Z Energy favours import terminal at Marsden Point

Marsden Point oil refinery. Photo / Michael Cunningham

Converting the Marsden Point oil refinery to an import terminal is likely to be the best decision for the firm and the country, Z Energy said.

The country's largest fuel retailer said it supports Refining NZ's "more rigorous" analysis of the long-term options for the refinery near Whangarei.

But where Refining NZ said conversion to a terminal is not a foregone conclusion, Z Energy chief executive Mike Bennetts said that, based on what it knows to date, its "strong preference" is to see the business transition to imports.

The customers of the refinery have always incurred cost and complexity from having to buy and hold crude oil to import, and from operating coastal tankers to ship finished product from the refinery around the country, he said

But those costs have been increasing in recent years, just as Marsden Point's margins have been under pressure from ever-larger, more efficient rival producers in Asia.

Relative to a straight import model – like that operated by Gull – customers of the refinery "have been disadvantaged for the last three or four years," Bennetts told BusinessDesk.

Margin pressures not going away

A smaller, simpler refinery focused on the Auckland market may reduce that imbalance, but that is not yet clear. And the margin pressures on the refinery are not likely to go away.

"What's tough today, we think is only going to get tougher in the years ahead," he told BusinessDesk.

Shares in Z, which owns 15 per cent of the refinery, fell 1.1 per cent to $2.76, taking their loss so far this year to 37 per cent.

Refining NZ shares declined 1.3 per cent to 77 cents, taking their loss for 2020 to 59 per cent.

The refinery, 43 per cent-owned by the three fuel companies that buy its fuel, today said it plans to simplify its operations and focus its business on the supply of fuel into Northland and Auckland.

That change, expected to be effective later this year, will capture the competitive benefit of the firm's fuel pipeline into Auckland, and enable the business to continue operating on a 'cash-neutral' basis in 2021.

In parallel, the company will continue to evaluate a possible staged transition to an import terminal, including its scale, timing and the commercial framework it could operate with customers.

Chief executive Naomi James said an inevitable conversion to imports "isn't where we are at."

Moving to a simpler operating model gives the company the time and space to really consider the best long-term options for the facility and the country.

That part of the review doesn't have a fixed timeline and will include consideration of alternative uses of the site, including the low-carbon fuel options the firm has previously looked at.

"That is a topic that the government has expressed a lot of interest in," she told BusinessDesk.

Spending halted

Refining NZ has halted all non-critical expenditure, but had previously planned to invest about $37 million in a solar farm as part of its strategy to reduce emissions and develop lower-carbon fuel options, including hydrogen.

It was also preparing to dredge the harbour approaches to enable it to lower costs by handling fewer, but larger, crude tankers.

But those plans collapsed this year as the Covid-19 pandemic stalled the world economy and left a glut of fuel, heightening the pressure the plant was already under from regional rivals.

Yesterday, Z said its fuel sales in the week ended June 21 were still down 27 per cent on pre-lockdown levels.

Excluding jet fuel, they were 17 per cent lower. Jet fuel volumes – up to a quarter of the refinery's production – were down 70 per cent.

The country's sole oil refiner and one of the biggest employers in Northland kicked off a strategic review in April.

Z Energy chief executive Mike Bennetts. Photo / File

At the time, the company said the four broad options under review included: improving the business under the existing operating model; adjusting the processing agreements in place since 1995 and the firm's distribution arrangements; separating the firm's refining activities from its land, storage, jetties and pipeline assets; or moving to an import terminal model, as several former refineries in Australia have done.

The decision to focus on Auckland and Northland signals a big shake-up for the fuel industry, which currently draws about 70 per cent of its supply from the refinery. About half of that annual supply is delivered on the pipeline to Auckland, without about 40 per cent shipped by Coastal Oil Logistics, the industry's joint-venture tanker operation.

A smaller, leaner operation focused only on Auckland also has big implications for jobs in the region. Marsden Point paid more than $61m in wages and benefits last year and employed 412 staff and 250 contractors. The company estimates that it supports 1,100 jobs in Northland and generates about 6.5 per cent of the region's GDP.

It also provides critical mass for the engineering sector and supporting trades, both regionally and nationally.

Reduced capacity

The plant has been operating at about half capacity since March, minimising production by running units on a rotating basis. Non-critical capital expenditure had already been halted and it already planned to put all its units on standby for "several weeks" in July and August to help reduce fuel stockpiles around the country.

On that basis, it had planned to operate on a cash-neutral basis until the end of the year, relying on fee-floor payments its major customers are contracted to provide at times when refining margins are too low to run production profitably.

Today, the company said it expects margins to remain below historic norms for an "extended period of time." Accordingly, it intends to extend cash-neutral operations into 2021.

Bennetts said reduced production to date is providing some guidance on what the smaller, more focused refinery could look like.

But further work is needed to really test the best model for that operation, and then how that could affect the coastal shipping business, and the additional imports that the fuel companies would need to bring in.

James said that while the refinery is planning to focus on Auckland and Northland near-term, it hasn't ruled out supply for other parts of the country. That, and the mix of products it will make, is still being worked through with its customers.

In the meantime, work will continue developing the longer-term options for the site. That process, including examination of other uses for the site, such as hydrogen and other fuels, is appropriate, Bennetts said.

In Australia, redevelopment of refineries into import terminals have typically taken up to two years.

Bennetts noted that, whatever the outcome of that review, Z Energy is "highly unlikely" to commit any additional equity to Refining NZ.