Refiner has to call on oil firms' cash

By FIONA ROTHERHAM

The NZ Refining Company, which runs the Marsden Pt oil refinery, was forced this year for the first time to invoke guarantees with the main oil companies to lift its income.

Chairman Ian Farrant says in the company's latest annual report that under the processing agreements with BP, Shell, Caltex and Mobil, the oil companies had to jointly pay $12.7 million to reach the refining company's agreed minimum income of $85.3 million.

As reported last month, NZ Refining posted a 76 per cent drop in profit to $5.68 million in last year after pressure on margins and a 20-day maintenance shutdown of its hydrocracker block.

Refining margins hit rock bottom, averaging $US1.70 compared with an average $US2.40 in 1998. The margins reflect the difference in the price of crude oil compared with the value of the refinery's products.

The processing agreements, renegotiated in 1996, allow for a cap on the refining company's fee when margins are high. When margins drop, the four customers have to meet the guarantee.

What each pays depends on whether it has purchased the amounts it is contracted to annually.

The four companies, who are all substantial shareholders, continue to fully use the refining capacity.

Refining margins improved markedly in January, but Mr Farrant says this was because of the usual increased demand during the Northern Hemisphere winter.

"There is little sign of sustainable improvement in margins over the balance of 2000."

He says that despite experiencing the worst financial result in many years, the company has maintained a strong operating cash flow.

The directors have previously said dividends would be affected by strong profitability fluctuations under the current processing fee arrangements.

A final dividend of 60 per cent has been declared, giving 70 per cent for the year.