MarketLine Blog

New Zealand: Halt to offshore drilling

New Zealand pumped an average of just 31,000 barrels of crude oil a day in 2017, according to data from the US Energy Information Agency (EIA), a fraction of the 913,000 barrels produced daily in the North Sea. The country’s annual oil production makes up just 1.4% of the country’s economy. The industry is already in decline after a downturn in the global market from 2014 took a heavy toll on its earnings. Crude oil production declined in 2016 to the lowest level in a decade, and spending on production had fallen.

In April 2018, the New Zealand government announced it is taking a huge step to address climate change and attempt to create a clean, green and sustainable future. It will limit the 2018 offer of exploration permits to onshore acreage in the oil-rich province of Taranaki. The existing exploration and any future mining permits are unaffected by the decision. The government will assist regions such as Taranaki in the transition, including investment in infrastructure and clean energy projects.

This recent announcement has split the government, with the opposition branding the offshore drilling ban as reckless and a hit to the country’s economy that could put thousands of jobs at risk and mean higher prices for consumers. The government has been criticized for not consulting the industry, and moving too quickly as alternative energy sources are not yet ready to meet demand and there is not enough time for transition to alternatives.

The industry players have also expressed dismay, as huge investments have been made by companies already anticipating offshore block offers. The government decision is raising concerns among investors as to the viability of investing in New Zealand businesses. If a multi-billion dollar energy industry can be banned, it means other industries might face the same fate.

The argument around whether the policy will have any impact on climate change is just as intense and divisive. Because petroleum is produced to meet growing global demand, not exploring and producing in New Zealand simply means other countries will produce it instead and New Zealand will have to import it at higher cost. Greenhouse gas emissions will, therefore, remain the same, or be even worse, if imports come from companies using less efficient production processes.

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