Plan to quit refining at Marsden Point could happen next year
The country's only fuel refinery at Marsden Point could exit the refinery business as early as next year.
Refining NZ has been reviewing its future options which include quitting the refinery operations and converting to becoming an import terminal only.
Speaking on Wednesday after booking an annual loss of $198.2 million, chief executive Naomi James said the Government’s move towards greener transport gave the refinery’s review impetus.
‘’I think at a point in time you would always be looking at this ... but it takes a number of years on the Government's forecasts, on the Climate Change Commission forecasts, for current fuel demand to shift significantly.'’
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Over the next 10 years, the main fall in demand would be in petrol because of electric cars, rather than diesel and jet fuel which James said was about 70 per cent of what went down its fuel pipeline to Auckland.
Refining New Zealand's problems were evident long before Covid, as a global glut of crude pummelled refined oil margins.
But matters were exacerbated by the lockdown, which saw demand for all types of fuel shrivel dramatically.
In response, the company – which had already begun reviewing its options – slashed costs, cutting about $70m in operational spending and capital expenditure.
It laid off 90 workers in December, about a quarter of its staff, excluding about 100 full-time contractors.
However, James says the refinery would shortly need to between 300 and 350 extra contractors for a major $20m maintenance programme, which would be a big boost to the local economy but would shutter the refinery for four weeks from the end of February.
The company had also done what it could to help redundant workers back into work.
‘’We have worked closely with local, regional and national authorities and agencies to provide support to help our people transition, with the aim of having everyone impacted in new jobs, or, retraining within 6 months.”
While no decision to move to an import-only terminal proposal had been made, it was being given serious consideration, James said.
Any decision would require approval of shareholders outside its oil company customers.
Unions concerned about the impact of the refinery's virtual closure say the move would not only hurt Northland, but the wider region.
First Union estimated last year up to 2400 people supplied services to the refinery from outside the region, a figure the company thinks is too high.
First Union organiser Jared Abbott said although the last year had been ‘’diabolical’' for the company, it seemed ''fixated'' with closing the refining unit and he hoped the Government would intervene.
'’We use all the by-product that comes out of the refinery and that's now putting other businesses at threat because they have to source those by-products from overseas too.
‘'The decisions the refinery is making are, in our view, solely about the refinery shareholders but they have a huge impact on the New Zealand economy and the people of Northland especially.'’
He also cast doubt on the size of the reduced carbon emissions that the refinery expected to make, saying most of the emissions were made in driving cars, and that the refining work would simply be done elsewhere.
Financially, however, the refinery maintains that it is overdue for a revamp, given that it is no longer covering the cost of its capital.
Converting the site would cost about $200m over five years, including $50m to $60m for demolition, the company estimates.
Pending an agreement from its customers, it would take about four to six months to get the necessary approvals, and nine to 12 months to implement the changes, followed by possible repurposing of the site.
Energy sector analyst John Kidd of Enerlytica said it was an ''awful'' year for the refinery but it could have been far worse.
'’The Covid-led collapse in demand for refined oil products kneecapped its already-struggling refining model which before Covid was struggling under structurally low regional refining margins.''
Kidd said throughput had fallen 30 per cent, and while the economic recovery had provided a glimmer of hope, jet fuel was still well down.
Refining margins had slipped well below the '’fee floor’’ agreement with its three oil company customers for nearly the entire year, costing them $90m in top-up payments.
However, Kidd said the refinery's response had been impressive, shifting into a cash-neutral basis for 2021.
An import terminal-only model focussed on supplying Auckland and Northland, which represented about 40 per cent of total demand.
But he said the really interesting work was the possibility the site could be repurposed for alternative fuels.
James said it was possible Marsden Point could be reshaped as a ''fuels and energy hub'’. Decommissioning would leave the site with a lot of spare tank storage and surplus land.
There was potential for production or importing of biofuels and sustainable aviation fuels, and storing LNG fuels for security of supply, hydrogen imports and electricity battery storage.
‘’We think our infrastructure can play a role in the future as those alternate liquid fuels become viable at scale.’’
At the moment, however, the key hurdle is striking an accord with its three oil company customer shareholders, BP, Z Energy and Mobil.
All three companies took legal action against the refinery last year, but James said BP had now come to an agreement in principle over future terms.
Although it supported the import-only terminal plan, Z Energy said it was unhappy about top-ups it was paying to the refinery when refining margins fell below the agreed ‘'fee floor’’.
The suggested new agreement would be for at least 10 years, revises the fees, and gives third parties such as other fuel companies access to the refinery’s Northland to Auckland pipeline when it is unused.
Under this model, the refinery estimates its total fees across all customers would be around $100m a year.
Refinery closures have become common overseas, but Marsden Point is New Zealand’s only fuel refinery and was considered a strategic asset when it was set up 50 years ago.
James said ongoing talks with the Government would include the security of the country's fuel supply and whether more fuel should be stored.
The company's fuel pipeline between Whangarei and Auckland is considered its most valuable asset after the refining operation itself.
Shares in the company remain at around 48 cents, just off a year low of 46c and a high of $2.11 during the year.
Wednesday’s loss includes a $158m non-cash writedown on its refining assets compares with a small profit of $4.1m in the previous year to December.