Major investment decisions in the oil, gas and mining industry are at risk of being stalled until ETS legislation allows carbon costs to be passed on under long-term contracts.
McDouall Stuart’s government-commissioned report, Stepping Up, said deep uncertainty over carbon costs weighed heavily on investment decisions.
Numerous industrial users including Genesis Energy and Todd Energy face hefty emissions costs and the prospect of them dropping production was a “live possibility.”
Under existing laws, gas producers are not obliged to pass on ETS costs to consumers under long-term (legacy) supply contracts, which are not a specific tax or levy.
The report said Kapuni gas field, which is in a declining production curve and needs further development investment, is about 42% carbon-rich.
That liability would be substantial and make further development uneconomic.
Todd Energy, which has contracts with NGC (which removes the CO2 from the gas and recovers LPG at its gas treatment plant) and Fonterra (gas feeds the pipeline to co-generation facilities at its Whareroa dairy plant), would be unlikely to pass on carbon costs from Kapuni.
In a submission to the ETS Review Select Committee, Todd Energy said without the ability to pass on costs, gas would be sold under contract at a loss.
“If this issue is not addressed, it may be necessary to cease or at least substantially reduce production from the field in question. Certainly there would be no incentive to invest further in the development of it,” the submission said.
The country’s oldest gas condensate field, Kapuni is a joint venture between Shell (Petroleum Mining Co) Ltd and Todd. Active during the 1980s and 1990s, the field’s ability to deliver waned and development studies are ongoing.
In its submission to the ETS Review Select Committee, heavy-emitter Genesis Energy said if it had to fund the full cost of its 5 million tonnes of 2007/08 emissions, it would have incurred $150 million in carbon-related fuel costs.
But Genesis Energy public affairs manager Richard Gordon said it was not delaying investment decisions, but “ramping up” renewable generation development.
Projects generally took a five to ten year period to complete, he said.
Kensington Swan partner Bryan Gundersen said parties had an opportunity to work it out contractually.
A similar issue arose when GST was introduced, with many contracts in place that didn’t allow for the pass through of increases in tax. Legislation was drafted to deal with the issue, which was potentially “disastrous” for some companies, he said.
Long-term supply contracts would be addressed in the final details of the ETS.
“There is always opportunity for subsequent, substitute legislation dealing with recourse,” he said.
“The government is clearly keen to ensure that our resources are maximised to stimulate economic growth. I would expect the government to do something sensible.”