In May, as part of Budget 2025, the New Zealand Government set aside $200 million of tagged contingency over four years for a Gas Security Fund (the "Fund") (see our previous article). The Fund's original purpose was for Crown co-investment in new gas field development, aimed at addressing New Zealand's waning gas supply and restoring investor confidence in the sector. The Government announced last week the Fund's scope is to be expanded, to enable a broader range of investments to accelerate or increase gas supply in the short, medium and long term.
The case for change – short-term solutions also needed
Since the Budget announcement, the Ministry for Business, Innovation and Employment ("MBIE") (supported by EY) prepared a business case into Government co-investment options that would support the following two investment objectives ("Business Case"):1
- increasing domestic gas supply; and
- reducing the perception of sovereign risk in New Zealand’s energy sector.
The Business Case demonstrated that restricting investment to new gas field development would mean waiting over a decade for new production to come online without alleviating immediate pressures. Rather, to meet the investment objectives, the Government needs to:2
- support bringing new gas to market as soon as possible;
- ensure that the investment vehicle is flexible enough to respond to New Zealand's energy security challenges, and that a strategic, system-wide lens can be applied to investments; and
- support investment in new gas fields.
In response, Cabinet has agreed to expand the Fund’s scope to include a broader range of projects, such as short-term drilling, production upgrades, and gas storage, to accelerate new supply and address immediate energy security challenges.
Pressure on the gas industry grows
The decision to change the scope of the Fund has also been made in the context of continued pressure on the gas industry in recent times. MBIE reported that New Zealand’s gas reserves have declined by over 50% since 2021, with a 27% drop in the year to January 2025.3 The gas shortfalls have negatively affected gas-dependent businesses, with some industrial plants mothballing production for a time, and others closing operations.4 The far-reaching consequences in the wider economy of a gas supply bottleneck were acknowledged by the Government, with operational cutbacks, job losses and economic challenges affecting regions with industries reliant on gas and some describing the consequences as deindustrialisation.
MBIE is also concerned about the market impacts from the impending closure of the ageing Māui gas field. Officials have warned that, even with the announced changes to the Fund, the current tagged contingency of $200 million may be too small to deal with falling production and the closure of Māui.5
Broadened scope of the Fund
The broadened scope of the Fund will now include a wider range of measures that will accelerate and increase the volume of gas to the market. As part of these changes, the Fund will also seek to embed more flexibility in the system to manage energy security and supply challenges through periods of peak demand – not just the quantity of extracted gas.
The type of projects the Fund can invest in include (as examples):
- Short-term (1 – 7 years): additional drilling in existing fields and upgrades to production facilities.
- Medium-term (7 – 10 years): exploration and appraisal drilling.
- Long-term (10+ years): greenfield exploration, including outside the traditional Taranaki region.
- Gas storage: building storage capacity to stabilise market supply and manage fluctuating seasonal demand.
How will the Fund work?
The fund will be administered by MBIE through Kānoa, the Regional Economic Development and Investment Unit, and investment decisions will be made jointly by the Minister for Resources and the Associate Minister of Finance, supported by an expert advisory panel with sector expertise.6 MBIE can now engage with industry on proposals to make investment recommendations to Ministers. The Business Case also highlights the opportunity for market-led proposals alongside other Government-led deal origination models.7 Work is also underway to appoint members of the expert advisory panel, with initial appointments to be made by the Hon Shane Jones (as Minister for Resources) and Hon Chris Bishop (as Associate Minister of Finance).
A range of commercial investment structures could be used, including loans, underwrites, and risk-sharing contracts, to promote a greater degree of flexibility and to respond to market preferences. Further, regional procurement and use of local labour will be encouraged wherever possible.
MBIE are still considering the option of establishing a new investment company for greater independence if needed.
Conclusion
The Government is signalling their commitment to addressing the pressing gas supply challenges in the context of longer-term energy security issues. The gas industry now has the opportunity to engage with the Government about co-investment proposals for projects that meet the expanded scope of the Fund.
Kānoa will be seeking expressions of interest later this month, with decision-making Ministers aiming to move quickly to support investment-ready projects.