“Fuel, that’s where we face our most important challenge and it’s the challenge created by the decline of the Maui gas field,” Hunt told shareholders at Contact’s 2005 annual general meeting in Auckland this morning.
“We are now well and truly in the post-Maui era.
“And it’s all the more important for us because Contact has two of the country’s largest gas-fired power stations, and resource consents to build another two,” he said, referring to the existing Otahuhu B and planned Otahuhu C stations in Auckland, and the existing Taranaki Combined Cycle plant and its planned clone in Stratford, Taranaki.
Contact had enough gas to meet its needs until late in the decade, but that was not long in the energy business, according to Hunt.
“We fully expect locally produced natural gas to remain a substantial part of the fuels mix into the future, even if New Zealand moves to import a proportion of its gas needs," he said.
“What Contact is not willing to do is to risk stranded assets or constrained growth by relying solely on domestic gas. Pursuing imported natural gas as a backstop is prudent risk management.”
Natural gas was widely recognised as the cleanest fossil fuel and a key option for New Zealand’s fuel future, though new sources – whether domestic or imported – would be more expensive than Maui. Gas-fired generation currently accounted for around 26% of New Zealand’s total electricity generation.
Higher fuel costs would also increasingly affect Contact’s bottom line, as a greater proportion of the company’s gas supply came from higher priced, non-Maui sources, such as the Pohokura gas contract, said Hunt.
Contact chairman and Origin Energy managing director Grant King said Contact saw higher gas costs as a major challenge for the next three to four years.
"While wholesale electricity prices are likely to continue to rise over this period, it is not expected that these prices will keep pace with the increase in Contact's fuel costs, and there will be significant pressure on the company's trading margins," King said.
“It is important shareholders recognise the pressure that this dynamic will exert on our earnings outlook over the next few years. We will be working hard on cost containment, margin management, and securing future growth opportunities.”
While New Zealand faced significant energy challenges, the industry was responding to the price signals by investing in new fuel sources and expanding generation capacity, he said.
Over half the possible new projects – there were more than 25,000 gigawatt hours of new generation on the drawing board – were gas options but their development depended on securing new fuel supplies.
While the near-term outlook was constrained, towards the end of the decade there would be larger scale opportunities, particularly within Contact’s thermal generation business, according to King.
But to capitalise on these opportunities, Contact and New Zealand had identify and secure the next major source of fossil fuel, which would bring significant investment requirements.
Hunt also said Contact was willing to participate in other local gas opportunities, where this made commercial sense, as well as progressing its own upstream work in its offshore Taranaki licence PEP 38493 where a seismic survey was about to start.
