Even if Labour had not banned offshore oil and gas exploration in 2018, it seems unlikely that exploration since then would have been delivering gas today. Gas reserves would have had to be discovered, then permits and equipment for drilling secured. Offshore platform construction at Kupe took three years.

So how could the 2018 ban on exploration be affecting prices and supply today, and causing gas-dependent businesses to pause operations or consider shut-downs?

Most obviously, the ban signalled a hostile and unstable policy environment for any large investment in gas.

On top of the ban on exploration, potential bans on new gas connections for houses were under discussion. And rather than relying on rising carbon prices to drive investment decisions between different forms of energy in reasonably predictable ways, the Labour-led government started providing subsidies for businesses adopting lower-emissions technologies.

Decarbonisation subsidies could not generally affect the country’s net emissions. Emissions are determined by the number of carbon credits that the government chooses to auction or allocate through the Emissions Trading Scheme. Burning gas requires surrendering ETS credits. If an industrial boiler does not use an ETS credit, another sector will use it instead.

But industrial subsidies that are unlikely to reduce national net emissions can send a strong signal to the energy sector that political decisions will be paramount in determining demand.

Before the oil and gas ban, decisions about future exploration and investment depended, among other things, on expectations around future demand. It is far from a simple decision process: new technologies, including substitutes for gas, are being developed all the time, in part driven by rising carbon prices internationally.

Policy risk is worse. A company could get everything right in forecasting how technology and demand will move, but then be blindsided by a politician looking for a nice-sounding announcement.

New Zealand shifted away from a regime in which property rights were stable and predictable.

In a stable regulatory environment, expectations of rising gas prices meant more investment in exploration and more production coming on stream.

Maintaining and extending existing production fields requires investment. Investment can only be justified if it leads to sufficient future returns. Those returns became far riskier when the policy environment became fundamentally unstable and unpredictable – both around the supply of gas and around demand for it.

Investment in extending current fields can only be justified at higher price points that reflect the sharp increase in New Zealand’s political risk.

While National has announced it will reverse the exploration ban, this kind of policy change is hard: once the basic property rights have become unstable, political commitments become nondurable. If one government promises to allow new exploration, a change in government could easily bring other changes that would frustrate any investments made.

Parliaments cannot bind future Parliaments. New Zealand’s Parliament has demonstrated that investments that result in greenhouse gas emissions are risky, even when those investments are covered by the Emissions Trading Scheme.

So the gas remaining in current fields has become all the gas there can ever be, barring imports and barring some way of making a policy change durable.

That difference matters.

Outside of dry years, gas companies might hold back more supply in case of future need, because no new fields can come onstream – a simple implication of economist Howard Hotelling’s work from almost a century ago. Gas prices would then be higher than might otherwise be expected.

And in a dry year, when thermal generation sets the price of electricity and demand for gas is high, gas shortages mean sharp increases in power prices.

In the short term, importing gas is the most obvious alternative. And it is practicable. Recall that when Russian gas supplies to Europe ended with Russia’s invasion of Ukraine, Europe ramped up imports from North America by ship.

In principle, the ability to import should limit gas prices. The long-term future price really should not be higher than the cost of importing gas, including the cost of import facilities.

So we might wonder why companies highly dependent on gas supply might not have already invested in facilities enabling importation, given the ban on future exploration.

But if the cost of building facilities for receiving imported gas cannot be recouped within a single election cycle, there’s a potential problem. As was the case in 2018, a future Prime Minister may find political need for a hasty announcement that frustrates those investments.

The Gas Industry Company, which co-regulates gas alongside government, has been looking for options for landing imported gas. Hopefully, low-cost solutions can be found. High-cost solutions may well require government support, given the unstable policy environment.

In the meantime, factories that depend on gas and others sensitive to spot electricity prices are shutting down. A rash decision in 2018 remains an important, obvious, and avoidable cause.

To read the full article on The Post website, click here.