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A Report on Possible Government Interventions to Promote the Sustainable Development of New Zealand’s Ocean Resources

Executive Summary

1 Introduction

2 Approach

3 Key Findings

Case study 1: The discovery, development and production of the Maui gas and oil field

Case study 2: Issues and barriers facing the oil and gas exploration sector

Case study 3: Issues and barriers in the development of a wave and tidal energy industry

Case study 4: Issues and barriers in the development of a gas hydrate sector

Bibliography

Appendix

Acknowledgements

Case study 4: Issues and barriers in the development of a gas hydrate sector

a. Introduction

Surveys have indicated the potential presence of large volumes of gas hydrate on the Hikurangi Margin off the East Coast of New Zealand’s North Island, and the Fiordland-Puysegur Margin on the West Coats of the South Island. Yet the study team was unable to identify any participants in the oil and gas sector currently involved in, or planning in the near term, participation in the economic development of the gas hydrate resource.

Consequently, this case study is based on feedback provided by members of the science community, in particular GNS and the National Institute of Water and Atmospheric Research.

b. Methane Hydrates

Natural gas hydrates are solid, ice-like materials containing predominantly methane and small quantities of other gases bound in a lattice of water molecules formed at moderate high pressure and at temperatures close to the freezing point of water. They are found in high concentrations in the ‘Hydrate Stability Zone’, which are permafrost regions onshore and in ocean bottom sediments in water depths exceeding 450 m.

One of their unique characteristics is that at sea level and standard pressure, gas hydrates will disassociate or dissolve and the methane component of the hydrate lattice or cage will expand to 163 times its ‘frozen’ volume.

Gas hydrates have attracted a lot of interest in the past decade because:

• natural gas is expected to be the fastest growing primary energy source in the world over the next 25 years²⁷

• methane hydrates constitute a potentially vast, relatively climate-friendly and efficient source of natural gas, with large deposits located in close proximity to expected growth demand areas (eg, Japan and India) compared to current resource areas for conventional gas²⁸

• significant methane hydrate deposits have been discovered within the jurisdiction of countries currently without indigenous oil or gas resources (eg, Japan, India, Korea).

The ‘Central Consensus’ estimate of the potential size of the methane hydrate resource worldwide is approximately 742,000 trillion cubic feet (tcf) of gas, compared to the estimated 13 million tcf natural gas resources (excluding methane hydrates).21 Irrespective of the actual figures involved, the magnitude of the potential resource base of gas hydrates could, if successfully commercialised, power the world for centuries.

c. Importance of Methane Hydrates to New Zealand

New Zealand shares with the rest of the world, an ongoing and increasing demand for natural gas. The depletion of the Maui gas field and the lack of capacity from both existing wells and lack of recent discoveries to meet anticipated demand in the future, will force the introduction of new strategies to meet the energy supply gap. One potential opportunity may be the economic development of New Zealand’s considerable methane hydrate resources.

New Zealand has the most promising known gas hydrate resource potential in the Southwest Pacific, the Hikurangi Margin in particular deemed to be one of the most promising gas hydrate provinces in the world.²⁹

The Hikurangi Margin covers an area of approximately 50,000 km2, extending from offshore Gisborne on the East Coast of the North Island southwards to offshore Marlborough. A recent study by Pecher & Henrys (2003) suggests a methane hydrate resource base of approximately 228.5 km3 of gas, with approximately 813 trillion cubic feet or tcf potentially recoverable. More importantly, Pecher & Henrys suggest that up to 10% of this area may be covered by ‘sweet spots’ or areas with very high gas hydrate concentrations. They have further suggested that these sweet spots collectively could contain recoverable gas more than six times the size of Maui and more than 16 times the size of New Zealand’s known gas reserves as of June 2002.³⁰ One sweet spot in particular is estimated to contain recoverable gas equivalent to 10% of the original volume of the Maui field.

Notwithstanding the technical complexities of extraction and production and a number of environmental concerns, gas hydrate sweet spots could provide an economically viable opportunity for New Zealand.

d. Gas Hydrate Research

Despite the huge potential economic opportunity, funding for gas hydrate research in New Zealand is not on par with the levels of research funding in Japan, Canada or the US.

Japan is the current leader in gas hydrate research, with an annual research budget of US$50m and a target of commercially viable production of natural gas from gas hydrates by 2016. Since commencing in the mid 1990s, the Japanese programme has developed two exploration test wells: one onshore in the McKenzie Delta in the Canadian Artic in 1997 and one offshore in the Nankai Trough, Japan in 2000. There is also an onshore production ‘concept’ well in the McKenzie Delta in 2002. It is worth noting that as recently as March 2006, the Japanese programme has claimed that they expect to achieve their target of commercial production of gas hydrates within a 2-year window of 2016.³¹

United States gas hydrate research is close behind Japan, with US$50m in gas hydrates research funding committed over a 5-year period by the Federal Methane & Hydrate R&D Act 2000. The US research programme includes two dedicated Ocean Drilling Programme (ODP) legs at Blake Ridge on the US East Coast (which commenced in 1995) and at Hydrate Ride, off the coast of Oregon (which commenced in 2002). The US collaborates with Japan and Canada in exploration activities on Alaska’s North Slope.

The US Geological Survey has estimated Alaska’s North Slope methane hydrates resources at 590 trillion cubic feet, with an additional 32,375 trillion cubic feet in the nearby Beaufort and Chukchi Seas. The location of methane hydrates near proven conventional gas reserves ensure that Alaska’s North Slope will be the premier area for methane hydrate research and future production in the near future.

India, Korea and China are also involved in gas hydrate research, predominantly into its characterisation as a potential energy source.

e. Gas Hydrate Research in New Zealand

Notwithstanding the relatively low levels of gas hydrate research funding, the quality of New Zealand research appears to be internationally recognised and valued. Evidence of this may be found in the participation of New Zealand researchers in a number of international research projects. They also play key roles in driving and securing international support for the development of an ‘International Gas Hydrates Research Corridor’ on the Hikurangi Margin.

Two key Crown-funded research projects are currently underway:

• an investigation into the characterisation of New Zealand’s gas hydrates as a potential energy source, funded by the Foundation for Research, Science and Technology (FRST) between 2003 and 2009;

• an investigation into the relationship between the disassociation of natural gas from gas hydrates into the ocean under natural conditions and seafloor stability, sponsored by the Marsden Fund.

The GNS gas hydrate Task Force led by Dr Ingo Pecher, a marine seismologist, currently heads New Zealand gas hydrate research. Members of the Task Force include from GNS: Stuart Henrys (marine seismologist), Susan Ellis (modeller), Kevin Faure (geochemist); and Jens Greinert, University of Ghent, Belgium (currently undertaking an European Union Fellowship at GNS, geochemist).

The Task Force is currently in collaboration with:

• Otago University: Andrew Gorman (geophysicist), Gareth Crutchly and Miko Fohrman, (PhD candidates and geophysicists)

• NIWA: Helen Neil (paleoceanographer) and Steve Chiswell (oceanographer)

• GeoForschungsZentrum in Potsdam, Germany: Nina Kukowski (modeller).

International collaboration in 2006–08 includes:

• a joint US-New Zealand funded expedition on the NIWA research vessel Tangaroa in 2006 to conduct high-resolution seismic and piston coring of the Hikurangi Margin

• a German-funded expedition on the German research vessel Sonne in 2007 to address some of the objectives of the Marsden and FRST projects.

In the medium to long term, New Zealand researchers hope to leverage their research capabilities by:

• expanding existing collaboration arrangements with Chile and Korea

• establishing an ‘International Gas Hydrates Research Corridor’ on the Hikurangi Margin

• developing new collaboration opportunities through attendance at relevant international conferences.

f. Reported Issues and Barriers

Policy

• The significance of the potential economic value requires policy debate now, and potentially the development of appropriate allocation regime to protect the resource while encouraging the development of a gas hydrates industry. Gas hydrates represent truly frontier opportunity, with limited information and high technical risk. Consequently, a robust yet risk tolerant regime will be required to facilitate development of the opportunity.

• Attention was drawn to the Marine Reserves Act 1971 which would potentially strand new opportunities as it prohibits protected areas (eg, national parks) from prospecting and other commercial activities.

Resource information

• Although the Hikurangi Margin has been surveyed to some degree, more research is still required to map and appraise gas hydrate sweet spots in the area, and prioritise sweet spots for future development when the technology becomes available.

• More research into the characterisation of the New Zealand gas hydrate resource is also required as methane compositions in hydrates can vary geographically, with resulting implications for extraction and production.

Technology and equipment

• Commercial production technology is currently unavailable, although conventional oil and gas technologies could be adapted.

• Significant technical issues currently exist around extraction and transportation of gas hydrates.

Investment

• The high levels of gas hydrate research may be an indicator of the potentially high cost of extraction and production technology when they become available.

• Access to the technology may require some level of government involvement or support, as occurred with the development of Maui.

• Attracting inwards private investment on the scale anticipated will require attractive policies and incentives, or better promotion of the higher prospectivity of the New Zealand gas hydrate resources relative to Alaska and Gulf of Mexico (the current focus of hydrate research by USA, Japan and Canada).

Infrastructure

• Existing onshore Taranaki infrastructure could be utilised if the technical issues around extraction and transportation are successfully addressed.

• There may also be a business case for the development of new infrastructure on the East Coast of the North Island to be in closer proximity to the sweet spots on the Hikurangi Margin. Such infrastructure is likely to follow successful petroleum development in the region.

Environmental

There are a number of environmental issues currently being debated internationally around gas hydrates.

• The ‘Smoking Gun’ hypothesis suggests that the release of methane into the atmosphere from disassociating gas hydrates creates one of two climate change scenarios (Fig C4.1):

• There is also the ongoing debate around the proposition that the extraction of gas hydrates from the seabed could affect seabed stability and lead to landslips or slides, resulting in tsunamis.

• Finally, there are ‘chemo-synthetic’ bio-organism colonies associated with gas hydrate deposits that not well understood or researched. This lack of information will have a bearing on the ability of pioneers to secure resource consents under the present consent regime.

g. Suggested Interventions

1. Respondents have suggested that government should lead a national or international discussion on gas hydrates, while the industry is still in a formative stage, to identify issues pertinent to economic development of New Zealand’s gas hydrate resource to ensure adequate debate and encapsulation of issues into policy.

2. Respondents have suggested that policy should ensure that relevant Ministers retain their discretion to permit new or novel opportunities, such as gas hydrates, to emerge in New Zealand’s ocean territories. The key point here is that the regulatory environment needs flexibility to provide for new activities.

3. Given the potential economic significance of gas hydrates, respondents and the study team agree that policy needs to be set before ‘trail blazing’ should be allowed to commence.

4. We agree that the policy environment should attract inwards investment for exploration, discovery and development. Gas hydrates could provide a long-term opportunity to replicate the skills and engineering base which development of Maui catalysed and which New Zealand has developed into a significant export opportunity since.

5. The respondents, participants at the MFE workshop and the study team agree that a closer integration of science policy (eg, mapping sweet spots and characterising hydrates) and a ‘national’ engineering policy (ie, to develop ‘enabling’ skills and technologies) with Oceans Policy in the short to medium term should occur as a strategy to facilitate the eventual commercial development of the gas hydrates opportunity

6. We concur that in support of the development of a gas hydrate industry in New Zealand, government should actively facilitate the opportunity development continuum from science investigation, to resource mapping, through a pre-commercialisation stage. At this point the typical oil and gas field development process can kick in prior to commencing commercial production.

7. Finally, a strategy needs to be developed to ensure that the mapping and quantification or appraisal of hydrate reserves, including intensive testing of sweet spots on the Hikurangi Margin, becomes a strategic national priority.

Summary and Conclusion

The economic development of New Zealand’s gas hydrates resource represents a truly classic frontier opportunity, involving high risk and potentially higher rewards on a scale vastly larger than the other case studies investigated.

Given the significant economic potential of its successful commercialisation, the study team suggests further investigation into the following issues:

• To what extent and in what timeframe does New Zealand need to prepare for the economic development of this resource? Given that technology is not currently available for extraction and production, should New Zealand wait till it becomes available to begin developing policy; or should discussion on an appropriately risk-tolerant policy framework begin now?

• At what point and in what role should government become involved in the development of the industry? Using the analogy of gas hydrates as a ‘ripening crop’ waiting to be harvested, it is important to note that pioneers may be prepared to accept ‘green fruit’. Consequently, there is a dynamic that has to be actively managed between ensuring that policy enables pioneering activity, while simultaneously protecting the national interest to the extent that ‘picking winners’ does not prevent an optimal development of the resource opportunity. Again, the key point is that the regulatory regime needs flexibility to allow unfettered entry and exit;

• Are gas hydrates governed by the Crown Minerals Act and if so, are the provisions appropriate to the sector? As gas hydrates fall within the ‘hydrocarbon’ definition of the Crown Minerals Act, prospecting permits can be granted under the current regime. However, an analogous case has arisen in respect of minerals (notably gold) associated with active and extinct volcanic vents. In 2002 a very large permit covering virtually all of New Zealand’s potential resources of this type, was given to an Australian entrepreneur. While this may or may not lead to the emergence of a viable new industry, the possibility of a monopoly situation. That limits other potential entrants should exploration prove successful and may be undesirable; this consideration needs to be carefully balanced with the need for a property right of sufficient scale to encourage investment.
  Additionally, the conventional permitting regimes may need to be adjusted as the development of the gas hydrate opportunity is likely to fall outside the timeframes that apply under the current act (ie, a 10-year permit term) thereby requiring a more flexible permitting regime

• What is the optimal regime to enable the Crown to capture a benefit from the development of the resource? Will a unique regime be required or will the existing regime support the expected ‘low margin, high volume’ business case? Without an appropriate regulatory framework in place, there may not be the required allocation and environmental management regimes to maximise their resource potential.

• What is the optimal policy framework for gas hydrates? Given the size of the potential economic opportunity and the international interest, the Study Team suggests that it needs to be based on clear principles, contains codes of practice that constrains proponents to act competitively, and also provides clear certainty that projects will not be compulsorily acquired, nationalised or taken over.

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