
- Reinstating the purpose of the Act to "promote" mining activities: The Bill reverses the 2023 amendment to the Act's purpose that replaced "promote" with "manage", returning the purpose of the Act to “promote prospecting for, exploration for, and mining of Crown owned minerals for the benefit of New Zealand”.
- Flexibility for decommissioning securities: The Bill has been presented as providing greater flexibility on the types of financial securities that may be accepted by the Minister under the decommissioning regime. We are keen to see how this will eventuate in practice, noting that the CMA currently provides a broad discretion for the Minister to take into account such matters as the Minister considers relevant in assessing the financial security, and this is retained by the Bill. If the Bill is passed, more detailed guidance from New Zealand Petroleum and Minerals will be very useful.
- Limits on trailing liability for decommissioning: Trailing liability for decommissioning costs will be restricted to the most recent permit or licence holder or the participant that most recently transferred their permit or licence to the current permit or licence holder, rather than all previous permit/licence holders (from most recent to least recent). This means that investors could have an eventual end to their financial exposure for decommissioning, once the party taking a transfer of the relevant permit then transfers that permit to a subsequent transferee. In practice, this might encourage investors to structure transactions going forward as asset transfers, rather than the current norm of share sale transactions.
- Perpetual liability for post-decommissioning: Permit holders who have completed their decommissioning obligations will remain liable for existing wells and infrastructure left in situ rather than be required to provide financial security to ensure the performance of post-decommissioning obligations. This will be more cost-effective for investors, as there will not be the additional cost of providing the financial security for an indefinite period.
Debates about the Bill
The Bill has polarised the House, with arguments in favour citing the need for energy security and opportunities for investment and job creation to support economic growth, and arguments in opposition emphasising the potential for environmental damage and backsliding progress towards climate commitments. Those in opposition have also stated that the reversal of the ban would not guarantee the return of investors, and that even if this did occur, it would take significant time for the discovery and exploration of gas fields to progress to the development and production necessary to support New Zealand's energy security. In addition, Labour Party energy spokesperson Dr Megan Woods highlighted that exploration in New Zealand has been declining since 2014, prior to the 2018 ban, in line with global trends.5
Overseas investors will be looking for certainty that the permitting regime will not again be reversed at a future Government's whim. This week, the Green Party has vowed to reinstate the ban and revoke any permits granted as a result of its reversal. However, Dr Megan Woods has indicated that Labour would consider reversing exploration but would not revoke any existing or subsequent permits granted following the reversal of the ban. This would be consistent with Labour's 2018 approach, where the imposition of the ban on exploration did not affect existing and subsequent permits. Woods signalled that this was because a Labour Government would not be willing to risk paying millions in compensation to oil and gas companies in respect of permit reversals.6 We assume Woods is referring to the protections granted to foreign investors against laws, policies, decisions or other actions that adversely affect the value or profitability of their investment, due to being contrary to their legitimate expectations at the time of investing.
If you would like to discuss the implications of the Bill or would like assistance with your submission, please get in touch with one of our experts below.