October 31, 2020

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Refining NZ considering transition to import only model

Refining NZ considering transition to import only model
Photo courtesy of Refining NZ

It might be a matter of when, not if, New Zealand (NZ) loses its only oil refinery as Refinery NZ, the company that operates the Marsden Point facility, contends with historically low margins. In a triple blow, the company is facing increasing pressure from mega refineries in China, South Korea, Singapore and India that offer a cheap supply due to scale, lower fuel prices, and the decimation of aviation and maritime fuel demand by Covid-19. It has been reported that the refinery’s margin fell to historic lows of just USD0.67 a barrel in March-April 2020 amid New Zealand’s enforced lockdown, from historical averages of around USD5.00.

Refining NZ kicked off a review of the fundamentals of its business in April 2020, which included the role it plays in New Zealand’s fuel supply chain and the potential impact of a low carbon future. The first stage of the strategic review was released in June.

The company has ruled out a complete shutdown of the refinery, but has confirmed that the business model needs to change. Options to reduce operating costs and make the operation more viable are being evaluated including simplifying refinery operations or conversion to an import-only terminal. A further update on the strategic review is expected at the end of the September quarter this year.

Construction of Marsden Point refinery commenced in 1962 and was completed two years later, at a cost of NZP10 million¹. The Northland location was originally selected due to its proximity to a deep-water port, expanses of flat land, and closeness to major population centres. The refinery was initially designed to produce 65,000 barrels per day (b/d). Today, the crude oil capacity is 135,000 b/d. 

Refining NZ considers import model

Photo courtesy of Refining NZ

Operating 24 hours a day, seven days a week, 365 days a year, the manufacturing facility produces a wide range of premium and regular gasoline, automotive and marine diesel fuel, aviation and lighting kerosene, fuel oils and bitumen for the New Zealand market. A substantial expansion was completed in the mid-1980s, and a series of growth projects since 2005 have lifted the refinery’s capacity and capabilities — at a further cost of NZD735 million (USD482 million).

Construction of a 168-kilometre pipeline in the 1980s has provided a competitive advantage by connecting the refinery with the Wiri Oil Terminal in Auckland, New Zealand’s largest city. The pipeline transports petrol, diesel fuel, and jet fuel with an average throughput of 320,000 litres per hour.

The toll refiner processes crude oil imported by oil company customers, Z Energy, BP and Mobil into high-quality transport fuels. Its two primary income sources come from processing fee income and pipeline fee income, with additional fees for refining crude and other feedstock.

With margins expected to remain low for an extended period, the company has been propped up by its three major customers who pay a “fee floor” when margins drop below fixed operating costs levels.

Refinery NZ is the leading supplier of refined petroleum products in New Zealand, accounting for 70% of the domestic market. Marsden Point currently produces 85% of the country’s jet fuel, 67% of diesel fuel, 58% of petrol, and all fuel oil for ships. Half of the fuel production travels via pipeline to Wiri for storage and distribution. The remaining 30% of fuel product demand is satisfied by imports from the Asia-Pacific region.

The next stage of the strategic review encompasses detailed planning on simplifying the refinery and further exploration of the option where the company no longer refines fuel locally.

Some believe the decision is essentially made and the company will eventually transition to an import-only model. Not only are Mobil, Z Energy and BP the largest customers of Refining NZ, they are also major shareholders. The company’s communications have also suggested they will focus fuel supply efforts on the Auckland and Northland markets.

BP has previously confirmed support for the direction Refining NZ is taking, while local operator Z Energy has indicated a “strong preference” to turn the Northland facility into an import-only terminal. Z Energy Chief Executive Michael Bennetts suggests they are at a significant disadvantage when competing against larger refineries with lower operating costs.

A potential shift to importing could have major implications for Northland. Refining NZ has already indicated this option would lead to a substantial downsizing of the facility. Many locals are fearful of the impact on the local economy. Marsden Point employs 400 permanent staff and a fluctuating number of contractors. First Union organiser Justin Wallace has claimed the refinery “directly or indirectly” provides work for 3,500 people and contributes 8% of Northland’s regional gross domestic product (GDP).

Shane Reti, National Party minister of Parliament for Whangarei is said to be “very concerned” about potential job losses. In June, Wallace told media outlet Stuff that plans to develop a proposal for a “green hydrogen” plant at Marsden Point, which could maintain much of the existing workforce, have not advanced to an application for funding through the Provincial Growth Fund.

Refining NZ’s facility produces around 130 tonnes of hydrogen per day. Submissions on the government’s hydrogen discussion document by Dr. Julian Young, chief development officer at Refining NZ, suggests there is “real potential for green hydrogen to make a significant contribution to reducing carbon dioxide emissions from transport and industrial processes in energy-intensive industries including refining.” Young’s submissions called for policy frameworks for the domestic hydrogen industry given the high cost of manufacturing green hydrogen.

The shift to an import-only model has also raised concerns around fuel security. Refining NZ has dismissed these fears, citing an ability to source refined fuels from multiple locations to minimise supply risks. Local low cost operator Gull Petroleum is already sourcing the majority of its fuel this way. Before opening the Marsden Point facility, all fuels were imported into New Zealand by oil companies.

Cost competitiveness of refineries is not just a local issue. New Zealand’s big brother across the ditch, Australia, has progressively shut down refineries over the past few years including: Westernport in 1984, Matraville in 1985, Port Stanvac in 2009, Clyde in 2012, Kurnell in 2014 and Bulwer in 2015. The announcement of a temporary shutdown of the Caltex Lytton refinery in Brisbane in May, one of four remaining oil refineries, is a further indictment on the ability of smaller regions to compete with larger-scale markets — particularly during difficult operating conditions where global fuel demand has plummeted.

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