NZ could cope without its own oil refinery, analyst says

Friday, 19 June 2020

Sharply lower margins have forced Marsden Point oil refinery to rethink its whole operation.

After more than 50 years, New Zealand may have to get used to the idea of not having its own oil refinery at Marsden Point.

The refinery was commissioned in 1964 to ensure New Zealand had a reliable supply of refined fuel.

But a global oil glut and, more pertinently, plunging oil refinery margins, have put Refining NZ's future on the line.

The Whangarei-based refinery is currently reviewing all options and a report is due out this month.

* Glut of cheap oil pushes Refining NZ into strategic rethink

One option would be to stop refining and become fully dependent on imported fuel.

''In principle there's really nothing that prevents the importation of nearly all of our refined products from other countries,'' John Kidd, director of energy consultancy Enerlytica, said.

''That's what the Australian sector in particular has been steering towards in the last two years as refining capacity in Australia has become uneconomic and it largely becomes an import country.''

The refinery has consent to instal a massive solar array which would help offset its electricity costs.

Until now the refinery has been responsible for around 85 per cent of the country’s jet fuel, two thirds of its diesel, just over half of all petrol, and all fuel oil for shipping.

But refining was a volume and a value business, Kidd said. The world's huge oil surplus came into sharp focus during lockdown, with oil prices diving to historic lows and reports here of all the oil storage tanks being full to the brim.

Although demand for petrol and diesel is getting back to normal, jet fuel demand will be a shadow of its former self for some time.

But even before Covid-19, Kidd said that growing competition from new refineries in Asia was pushing refinery margins ''through the floor''.

The New Zealand refinery pegs its margins to an overseas index, and with high electricity prices adding to the pressure, its processing fee is not even covering the cost of its capital.

Its processing agreements with key shareholders Z Energy, Mobil and BP date back to the 1990s.

It all raises the question whether the refinery needs a completely new business model.

''For a refinery that has its revenue determined by an international index, out of Singapore, and also has a volume business that is fractional to what it was, it's an extremely painful mix,'' Kidd says.

Energy analyst John Kidd says New Zealand's economy is increasingly less reliant on energy.

''Do they become a toll processor? In other words, do they handle refined product coming through their port and through their tankage and send it through their pipeline to Auckland and use that existing infrastructure?

''Or do they produce some other model?''

The review is expected to set out the options more starkly. Complete closure is the most extreme, although Kidd said its storage tanks were still needed.

Becoming an importer only is an option. A third of the country's refined oil is brought in directly by other players, including to Gull's tank in Tauranga.

And the refinery has an ace in its hand - the pipeline from Whangarei to Auckland. Only a couple of years ago, the country and particularly airlines experienced a nasty supply shock when a contractor accidently put the pipeline out of service.

Kidd called the pipeline a ''very valuable set of infrastructure,'' and one that would be hard to replicate.

''Refining and oil product handling is a logistics business, it's extremely capital intensive and that capital is already sunk along the supply chain from the deep water port through to the storage facility at Wiri.''

Should New Zealand stop refining, Kidd did not believe New Zealand would be hostage to the vagaries of world supply, as it once feared.

''The market for refined oil products is very deep and very liquid. There are refineries particularly through Asia, that is their business and they serve the region and the world,'' he said.

''Yes, there are going to be issues that are geopolitical and questions around the strategic case for having an in-country refinery, there's absolutely discussion to be had around that.

''But in principle there's nothing to prevent [the refinery] instead of being a manufacturer of crude, being a full handler of refined products.''

Other options include going into brave green directions. The huge solar panel farm that the refinery has resource consent for could not only drop its power bill but also help it move into renewable hydrogen.

Instead of refining its crude using hydrogen, the company could make hydrogen fuel for cars by pushing water through an electrolyser, powered by the solar farm.

But this is pioneering and expensive stuff, and Kidd said there were other broader trends in play.

The once close correlation between energy demand and economic growth is weakening. New Zealand's ''energy intensity'' has fallen 25 per cent since 1990.

Freight-driven kilometres, a measure of growth, have been contracting as energy efficiency increases.

Energy-hungry legacy industries like meat works, gold miners and pulp and paper mills have become a smaller part of GDP.

And with Tiwai Point aluminium smelter at constant risk of closure, and demand for aviation fuel in hibernation, the refinery is another energy provider in uncertain waters.

There is also the matter of Whangarei Harbour. Refining NZ has until recently been championing a deepening of the channel at the mouth of the harbour so it can bring in bigger tankers.

For the moment, though, capital spending has been scaled back, and the refinery has been effectively put to sleep in July and August to balance fuel supply.

Northland Chamber of Commerce president Tim Robinson said rumours of the refinery becoming a ''tank farm'' surfaced every few years.

As increasing numbers of people moved to the region, he said a shutdown would not ''cripple the city'' of Whangarei long-term, but it would be certainly be felt.

''At the end of the day, they employ high-skilled, well-paid workers and they live locally, so that would be a fair chunk of spending power removed from the local circle.''

Facts:

* As at the end of last year the refinery employed over 400 staff and about 250 contractors

* The company made a net profit after tax of just $4.2 million in the 2019 calendar year, down from $29.6m.

* Its three biggest shareholders are Mobil, Z and BP, holding about 43 per cent.

* Refining NZ's share price has plunged from $2.61 in August 2018 to 85c on Thursday.