Barrier to gas storage development being removed

The Government will remove a key barrier to creating underground gas storage by ending the requirement for developers to pay royalties on gas that is unlikely to be extracted or sold, Resources Minister Shane Jones says.

"Across the world, underground gas storage is a proven way of improving flexibility and resilience in energy systems. There are already proposals being explored that could significantly expand New Zealand's storage capacity, and we want to ensure unnecessary regulatory barriers are not standing in the way of those investments," Mr Jones says.

"Gas production is relatively steady throughout the year but demand for electricity generation can surge during winter peaks and dry years. Gas storage helps bridge that gap by ensuring supply is available when it is needed most.

"At present, developers can be required to pay royalties on 'cushion gas' that cannot be extracted or sold because it is needed to maintain operational pressure within a storage reservoir."

Cushion gas is the volume of gas needed to maintain pressure within a storage reservoir so gas can be injected, managed and withdrawn effectively. It is operational gas, not gas that is intended to be sold.

"By removing the requirement to pay royalties on gas that is unlikely to be produced, we are making it easier to invest in underground gas storage thereby strengthening New Zealand's energy security," Mr Jones says.

"This change will require an independent expert to determine the proportion of a storage facility's original gas that qualifies as cushion gas and is therefore not subject to royalties. Any gas above that amount will remain subject to existing royalty requirements.

"New Zealand's energy security relies on reliable access to the fuels needed to keep the lights on, power industry and support economic growth."

Mr Jones says that while Methanex's decision to idle its operations next year frees up gas for other users and improves the short-term outlook for the market, it does not remove the need to strengthen New Zealand's longer-term energy security.

"Gas will continue to play an important role in supporting electricity generation and industry for many years to come. We need practical measures that improve the flexibility and resilience of our energy system.

"New Zealand cannot afford a future where factories close, industries shut down and electricity prices spike because we failed to prepare. This decision removes a barrier to investment and helps ensure we have the energy security our economy depends on," Mr Jones says.

Future reviews of the petroleum regulatory framework will consider how effectively the new measure is helping investment in underground gas storage and strengthening New Zealand's energy security.