Middle East conflict clouds case for Port Taranaki LNG terminal as gas prices surge

An LNG terminal is an import facility for liquefied natural gas. LNG is gas cooled into liquid form so large quantities can travel by specialised tanker. At the destination, the liquid must be stored and converted back into gas before entering the energy network. This matters because New Zealand’s local gas reserves are dwindling, while gas can provide backup electricity when renewable generation is insufficient.

The proposed Port Taranaki solution appears to use a Floating Storage and Regasification Unit, or FSRU. One moored vessel would store LNG and regasify it when required. It would then distribute natural gas into the transmission pipeline. A second vessel would carry LNG from overseas suppliers and deliver it to the FSRU.

MBIE is managing the procurement process and has been discussing the project with a preferred provider. The Government planned to decide after the election. However, the proposal faces political opposition, and global LNG prices have become much more volatile since the plan was first announced.

Global LNG prices have nearly tripled since February, according to the article. The increase followed conflict in the Middle East and disruption around the Strait of Hormuz. That makes imported gas a much less predictable and potentially more expensive source of backup energy for New Zealand.

New Zealand’s wholesale electricity prices moved in the opposite direction recently. During the winter 2024 crisis, prices averaged $820 per megawatt hour, compared with a winter average of about $160/MWh. This week, electricity traded at about $75/MWh at Ōtāhuhu. The grid was also operating with 99% renewable generation because hydro conditions were favourable.

These figures are not identical markets, so they do not measure the same change. They do show why the LNG case has become less straightforward. Imported fuel has become more costly and volatile, while new generation, stronger hydro storage and favourable weather have reduced current electricity prices.

LNG depends on international shipping as well as gas production. Gas is cooled into liquid form, loaded onto specialised tankers and sent to markets where demand or prices are highest. Conflict can therefore affect both the fuel’s price and whether cargoes arrive when expected. That matters for countries relying on imports for electricity security.

The article identifies two direct effects. The conflict in the Middle East pushed global LNG prices to nearly three times their February level. Qatar, the world’s second-biggest LNG exporter, was unable to ship cargoes to buyers in Asia and Europe because the Strait of Hormuz was nearly closed. Reduced supply and blocked routes increase competition for available cargoes.

This volatility has weakened confidence in imported LNG. Paul Chapman of Energy Link said exposure to the international market was worrying. New Zealand could still value LNG as winter backup, especially as Māui production ends, but the fuel would no longer look as cheap or dependable as initially expected.

The original case for an LNG terminal was energy security. In winter 2024, calm weather reduced renewable generation while tight gas supply limited thermal backup. Wholesale electricity prices averaged $820 per megawatt hour, compared with about $160/MWh in a normal winter. With local gas reserves dwindling, the Government announced a Port Taranaki LNG terminal in August 2024.

The energy system has since gained several safeguards. A fast-track panel relaxed access restrictions on Lake Pūkaki water storage for three years. Twenty generation and battery projects, totalling 1209MW, were commissioned and now contribute to the grid. New projects are also under construction or in the pipeline. Huntly’s coal stockpile is shared by the four major generators under a firming deal.

The case for LNG has therefore become less urgent in some respects, but not disappeared. New capacity and storage help, yet Paul Chapman said they would not get New Zealand through every dry, cold winter. LNG could still cover winter peaks, although international prices have made the option less attractive.

New Zealand’s alternatives to imported LNG are mainly more renewable generation, batteries, stored hydro energy and coal-fired backup. They matter because winter electricity demand can rise when renewable output is low. A mostly renewable grid still needs dependable energy that can be held back and used during difficult conditions.

Since winter 2024, 20 generation and battery projects with combined capacity of 1209MW have been commissioned. Lake Pūkaki water storage access was also opened up for three years through a fast-track panel decision. In addition, Genesis and the other three major generators agreed to share the burden of Huntly’s one-million-tonne coal stockpile, kept for dry-year risk. Solar construction is advancing too.

These measures have already changed the system. This week, favourable hydro conditions allowed the grid to run on 99% renewable sources, with electricity trading near $75/MWh at Ōtāhuhu. Yet dry, cold weather could still reduce hydro availability and raise demand. LNG remains one possible extra safeguard, but its international price risk is greater.

The Government initiated the LNG proposal because local gas reserves are dwindling and winter electricity security was a concern. MBIE is managing procurement for an import facility, with Port Taranaki as the proposed location. It has been instructed to progress discussions with a preferred provider and prepare for a decision after the election.

The likely facility would involve a moored FSRU and a separate LNG delivery vessel. The FSRU would store and regasify imported fuel before sending it into the transmission pipeline. Transpower commissioned the new generation and battery projects now contributing to the grid. Genesis and the other three major generators share responsibility for Huntly’s coal stockpile under their firming agreement.

The wider decision also depends on the performance of energy facilities and market conditions. Māui is expected to stop producing before year-end. Labour says it would stop the terminal, and Opportunity also opposes it. The article does not name the preferred LNG provider or the four generators individually.

Renewable electricity depends on conditions such as rainfall, water storage and weather. A dry winter can reduce hydro generation, while a cold winter can increase electricity demand. Even if the grid produces mostly renewable power on average, it may still need energy that has been stored and can be released at short notice.

Paul Chapman described this as both an energy case and a capacity case. Gas has traditionally provided stored energy when renewable generation is not enough. Huntly’s one-million-tonne coal stockpile serves a similar dry-year role. Hydro storage also helps by holding water for later use, while batteries can support the system after charging from available generation.

Recent figures show both the progress and the remaining risk. The grid ran on 99% renewable sources this week under favourable hydro conditions. But Chapman said 1209MW of new generation and battery projects would not get New Zealand through a dry, cold winter by themselves. LNG could still help cover winter peaks, though it is now more expensive and volatile.