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On the international energy front, the world is hungry for energy and meeting this demand will require multiple resources. I attended the 2009 World Future Energy Summit (WFES) held in Abu Dhabi, capital of the United Arab Emirates, which left myself and other attendees in no doubt as to the future direction of the global energy sector. Renewable energy generation, primarily solar, wind and ocean power, as well as geothermal, biofuels and fuel cell technology, is where the future lies for energy generation. Carbon capture and storage provided another rich source of debate and discussion. Both solar and wind energy have become key focus points for renewable energy production internationally. According to solar power experts that spoke at the WFES, this technology is becoming increasingly economic, even when compared to fossil-fuelled energy generation. If the technology continues to advance at the pace it currently is, and if governments are prepared to utilise subsidies and incentives in an appropriate manner, solar energy could one day absorb a lion’s share of powering our cities. Further, wind is the fastest growing area of the global electricity sector. There is currently 100GW of wind generation world wide, but this could increase up to a 900GW capacity by 2020. This trend towards renewable energy production is certain to continue into 2010 and the years beyond. We have also seen international energy companies jumping on the renewable energy bandwagon. For example, British Petroleum has invested more than US$1 billion in the 2009 year into its alternative energy business, while Shell has continued to invest in developing sustainable biofuels from sources such as straw and algae. The need to decarbonise the global economy in order to avoid a climate catastrophe has become an increasingly central issue in this sector. One ‘solution’ that has gained support over the past year is CCS. This involves capturing the carbon at the point source, such as a major coal-fired power station, and then permanently storing this gas, either under the earth’s crust or in deep-sea bodies. Although CCS is still in its infancy, internationally it has received much attention. In December this year, the Global Carbon Capture and Storage Institute (Australia) took the lead by establishing a A$50 million annual fund to support large-scale CCS projects around the world. Similarly, ExonMobil invested more than $100 million in a test facility to develop controlled freeze zone technology (a single-step cryogenic separation process for removing CO2 and other undesirable elements from raw natural gas), which is a process likely to make CCS less expensive over time. More research and technological advancements can be expected in the in the coming years. The domestic frontThis international trend towards renewable energy has had an impact on our energy and resources sector and has led some of our clients to focus on energy production from renewable sources. For example, the geothermal scene has become very active. There has been a great increase in investment in the domestic market with the initial focus on further development of existing operations, but also some plans for ‘greenfield’ developments. In his speech on February 24, 2009, the new Minister of Energy and Resources, Gerry Brownlee, echoed the international trend stating that New Zealand has extraordinary renewable resources such as wind, hydro and geothermal power – sources that will play an important and positive role in the country’s energy future. He announced a new action plan for the sector which included plans to increase transmission investment, improving the security of supply, upholding New Zealand’s environmental responsibilities, the creation of a new energy strategy, and improvement of energy efficiency. Ideally, this action plan will need to take a more definite shape for 2010 to be a prosperous and transaction-filled year and we strongly encourage its development. Since his appointment as energy minister, Brownlee has continued to emphasise that New Zealand’s natural resources, such as minerals, oil and gas, have a significant role to play in contributing to our economic prosperity. Other resource-rich countries have worked hard to maximise the return from their resource endowments and have reaped the rewards. Although New Zealand is also resource rich, it has currently failed to utilise its own natural resources – something Brownlee would like to see change. The move towards increased development of and investment in oil, gas and minerals that was announced in the minister’s speech in November 2009, will hopefully assist in the sector’s recovery from the recession and lead to an increase in the amount and frequency of deals after a quiet year from a transaction perspective (obviously, as legal service providers we are keen to see this happen!). In September 2009, Brownlee released a Ministerial Review of the Electricity Market. The Review recommended (among other things) that demand side participation (DSP) be encouraged and promoted to a much greater level in order to improve the efficiency of the electricity market as a whole. The development of DSP was promoted as one solution to reduce demand peaks, defer inefficient investment in generation, transmission and distribution and to remove grid constraints. This recommendation was warmly welcomed by demand side participants, the Electricity Commission and the System Operator, as an effective way in which to improve the energy market. Since the Review, we are happy to report that there appears to be far greater enthusiasm for DSP, and that some very promising and exciting projects around DSP are now in the pipeline (and we are acting on one of the exciting ones). An exciting futureObviously, the global financial crisis which resulted in fewer transactions than usual in the New Zealand energy sector was the first disappointment. Unsurprisingly, exploration and production of Crown-owned minerals and petroleum decreased as investment and production companies contracted their businesses given the downturn. Renewable energy projects in here, and the rest of the world, also suffered from the contraction of the economy and lack of funds available for investment. The delay in the establishment of a New Zealand Emissions Trading Scheme (ETS) following the change of government in November 2008 was the second disappointment. The long delay in solidifying the structure and outlook of the ETS has caused much uncertainty in all sectors covered by the original legislation passed during the Labour Party’s term in government, but has had a particularly significant impact on forestry. It has hindered progress and development in this sector considerably, with the 2009 years seed-planting season being missed. In other sectors, fewer transactions have been entered into as industry participants have taken the safe road by suspending investment and development. However, now that the amended ETS legislation has been passed, all sectors covered by its provisions can be relatively certain as to their obligations and transactions (and our involvement in them) are expected to pick up again. Despite the disappointments resulting from the global economic crisis and the delay of the ETS, the last year has been one of excitement and change. The impact that renewable generation and improved technologies will have on the energy sector is not yet comprehended, let alone understood, but it is certain to be enormous. At the same time, the more traditional elements of the sector remain healthy as oil, coal and gas continue to meet the majority of the world’s energy demand (and will continue to do so for some time). For us at Kensington Swan, we simply share in the same excitement, change and disappointments as our energy sectors clients.
Energy NZ Vol.4 No.1 Energy Perspectives 2010 |
Over the past year, the energy and resource sector has seen several great advancements on both an international and domestic scale, as well as several key disappointments. By Bryan Gundersen, partner and energy specialist at Kensington Swan Lawyers.