Glut of cheap oil pushes Refining NZ into strategic rethink

Wednesday, 15 April 2020

Refining NZ says low fuel margins and 25-year-old refining agreements are pushing the company to take a hard look at its operation.

The country's key refinery for petrol and diesel has announced a complete review of the company, thanks to a global oil glut.

During the lockdown, the New Zealand Refining Company, which owns the Marsden Point oil refinery, has halved its normal output because of motorists being largely off the roads.

But other global trends, such a surplus of oil and new entrants to the Asia-Pacific market, have been making it hard for the refinery to compete.

'Refining NZ has quickly responded to the current Covid-19 situation but is challenged by structural conditions resulting in low refining margins globally and oversupply in the Asia region,' chairman Simon Allen told the NZX.

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'It is appropriate for us to review the fundamentals of the business and the company's future within the New Zealand fuel supply chain.'

Allen underlined the seriousness of the company's situation, saying its investments had not delivered an acceptable return over the last decade.

Its current processing agreements were 25 years old, entered into in 1995.

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Significant new volumes of fuel were flooding the Asia Pacific region from China, Korea, Singapore and India, whose refineries were able to produce large volumes of low cost fuel, pushing down fuel margins for the whole region.

Another issue had been significant hikes in electricity prices, 'meaning that at the fee floor in the processing agreements Refining NZ does not cover its cash costs'.

'Currently, our view is that the refinery is not able to earn its cost of capital,' Allen said.

The review's scope includes what would happen if it switched to a fuel importer business model, and options for separating its refining and infrastructure assets.

One thing that the company – which produces 70 per cent of New Zealand's refined fuels – suspects is that some of its assets, particularly its pipeline into Auckland, are undervalued.

The importance of its jet fuel pipeline to Auckland was highlighted in 2017 when the pipe was damaged by a contractor, costing the refining company more than $14m and cancelling scores of flights out of Auckland.

Petrol and diesel volumes have sunk significantly since lockdown began.

Placing a higher value on its pipelines into Auckland could aid Refining NZ's share price and any future capital raising efforts.

Another option for the company is greater involvement in green energy. The company has plans for a $37m solar farm project, Maranga Ra, but it could also diversify into areas like hydrogen energy and biofuels.

Currently Refining NZ is 43 per cent owned by customers such as the oil companies, and 57 per cent by retail and institutional investors.

At present, the company has a short-term agreement with customers to run on a cash-neutral basis this year, in part by deferring significant shutdown and capital spending until 2021.

The review is expected to be finished in June.

While NZ Refining says its problems are structural, Covid-19 has caused a dramatic fall-off in consumer demand for fuel.

In a weekly update on fuel sales, Z Energy's sales of 91 and 95 Octane have dropped from a weekly average of about $15.18 million litres to just over 3 million litres in the week to April 5.

Jet fuel sales plunged from over 14 million litres to 2.4 million, and Caltex brand petrol fell from 6.47 million litres to 1.2 million litres.

As a result, Z Energy has narrowed its full year guidance to be in the range of $355 million to $365m, down from $350m to $385m previously. Its results are due in May.

For the consumer, however, a global fall in demand for fuel has not been all bad.

Petrol prices have fallen from an average of $2.28 per litre in Auckland at the start of 2020 to $1.83 as of April 3, according to the Ministry of Business, Innovation and Employment.

Crude oil prices hit an 18-year low after a price war broke out between to Saudi Arabia and Russia, two key oil producers who could not agree over curbing production.

Global oil alliance Opec has since sealed a deal to slash global supplies by 10 per cent, but confidence is low as the pandemic continues to ground aviation, suspend manufacturing and curb motor vehicle use.