Call for oilcos to change refinery formula

The New Zealand Refining Company was dubbed a "plaything for the oil companies" at yesterday's annual general meeting by a minority shareholder angry at the processing agreements with BP, Shell, Caltex and Mobil.

Lowest-ever refining margins at the Marsden Point refinery in the 1999 year saw the oil companies jointly pay for the first time $12.7 million to meet a guaranteed minimum income of $85.3 million.

The processing agreements, renegotiated in 1996, also cap the company's fee when margins are high.

Shareholder Martin Ellis said the processing agreement disadvantaged small shareholders as the oil companies benefited from cheaper product when the margin dropped.

"We're in a no-win formula. The oil companies should do the honourable thing and buy out the minority shareholders so we can reinvest our money elsewhere."

Independent director Sir Colin Maiden said the processing arrangement was judged fair by an independent party when introduced and could be adjusted yearly.

Sir Colin said NZ Refining had "done very well" in terms of bottom-line profit compared to refining companies worldwide in recent years. Further cost reductions of $13 million targeted for this year should see reasonable future returns, he said.

Worldwide margins have trended down in the past four years from $US4.50 a barrel to the current underlying $US1.00 to $US1.50.

The margins reflect the difference in the price of crude oil compared with the value of refined products.

Since January this year, margins have been buoyant due to changes in Opec crude oil production, bouncing up to $US4.70 in March. Processing fees in the first quarter this year were $43 million. Before tax, unaudited profit was $29.5 million.

"As the year progresses we anticipate a return to more modest margins when product supply and demand becomes more balanced," chairman Ian Farrant said.

Although the margin has already slipped back to around $2 this month, the company does not expect to invoke the income floor again this year.

A $500,000 feasibility study is under way into options for improving product quality, as New Zealand is likely to follow Europe and North America in legislating new standards for less-pollutant transport fuels.

The Marsden Point Refinery could tolerate some reduction in fuel impurity levels, but not to the proposed European standards.

Options include reducing production, and thus income, or adding new units to achieve the specifications. "We want a solution that has the least impact on capital expenditure and on margins," chief executive Alan Davey said.

An additional $3.5 million was raised in 1999 from the extra capacity on the Whangarei to Auckland pipeline. The four oil companies take all the extra capacity at a discounted fee for product trucked out of Auckland - 85c a barrel instead of the normal $1.50.

NZ Refining said it had held talks with other petrol retailers such as Challenge and Gull, but its production was fully taken up by the existing customers.