In December 2024 a report titled "Methanexit: Should NZ Be Subsidising Its Largest Gas User?"¹ was jointly published by the Centre for International Corporate Tax Accountability, Common Grace Aotearoa and 350 Aotearoa. The report is based on an analysis of the financial statements of Methanex New Zealand Limited, the NZ subsidiary of Canadian Methanex Corporation. Methanex NZ has significant gas supply contracts, and typically uses between 30-45% of all gas produced in New Zealand.

As gas production winds down, the value of that contracted gas rises. Given the role gas plays in backstopping NZ's electricity security in dry years, the report suggests that Methanex will be in a position to on-sell gas at a significant markup. The report was an unofficial follow-up to the "Generating Scarcity" reports (2022² and 2023³), that I authored in my previous capacity as the researcher at FIRST Union.

Those reports argue that in the decade since the partial privatisation of Genesis, Mercury and Meridian, dividends have skyrocketed while rates of capital investment have collapsed. Cumulative dividends of those three companies reached $9 billion by 2024, while only $1.38 billion has been invested into new renewable generating capacity.

2024 Electricity Crisis

The impact of this underinvestment became painfully obvious in the dry winter of 2024, when the wholesale electricity price quadrupled and a number of large-scale manufacturers (including the Oji Penrose facility and Winstone Pulp's two Central North Island sites), announced that high energy prices had pushed them over the edge.

Cynically, the Government blamed the crisis on Labour's 2018 offshore oil and gas ban, in an attempt to deflect from the failed privatisations of the Key-English era. Within weeks it had proposed amendments to the Crown Minerals Act to repeal the ban. That draft legislation blasted through the committee stage at breakneck speed, before being hung out to dry by the industry who wanted a more lenient decommissioning regime. More on this later.

While this formed the main plank of the Government's response to the 2024 electricity crisis, the Ministry of Business, Innovation and Employment's (MBIE) advice confirms that new offshore gas is unlikely to reach the market before 2035.⁴ A small amount of new generating capacity has come on stream since winter 2024, however Transpower is already warning that similar conditions will likely be in play in 2025.⁵ With such a substantial mismatch between electricity supply and demand, the report argues that "greater improvements in energy security could be achieved by rationing demand (for gas) from our largest user, Canadian methanol producer and trader Methanex".

Markups Required To Offset Declining Production Margins

It argues that Methanex's New Zealand operations are already in a state of financial decline. Revenue has declined by 58% in the last decade, from $1.5 billion in 2014 to $624 million in 2023. The company hasn't turned a profit in four of the past five years, in spite of substantial subsidies. In 2024 when electricity prices spiked, Methanex announced that it would be on-selling gas to generators. In its communication to the market, it noted that the sale of this gas was expected to "meaningfully exceed the margin lost on New Zealand's methanol production delivered to customers.⁶"

In other words, the company is effectively stating that producing methanol no longer covers costs, and that it needs to on-sell gas at a significant markup to offset production losses. When Methanex filled the "all-of-Government" contract in 2024, industry sources estimated a markup of 200 to 300%.⁷ Another analysis suggests that when selling gas to the gentailers (Contact and Genesis) Methanex applied a markup of 400%.⁸ Given the time it takes to build new renewable generating capacity, we expect these conditions to continue for the duration of Methanex's current gas contracts, that run until 2029, at which point we expect Methanex will exit the market.

Climate And Tax Rules Subsidise Methanex

The report describes two forms of subsidies enjoyed by Methanex, through both our climate and tax rules. Methanex is the second-biggest recipient of free emissions units, worth around $300 million over the last decade and around $60 million in each of 2022 and 2023. There is some marginal abatement on this subsidy (1% a year until 2030), but its dollar value will likely continue to rise in line with the carbon price.

Removing the value of this subsidy over the last decade from Methanex's pre-tax profit results would have turned the company's cumulative $219.7 million profit into a $81.3 million loss. This is more pronounced in the last half-decade when the company has already generated losses in four of the past five years.

Methanex may have also stockpiled some of the emissions units it has received in the past decade, whose value would be rising over time. The Climate Change Commission has estimated there are around 68 million stockpiled units in circulation, but there is no requirement for companies to report these, either in a central register or on their balance sheet. These units have no expiry date and there is no cost to carry or store them.

Methanex also enjoys an implicit subsidy from our transnational tax rules. The company's balance sheet shows a $US350 million ($NZ597 million at the time of its publication) intercompany loan to its Hong Kong-based parent company, Methanex Asia Pacific Limited. There is no clear evidence of capital investment as a result of this loan, and there appears to be no attempt to repay the principal.

This notwithstanding, in the past decade a total of $257.4 million in interest payments have been made in relation to the intercompany loan. These loans are often used by transnational companies to shift profits between subsidiaries, from high-tax jurisdictions - like New Zealand - to low-tax jurisdictions - like Hong Kong.

This appears to have had the effect of substantially reducing the company's taxable income. The withholding tax rate on interest payments to Hong Kong is 10%, rather than the NZ corporate tax rate of 28%. We estimate that this could have had the effect of reducing the NZ tax take by $46.3 million. This is substantially greater than the total amount of tax paid by Methanex over this period ($32.5 million).

Methanex Asia Pacific Limited is incorporated in Hong Kong and therefore is not required to publish financial statements; however, records show that it is owned by Barbados-incorporated Methanex Holdings (Barbados) Limited. Recent litigation from Methanex's subsidiary in Trinidad and Tobago also refer to a separate Barbadian company, which is owned by Methanex International Holdings Limited, based in the Cayman Islands.

This company is not mentioned in the annual reports of Methanex Corporation, however previous reports do mention another wholly-owned Caymans-incorporated subsidiary, Waterfront Shipping Company Limited. In 2022 the incorporation of that company moved to Canada after a sale of a 40% equity interest to South Korean shipping company Mitsui OSK Lines. Nonetheless, in the eight years that preceded that sale, Methanex New Zealand Limited paid $NZ920 million in shipping costs to the company. The methanol-powered "Taranaki Sun" is incorporated in the Cayman Islands.

The report argues that these subsidies help enable Methanex to continue operating, and in doing so effectively enable the company to markup gas prices in dry winters when electricity prices rise. Genesis has responded by defensively stockpiling large amounts of coal to prevent the value of gas rising too excessively.

Just Transition Required

Methanex has historically played the role of an anchor customer in the NZ gas market, underwriting capital investment in the gas sector. As a result, it has enjoyed very low gas prices. However, as gas supply contracts it is likely that it will be unable to achieve these comparably low prices in New Zealand anymore. If this is indeed the case, its owners would be incentivised to extract as much value as possible from the investment before its existing gas contracts run out. Given it's the last-in marginal units of electricity that set the price for the whole market, this could mean higher prices for industrial consumers and further impacts on our industrial capacity and employment.

The Government has a lot of unused power here. A good first step would be to review Methanex's current industrial allocation to see how justifiable it is to keep handing over tens of millions of dollars a year to a company that has to markup gas prices just to break even. At the same time the Government should be negotiating directly with the company (or through its gentailer shareholdings) to secure preferential access to gas, safeguarding national energy security.

Workers at Methanex (and those in upstream and downstream businesses) also need to be part of this discussion. Just transition pathways should be negotiated between workers and the company, with the support of central and local government. The aim here must be to maintain our skilled energy and manufacturing workforce here in Aotearoa while sustaining household incomes, safeguarding workers' rights and conditions, and supporting regional economic development. The 2024 electricity crisis has shown that failure to effectively plan our way through this process has resulted in the loss of other jobs. This may continue in 2025.

The Crown Minerals Amendment Bill was expected to return to Parliament in February 2025 after amendments to its decommissioning rules. It was revealed, however, in December 2024 that Associate Energy Minister Shane Jones was open to rules that would have left NZ taxpayers on the hook for unfruitful offshore drilling.

It's unclear, however, whether Jones' more laissez faire coalition partners are ready to accept a subsidy of this kind that results in no net benefit to the country. The Bill has languished at the bottom of the order paper as the Government prioritises more pressing reforms. In the meantime, winter is coming without any real improvements on energy security. If demand again outstrips supply, somebody will have to come up short. If 2024 is anything to go by, it is workers in the manufacturing sectors that will pay the price.

Footnotes

1. METHANEXIT: Should NZ Be Subsidising Its Largest Gas User?
2. Generating Scarcity -How the gentailers hike electricity prices and halt decarbonisation
3. Generating Scarcity 2023 Update
4. Crown Minerals Amendment Bill modelling
5. Security of Supply Outlook - 5 February 2025 by Transpower
6. Methanex Corporation to Temporarily Idle New Zealand Operations to Assist in Improving Energy Balances
7. "Government tipped to buy back gas for at least four times its cost" (Post, Tom Pullar-Strecker, 11-09-2024).
8. "Updated: Methanex paid $200m to sell its gas and idle operations" (BusinessDesk, Ian Llewellyn, 6-12-2024).

Watchdog - 168 April 2025