With all the noise recently about the economics of building new electricity generation capacity, the Govt’s National Infrastructure Plan is notable for saying the biggest immediate priority for energy infrastructure is Transpower’s grid investment plan. The absence of any serious concern about a shortage of electricity generation capacity boils down to the fact history shows power stations do get built, more or less on time. Where the report gets more interesting is in its discussion of water issues generally, and rural water infrastructure particularly, as the Govt prepares to restructure Canterbury’s ailing water resource governance and to support the construction of increased rural water storage.

One immediate problem: despite involving around $33bn in assets and its importance to national well-being, there is no national collection of information about the country’s water infrastructure, creating a “potential risk” to understanding future needs. The report expects water infrastructure investment will soak up around 25% of the total forecast capital spend by councils over the next 10 years - ie around $1.5bn a year, although many smaller councils will struggle to meet international drinking water standards because of the high cost of plant to eliminate protozoa (giardia and cryptosporidium). The report notes 77% of all water extracted in NZ goes to irrigation while Canterbury accounts for 360,000 hectares of the 550,000 hectares currently irrigated nationally, but an explosion in new irrigation needs is coming.

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By 2012, catchments in most of Canterbury, Waikato, Marlborough, and Northland will be fully allocated on current projections, and 22 irrigation schemes are in planning for Canterbury, Otago, Tasman, Marlborough, Hawke’s Bay and the Bay of Plenty. The report shows irrigation schemes have continued to be built by private investors ever since Govt stopped subsidy schemes in the mid-1990s, suggesting they have been commercially attractive. However, greater demand on water resources and the fact the most easily exploited sites are already in use mean future water storage will be more challenging. A “range of strategies” will be required to meet demand, especially as several feasible schemes have recently failed to reach construction thanks to both market and regulatory difficulties.

The infrastructure plan says new approaches will need to include better use and capture of water already being taken, freeing up existing allocations to allow water to be used where its value is greatest, and may require some reconfiguration of existing schemes, including “ground and surface water swaps.” Among central Govt options to help overcome emerging barriers are “supporting local Govt with their planning responsibilities,” and exploring how market barriers could be reduced. The report still expects the July 31 report of the Land and Water Forum to be a vital input into this process.

US oil explorer Andarko Petroleum is to take a 50% stake in a joint venture with Origin Energy to explore oil and gas prospects about 65km off the coast of Dunedin. It could contribute around $US30m towards the project. Andarko Petroleum Corporation, listed on the New York Stock Exchange with a market capitalisation of $US36bn, is one of the largest independent oil and gas exploration and production companies in the world. Its appearance on the NZ exploration scene points to a new phase in exploration in NZ waters. Origin completed a seismic survey of the Carrack and Caravel prospects last year, covering about 300 sq km within the southern end of the Canterbury Basin. Andarko has since paid for specialist processing of the seismic data. Origin’s executive manager for geoscience and exploration new ventures, Rob Willink says “the joint venture will now move forward to secure a suitable rig for the drilling of an exploration well, most likely in 2011.”

Petroleum Exploration and Production Association CEO John Pfahlert welcomed the move, especially since it means Origin has “introduced” a new exploration company to NZ. He says a one-hole deepwater drilling programme is likely to cost between $US75m and $US100m, with costs beyond Andarko’s contribution shared among the joint venture partners. Pfhalert says the deepwater drilling rig to be used for the Origin programme could potentially be contracted by permit holders in the Great South Basin.

American regulators have approved an experimental North Dakota coal-drying plant which has imported more than 400 tonnes of NZ lignite to test in the hope the same process can be used in Southland. But Solid Energy project manager Greg Visser says the processing of the coal has been put back to this month or early next month after delays to construction of the plant by a ferocious winter. GTL Energy USA is building the plant to test a process called beneficiation which removes water and pollutants from lignite. Solid Energy sent its trial shipment to North Dakota in the expectation it will produce about 280 tonnes of briquettes, after the water is removed from the lignite. Nearly 200 tonnes will be sent back to NZ for trials among potential clients. If successful Solid Energy plans a joint venture with GTL Energy to investigate building a briquetting plant at the former paper mill at Mataura, 10 km east of its New Vale mine.

SOE Minister Simon Power’s requirement for Govt-owned businesses to start reporting their activities in the same manner as companies listed on the NZX is starting to look like a make-work scheme for investment relations managers. With SOEs dumping out results in the middle of the NZX half-year reporting season, the vast gulf between listed and state-owned companies’ financial disclosure verged at times on the embarrassing. At the most disclosive end of the spectrum in the energy sector: Contact Energy, which appears determined to flush out electricity SOE’s wholesale and retail pricing behaviour by moving to a level of disclosure about its own business in both those areas it may yet live to regret, such is the level of detail.

Contact not only publishes a lengthy management discussion and analysis text, but contributed a pack of slides looking at the most recent result, and another pack giving an “alternative” way of looking at the profit which disclosed, among other things, its retail margins are under intense pressure. On top of this, it puts up four of its senior management team, including MD David Baldwin, for a briefing which goes for as long as there are questions. Next best effort, albeit a long way behind, was Meridian Energy, which released its half-year result with a briefing for journalists and analysts headed by CEO Tim Lusk and newly appointed CFO Paul Chambers, whose verbal dexterity and willingness to cut in on the hard issues inevitably invited CEO-in-waiting speculation. Included was a slide pack with a lot of the important numbers, although nothing like a Contact-style kimono-opening.

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MightyRiverPower scrambled to alert journalists just hours before it released a two page press statement and a bare bones earnings schedule, and held a phone briefing without notes or slides, but which did give access to chair Joan Withers and CEO Doug Heffernan. Trailing by a mile was Genesis, whose results first appeared on an online energy news service, leaving journalists to search the company’s website for a new, fairly deeply buried “continuous disclosures page.” A far cry from the pre-announcement, weeks in advance, of a day and time for release from major listed companies. Genesis did include a slide pack which would have benefited from a briefing, but none was offered.

Perhaps most incongruous is the fact at this stage, most of the SOEs produced no more than basic earnings figures, no balance sheets, and many appear still to be negotiating their interim dividends with shareholding Ministers. This timing mismatch is a function of the ministerial instruction to issue profit results within 60 rather than 90 days of the end of a reporting period, so it’s not really the SOEs’ fault (yet) that parliamentary process and good financial reporting practice have yet to be married. As a dry run for future reporting, the best which can be said about this year’s batch of SOE half-year reporting is it was instructive. Hopefully it will pick up for the full year. It is encouraging, in principle, to see many SOEs issuing statements through the NZX announcements platform, although again, the timing and quality of disclosure was generally haphazard.

Local bodies failing to process resource consent applications on time will be slapped with a 25% penalty, ratcheting up at the rate of 5% a week for every week an application remains outstanding, under proposals from Environment Minister Nick Smith. Consultation on the penalties regime is under way now, for implementation on July 1. A report last year found 31% of resource consents were processed late and another 28% required time extensions, and this problem has worsened over the last decade.

Smith says “this new policy…is designed to reverse this trend and get councils focused on providing a timely service.” The suggestion is councils must provide a discount of 25% for a consent one week late, with an additional 5% per week up to a maximum of 80%. The regulations also set out procedures for determining fault, and definitions to ensure the incentives are workable.

Contact Energy’s application for a fast-tracked resource consent for the 250MW Tauhara geothermal power station will be the first to be considered by Environment Minister Nick Smith under the new, streamlined Environmental Protection Authority process. Under the new process, applicants seek Ministerial approval through the EPA for a decision within nine months. The changes are a key part of Smith’s “phase one” Resource Management Act reforms, enacted last year, to speed up applications for infrastructure of national significance. Contact already holds a consent to replace the 168MW Wairakei plant with a 220MW plant nearby at Te Mihi, but deferred a construction start date last year as electricity market conditions softened. It remains the more likely of the two projects to be built first. Contact has been particularly careful to research potential subsidence impacts from Tauhara. MD David Baldwin says “the results of this work give Contact confidence that land subsidence will not be an issue with the development.”

Subsidence on the outskirts of Taupo was a major issue in Contact’s six year battle to renew consents for the ageing Wairakei geothermal power station. Contact ultimately succeeded in showing no link between its geothermal extraction at Wairakei and subsidence on the opposite side of Taupo. The Tauhara plant is the second stage of developments in the Tauhara geothermal steamfield, which is adjacent to the Wairakei resource. The 23MW stage one binary plant is close to completion.

Meanwhile, Contact is to pursue a geothermal joint venture with Taheke 8C, a family-affiliated Maori land-owner with connections to the Ngati Pikiao iwi. Taheke owns land over a geothermal steamfield on the shores of Lake Rotoiti, which has yet to be assessed for its commercial potential. An exploration programme is planned over the next two years.

As a greenfields opportunity, it can be expected to require a higher long run marginal cost of wholesale electricity to sustain an investment than the current crop of “brownfields” geothermal developments currently under construction or consenting by both MRP and Contact. MRP has previously indicated LRMC above $100MWh for greenfields geothermal, making it comparable with wind farm opportunities. Geothermal power in areas where the resource is already understood and in use is currently the most attractive new generation option, with LRMC of $85MWh-plus.

Environment and Local Govt Ministers Nick Smith and Rodney Hide need to move quickly - possibly as early as this week - to deliver a verdict on the future of the elected councilors at Environment Canterbury, after last week’s Govt-ordered investigation left the Canterbury regional body a virtual lame duck. The report makes grim reading, and was backed up by an unusually gloomy assessment of ECan’s capacity to manage the huge water issues bedevilling the country’s most heavily used water resources. Doug Martin, a highly experienced public sector management consultant and member of the review team led by former National Minister Wyatt Creech says “in my experience, I have not come across such a gap in capability” at all levels of the organisation for handling water management issues.

Canterbury water is the most heavily used in the country, accounting for 70% of all water allocated nationally, and includes half the available water storage for hydro-electricity, itself responsible for 60% to 70% of national needs. Smith and Hide are meeting ECan councillors this week, they will also meet with the Canterbury mayoral forum, whose complaints about ECan helped spark the review, and with Ngai Tahu, which has substantial freshwater interests which it is advancing also through the Land and Water Forum and the Iwi Leadership Group, which is emerging as a key influence on Maori Party and coalition Govt decisions on Treaty issues.

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Meanwhile, ECan’s chair Alec Neill - an MP in the 1990’s Bolger govt along with Creech - is warning Cantabrians not to expect an election for regional councillors this year, a clear sign the Govt is likely to heed the report and replace ECan with commissioners to try to get the region’s water issues on an even keel. Importantly, the review team has endorsed the Canterbury Water Management Strategy, a major community consultation process that ECan engaged with. Its approach is likely to inform much of whatever happens next. Whatever those next steps are, we are picking it is unlikely Cabinet will favour a new Canterbury-only body to manage water issues. With the creation of the Environmental Protection Authority, the Govt has created a structure whose role is intended to be national coordination of nationally important resources.

Smith says “this is an important long term decision about the right water structure. Is it a separate water authority, how that fits in with RMA phase two reforms, the EPA, and the Land and Water Forum process?” Nor does the focus on ECan - or the relative exoneration of the Far North District Council in a report released with the ECan review - mean other regional councils can breathe easy. Environmental Defence Society’s Gary Taylor says the report “puts all regional councils on notice they need to lift their performance and Govt is looking for improved governance in freshwater management.”

L&M Energy, planning a merger with private sister company L&M Coal Seam Gas, could become NZ’s biggest coal seam gas explorer with 12 exploration permits and a market capital value of more than $100m. An independent report has valued LMCSG at about $118m, based one 173PJ 3P coal gas reserve at Ohai, Southland. The 3P classification means there is an estimated 10% chance of recovering the 173PJ of gas.

LME CEO John Bay says if the merger is approved, the company will aim to expand 3P reserves and certify its first 2P reserve in Southland this year. A 2P classification signifies an estimated 50% chance of recovery. It could be the basis for LME to initiate supply contractors. Potential customers could include Fonterra and Rio Tinto’s aluminium smelter at Tiwai Point. LMCSG’s Kent Anson hopes LME might be producing gas commercially in 2012 if the merger goes ahead. Cheaper gas could replace lignite, coal and wood as industrial fuel. Shareholders are due to vote on the merger proposal on February 22.

John Key has announced a kind of “devil’s pact” approach to mining on Dept of Conservation land by proposing a portion of the royalties from such activity should be diverted to a fund for special conservation projects. Described by Greens co-leader Russel Norman as “Orwellian” because it seemed to imply the environment could only be saved by first destroying it, the idea shows every sign of having neutralised such public opposition as exists for the exploratory phase of the Brownlee plan.

In a remarkably measured response, the Environmental Defence Society’s Gary Taylor says EDS “does not oppose mining on all Crown owned conservation land. It’s a question of limiting mining to lower value areas for nature conservation and continuing to protect higher value areas.” Willingness to expand so-called “Section 4″ protection to new areas of high ecological value, and the creation of a royalties-based fund were both cautiously welcomed, as long as the new fund didn’t lead to funding cuts elsewhere at DoC. Signs the Brownlee plan continues to capture the public imagination is perhaps most potently demonstrated by the fact the PM’s favourability ratings remain at all-time highs, in polling undertaken after Key’s agenda-setting speech to Parliament last week.

Whether the intervention of the heavyweight US environmental protection society, the Sierra Club, has political impact remains to be seen. However, it is just as likely the perception of wealthy Americans telling NZers what’s good for them will be seen as a negative rather than a positive. While the disclosure of Key’s minor ownership interest in uranium mining gave TV news something to run with at the weekend, Key’s explanation of the way the holding came about was credible and uncontroversial. As a taunt for the Opposition, it looks to have a pretty short half-life.

As predicted in NZ Energy & Environment Business Week in our first edition this year, water is emerging as one of the key economic and environmental issues of 2010. While not the main theme of his agenda-setting speech to Parliament last week, John Key used the speech to make important noises about water, and used NZ’s water abundance as an example of the areas of potential NZ can exploit to try and catch up with Aust. Key told Parliament an early priority will be to take action “this year to remove particular regulatory roadblocks to water storage and irrigation in Canterbury,” before warming to the theme at the opening of a new drier unit at Fonterra’s Edendale plant in Southland last Friday.

The PM says “The point I think Bollard was missing is NZ has something Australia doesn’t have, and that’s water.” He says the Govt will be raising public understanding of the value of NZ’s water, and the potential to use more than is currently extracted for irrigation. 90% of the flows in the South Island currently wash out to sea without being used at all. Key says “once you’ve sold minerals to China it’s gone, but with water, it’s with us for a lifetime,” although minerals are another string to the Govt’s economic transformation bow. Meanwhile, Environment Minister Nick Smith is talking up the significance of water intensity in farming production, highlighting creating a litre of milk requires 800 litres of water, while one kilogram of steak requires 1000 litres of water to produce.

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Federated Farmers has become highly visible in applauding the Govt’s actions on water, going so far as to claim the Govt has listened to it and is pursuing policies to extract more water for agricultural irrigation as a direct result of its lobbying. The Govt will be pleased, after months of criticism on environmental policies generally and climate change policy in particular, it has found something it can agree about with Fed Farmers. Whether it helps the ensuing wider debate on appropriate water takes, and the creation of new storage facilities or water-sharing arrangements, remains to be seen.

Already, hydro-electricity generators and environmental activists are lining up as unlikely allies in the cause of protecting water resources from over-exploitation by the farming industry. Genesis, which is due to gain the Tekapo A and B power stations and associated storage is still getting to grips with its new South Island water assets, while Meridian is nervous already about lost operating flexibility created by placing those stations with Genesis, let alone new demands on water used by its other Waitaki hydro stations.

Meanwhile, TrustPower is investigating an irrigation development strategy, joint-venturing recently with Barhill Chertsey Irrigation Ltd and Electricity Ashburton to supply Rakaia River water via the Highbank generation facility.