Taxpayers should pay for any national fuel reserve once refinery shuts, Z argues

Thursday, 9 December 2021

RNZ's podcast The Detail looked in August at the history of Marsden Point, and why some people were warning that closing it could put the country's fuel security at risk.

Z Energy says petrol companies such as itself should not be forced to pay to maintain higher fuel reserves, in case of supply disruptions after the Marsden Point oil refinery closes in April.

Instead, if such extra reserves were deemed necessary, the Government should take responsibility, it suggested on Thursday.

Z said it believed it was “worth considering” ways to make fuel supplies more resilient, once the country lost the capacity to refine crude oil next year.

But it said the best options would be to encourage the local production of biofuels, or to make arrangements to bring in fuel from Australia in a crisis.

Alternatively, the Government could establish “a national fuel stockpile” to provide additional fuel security, it said.

Figures suggest the cost of the latter option could run to hundreds of millions of dollars, but would depend on the size and type of any facility.

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Tanks previously used to store crude oil at the Marsden Point oil refinery could be converted to hold emergency supplies of refined fuels, or new storage could be built at a higher cost, but a question is who should foot the bill.

Refining NZ, which owns the Marsden Point oil refinery, confirmed last month that it would stop refining oil in April and that its fuel company customers and shareholders that had encouraged that move would instead import pre-refined fuels such as petrol, diesel and aviation fuel from Asia.

A Cabinet paper prepared by Energy Minister Megan Woods in November suggested there would be little impact on the country’s fuel security, given that the Marsden Point refinery was geared towards refining imported crude oil.

But it said it was “not entirely implausible” that New Zealand could be cut off from fuel supplies in “an exceptional ‘no fuel imports’ scenario”.

“Loss of ability to refine domestic crude oil could leave New Zealand more exposed to the severe consequence of depleting all fuel stocks if unable to import any fuel for a sustained period,” it said.

New Zealand was in many respects an “outlier” among comparable countries because it did not maintain domestic fuel reserves, it said.

The Cabinet paper said the Government could establish a fuel reserve, or impose “minimum stockholding obligations” on fuel companies.

Energy Minister Megan Woods has played down supply chain risks while nevertheless describing a “no fuel imports scenario” as not entirely implausible.

Those obligations could be set at current commercial levels or raised to “offset a potential reduction in supply resilience when refining operations cease”, it said.

But Z’s report baulked at the suggestion that the Government could require fuel companies to stockpile refined fuel for supply emergencies, describing that as “an expensive and unnecessary exercise”.

Any costs would probably be passed on to consumers it said.

“We would not endorse this for New Zealand given the availability of lower cost alternatives.”

Woods has been contacted for comment.

Z Energy general manager of transition Julian Hughes said there were ways in which importing pre-refined fuels would improve the country’s fuel security.

Instead of importing crude oil from the Middle East, a region which has faced “frequent political instability”, New Zealand would instead predominately acquire its refined fuel from Asia, including Singapore, Japan and Korea, he said.

“A refined-fuel import supply chain, sourced from multiple refineries in multiple countries, will provide more options from where we source product and is therefore more resilient to most credible fuel disruption scenarios,” he said.

“There will also be more frequent deliveries of finished product to New Zealand – we estimate around 175 tankers arriving annually. This means a tanker will be discharging into our domestic supply chain every two days.”

In a statement that may be less likely to reassure fuel consumers, Z said it believed it would be useful for the Government to mandate “annual exercises” to simulate a large-scale fuel supply chain disruption.

That would be “to see how importers and other critical customers like Air New Zealand, Auckland Airport and large domestic commercial firms would respond”, it said.

Woods’ Cabinet paper revealed ministers considered but did not follow through on the idea of saving the refinery by underwriting it for a period of up to 10 years.

Refining NZ has said that refining oil in Asia rather than at Marsden Point should result in a net drop in carbon emissions.

Hughes said Z could look at sourcing refined fuels from Australia, which has decided to subsidise rather than close its refineries, as well as from Asia, but that it expected larger refineries would be more efficient and would therefore produce less carbon per barrel.