Resource Minister Shane Jones has announced that developers will no longer be required to pay royalties on gas that serves a purely operational function within a storage reservoir. Known as "cushion gas," this is the volume of gas that must remain in place to maintain reservoir pressure so that gas can be injected, stored and withdrawn effectively.
Why are royalties payable on stored gas?
Under the Crown Minerals Act 1991 ("CMA"), all petroleum, including natural gas, is a Crown-owned mineral.[1] The Act promotes prospecting, exploration and mining of Crown-owned minerals for the benefit of New Zealand, and a core objective of the regime is to ensure the Crown receives a fair financial return in exchange for granting rights to extract those resources.
The Crown Minerals (Royalties for Petroleum) Regulations 2013 ("Regulations") require permit holders to pay royalties on all petroleum "obtained" under a permit that is sold, used as fuel, exchanged, removed, or remains unsold when a permit ends.[2] While the regulations do provide a deferral for gas injected into an underground storage facility within the same permit area, royalties remain payable "until such time as petroleum is extracted and a royalty becomes payable."[3]
Cushion gas operates as infrastructure, not a product that will ever be sold. Despite this, the existing framework treats cushion gas as petroleum that has been "obtained" under a permit, creating a royalty obligation (or at the very least a contingent liability) on a volume of gas that a developer would have difficulty monetising. For prospective investors, this materially undermines the economics of gas storage projects.
Why does underground gas storage require a permit and why are royalties payable?
Underground gas storage is treated as "mining" under the CMA. The statutory definition of "mining" expressly includes activities relating to the injection of petroleum (which includes gas) into, and extraction of petroleum from, an underground gas storage facility.[4] As the CMA restricts anyone from mining Crown-owned minerals without a permit, a developer or operator of an underground gas storage facility must hold a petroleum mining permit under the Act.[5]
Royalties on underground gas storage are prescribed by regulation 15 of the Regulations, which applies specifically to "the holder of a mining permit that includes an underground gas storage facility." That regulation imposes two obligations:
- payment of a one-off ad valorem royalty of 5% of the estimated value of the "original gas" in the reservoir[6] at the time the permit is granted or amended to include the facility; and
- an ongoing 5% ad valorem royalty on the sales value of any liquid petroleum extracted from the facility in each reporting period.
It is the one-off original gas royalty that appears to be the target of the announced reform. The original gas in the reservoir includes cushion gas as this is required to maintain reservoir pressure. Given that existing permits will have already paid the one-off royalty payment, it is not clear at this stage whether such permit holders will be able to obtain a refund of some of that royalty.
Government proposals
Minister Jones stated that developers being required to pay royalties on cushion gas presents a significant economical barrier to underground gas storage investment. Gas storage ensures supply is available during periods where electricity requirements surge, such as in winter peaks, and where gas generation is needed to mitigate a reduction in hydro-electricity supply in dry years.
The proposed removal of royalties on cushion gas 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. This appears to be built on the existing mechanism in the Regulations which requires independent expert assessment at the point a permit is granted or amended.[7] The independent expert will now also be required to determine what volume of the original gas is cushion gas and therefore exempt from the royalty.
It is not yet clear from the available policy material whether this is a single determination that fixes the exempt volume for the life of the permit, or whether there is any mechanism for reassessment. However, Minister Jones has acknowledged that gas storage is a proven way of improving flexibility and resilience in energy systems and that the government wants to ensure unnecessary regulatory barriers are not standing in the way of investments that could significantly expand New Zealand's storage capacity.
There is currently no public information available on how or when these proposed changes will be implemented. However, it is possible the changes can be given effect through amendments to the Regulations, which prescribe how royalties are calculated.[8] In that case, legislative change under the CMA may not be required.
Because regulatory amendments do not depend on the parliamentary timetable, it would be open to the government to progress the changes before the House rises next week and prior to the election.
Reform is part of wider gas coordination by the government
The government views gas as an essential transitional fuel for energy security and is trying to remove regulatory barriers that deter private investment in gas infrastructure. This royalty reform does not sit in isolation; but is part of a coordinated suite of government actions:
- The Gas Security Fund announced the first two investments from the $200 million Gas Security Fund. These investments are in projects run by Todd Energy, and will receive up to $23.5 million, with the potential to unlock up to 19.9 petajoules of additional gas reserves over five to nine years. If successful, the two projects are expected to deliver around four petajoules per year at peak production, equivalent to approximately 6% of New Zealand's expected gas production for 2027.
- The government's LNG import facility procurement in Port Taranaki. The government is progressing with its procurement process, but Minister Brown stated today (17 September) that a decision on the investment will go back to Cabinet with the intention to make a decision before the election"[9]; and
- The government's reversal of the ban on new offshore petroleum exploration, with the first new offshore petroleum permit having now been granted over an area east of Kupe gas field in Taranaki.[10]
Conclusion
The removal of royalties on cushion gas is a targeted and practical reform that addresses a misalignment between New Zealand's petroleum royalty framework and the realities of underground gas storage. By recognising that cushion gas is infrastructure and not a saleable product, the government is opening the door for new private investment in an area where New Zealand is acutely underserved.