What is the Refining NZ vote and what does it mean for oil industry and Northland?

Thursday, 5 August 2021

EXPLAINER: A pivotal vote on Refining NZ’s future will be held on Friday, determining if oil refining continues in New Zealand.

The vote asks New Zealand Refining Company shareholders to decide if the Marsden Point site – New Zealand’s only refinery – should become a dedicated fuel import terminal.

It is set to have a big impact on Northland, alongside the 300 staff and 200 contractors who work on the site.

The future of Refining NZ is up in the air ahead of a crucial shareholder vote on whether it should become an import terminal (file photo).

However, the vote is not the final step in changing to an import terminal, and there is still time for the Government to intervene.

Shareholders will make their vote on Friday morning. (File photo)

* Closure of Marsden Point oil refinery set to cost 240 jobs

* Closure of Marsden Point oil refinery set to be put to shareholder vote

If approved, the Marsden Point site will no longer refine oil, and will instead become a dedicated fuel import terminal. (File photo)

What is Friday’s vote?

Shareholders will make a decision on two votes. The first, is to make a major change to refinery’s business, including changing its name to Channel Infrastructure NZ.

A yes vote effectively agrees to stop refining crude oil in New Zealand. As it is a significant change, 75 per cent of shareholders must agree for it to be passed.

Most refinery workers earn more than $100,000 – well above the Northland average of $24,800. (File photo)

The second vote is on the refinery becoming a dedicated import terminal for the majority of New Zealand’s fuel needs. This will use about 18 per cent of the current site.

Only non-customer shareholders will vote on this (its customers are BP, Mobil and Z Energy), but a simple 50 per cent majority is all that is required.

If shareholders vote yes, the proposal still needs approval from lenders, customers and a final decision by the Refining NZ board, with conversion possible by mid-2022.

The Marsden Point oil refinery has a big impact on Northland’s economy. (File photo)

How many jobs will be lost?

There are 300 people employed at the refinery, but this will drop to 60 within 20 months of an import terminal starting up – making 240 people redundant.

However, that is not the full picture as the refinery also uses contractors, with about 100 to 200 employed full-time. This number is also set to drop by 80 per cent.

The Marsden Point oil refinery came under pressure last year due to Covid-19 and international volatility in refining margins. (File photo)

On top of this, the refinery uses hundreds of contractors for its annual maintenance.

In a major maintenance shutdown in 2018, 700 extra people were brought on-site for the six-week operation, which cost the company $85m.

A large proportion of that went directly to the Northland economy, through payments for contracting, equipment, accommodation, catering and other services.

Chairman Simon Allen says the relatively small size of the refinery and increasing operational costs, such as electricity, makes refining in New Zealand challenging. (File photo)

How will Northland’s economy be impacted?

There’s no sugar-coating the effect on Northland’s economy if the refinery becomes an import terminal: The impacts will be huge.

While Northland recently has seen good growth and low unemployment, the region traditionally sits behind the national average for both wages and employment levels.

In the 2018 census, Northlanders’ average income was just $24,800 – 78 per cent of the national average.

By contrast, more than 90 per cent of refining staff earn over $100,000, and that has a big multiplier effect in the local economy, said First Union spokesman Jared Abbott.

The refinery is responsible for about 7 per cent of regional GDP, Abbott estimated.

To put this into perspective, the last time New Zealand experienced a 7 per cent fall in GDP was in the 1932 Great Depression.

Why is this vote being considered?

Whangārei MP, Labour's Dr Emily Henderson, says the Government is still trying to figure out what is needed to keep the refinery running. (File photo)

Refining NZ – which refines all of New Zealand’s jet fuel – was hugely impacted by Covid-19, both through local lockdowns and through the lack of air travel, which is still expected to take several years to recover.

The company only managed to break even by simplifying and reducing what it does, and relying on a minimum payment subsidy from its customers BP, Mobil and Z Energy.

This subsidy (called the fee floor) cost these customers $115m from January 2020 to the end of April 2021, and they don't want to keep paying it.

Aside from Covid, refining worldwide is moving to large-scale “super refineries” to get better economies of scale, in an industry where margins are volatile.

Chairman Simon Allen said the refinery faces structural challenges due to its relatively small scale, along with increasing costs of operating in New Zealand, such as electricity and gas prices going up.

Finally, Refining NZ is also looking at its carbon dioxide emissions, and New Zealand's plans to be carbon-neutral by 2050.

Moving to an import terminal will reduce the site’s carbon emissions by 1.2m tonnes, or 5 per cent of New Zealand’s total reduction required by 2030 under the Paris Agreement.

Also, as the country moves to a carbon-neutral society, there will be less demand for petrochemicals as people move to the likes of electric vehicles.

First Union’s Jared Abbott argues an import terminal will actually increase global carbon emissions because international refineries are more emissions-intense than refining in New Zealand.

Importing refined fuels will also rack up more transport emissions than importing crude (unrefined) oil – because crude is denser and doesn’t need to be separated into petrol, diesel and jet fuel.

Could the Government intervene?

Abbott wants the Government to intervene to keep refining in New Zealand, at least until a viable alternative such as biofuel manufacturing can be set up.

He argued the cost would not be much more than what the Government stands to lose in lost tax, and it would be a strategic investment to secure New Zealand’s fuel.

Jacinda Ardern has already said the Government will not intervene in Friday's shareholder vote.

However, Whangārei MP Labour’s Dr Emily Henderson said she, Energy Minister Megan Woods and the Ministry of Business, Innovation and Employment were trying to work out what is needed to keep the refinery running.

“We’re trying to understand from the refinery what they need, but they haven’t actually asked for anything,” Henderson said.

She and Woods have met with the union, which represents 100 per cent of operational staff, and listened to its suggestions.

Government support for a strategic New Zealand company is not unheard of.

Air New Zealand has twice received support – a $900m Covid-19 Government loan, as well as $885m bailout in 2002, when the September 2001 terror attacks in New York led to the collapse of subsidiary Ansett.