Retaining a functional oil refinery would be the least cost option for improving fuel reserves – but only if the Government moves swiftly to hold off the gas axes
Opinion: Hundreds of millions of dollars hang on whether the Government acts in time to preserve the Marsden Point oil refinery.
The facility is winding down operations but if plans to start scrapping it from next week were put on hold, this would buy time to reimagine it as New Zealand’s least cost option for coping in a fuel supply crisis.
Retaining a functional refinery appears a lot less expensive than building equivalent new tank storage.
In the wake of the Ukraine invasion, the Government has indicated it will increase onshore fuel reserves – which could cost fuel users hundreds of millions of dollars.
This is after having earlier proposed a plan to leave storage capacity essentially unchanged.
That plan would have seen onshore fuel reserves rise from an average of just 20 days’ supply to 24 days for petrol and 28 days for diesel – against a European average of 90 days supply.
“The Marsden Point refinery cannot produce fuels solely from light crude oils like those produced in Taranaki without significant reconfiguration.” – Refining NZ
Having apparently now recognised that greater security of supply is required, the question is how much is needed and how to get it.
Additional storage tanks are the base case. But if what is ultimately needed to run the nation is thought about in terms of ‘reserve capability’, rather than simply storage tanks, then the refinery turns out to be not just a low cost option but also one ideally suited to be part of the mix.
It can provide another form of capability – ‘perpetual storage’ – an amount that can be produced continuously from domestic crude.
Perpetual storage is more valuable because the volume reserved does not run out. It is particularly suited to the highest value uses – emergency services and the maintenance of utilities and food distribution.
Government’s analysis of information provided by Refining New Zealand concluded that the refinery in its existing form could produce 3-5% of annual fuel demand from Taranaki crude on an ongoing basis – an amount broadly similar to that required to keep those highest value services in operation. Further, MBIE’s analysis is that this could be done without having to mix Taranaki crude with heavier imported crudes. And this is now official.
It is also contrary to what Energy Minister Megan Woods’ recently told RNZ, and particularly contradicts the line Refining New Zealand has been pressing. The company most recently told Newsroom “The Marsden Point refinery cannot produce fuels solely from light crude oils like those produced in Taranaki without significant reconfiguration.”
Unpack that line a little and I believe this is the way things actually stand:
► While the refinery can’t produce fuels economically or efficiently from Taranaki crude, in a crisis the refinery in its current form could certainly deliver fuel “solely” from that source.
► If imported heavier crude is used at the same time, so there is not “solely” Taranaki light crude, this raises the efficiency to deliver more petrol and diesel from what is fed in. And the same dollop of heavy crude can be recycled many times, according to an engineer formerly working at the refinery Newsroom has spoken to.
► Finally, the physical plant itself could be altered to further raise the efficiency. The company will not disclose the cost or what efficiency is obtainable, but says this reconfiguration would take “some years to plan and implement”.
Refining New Zealand cites volatility of refining margins as the main reason for closing the plant. But the company’s independent advisor reported in July that the refining operation was far from a poor business.
Grant Samuel projected that Refining NZ would actually be more profitable over the period to 2035 were it to keep the refinery open, than to close it and become an import only terminal as now underway.
Understanding that the refinery was just going through a cyclical low point at the time, in September the Government considered loaning the company enough to keep the operation going.
Russia's isolation will "prompt companies and governments worldwide to re-evaluate their dependencies ... Energy security has joined the energy transition as a top global priority." – Larry Fink, BlackRock
Given the speed at which refining margins have since recovered, and that the company has been repaying its oil company shareholders out of recent earnings, a loan to the refinery in exchange for assurance of a minimum period of continued operation is an increasingly low risk and low cost investment.
Even just working out an arrangement to mothball the plant so it could be restarted in an emergency would deliver a lot of the gains.
The alternative is to build new tank storage to get the equivalent amount of additional reserve capability. How much depends on what is being targeted.
Looking at just the highest value uses, emergency and critical services, the costs to the country of not having these is such that the design specification for reserve capability should be the ability to withstand essentially any scenario.
If two years’ worth of fuel were to be kept in reserve for these highest value services, for example, and it is assumed this accounts for 5% of annual demand, then providing for this through tank storage alone would require roughly a doubling in the current capacity.
That would cost in the region of $600 million just for the tanks for that 5%, with additional levels of storage for the other 95% of fuel use a further expense.
Whatever the assumptions, this is the work that needs to be done so that the cost of retaining or not retaining a functional refinery is made clear. Fuel users who will ultimately pick up the tab will be especially interested to see that calculation.
But the work only has meaning if the Government moves swiftly to get the refinery demolition work put on hold.
There is no need to decide immediately whether to mothball the plant as it will remain in good condition for quite a few months without this, according to the engineer formerly with the refinery.
All that is required right now is pausing to take stock of what role the refinery could have if the nation wants to seriously consider increasing its fuel reserves capability.
While the Ukraine invasion is an obvious reminder of how things can change abruptly, it was never a smart plan to go cheap on supply security.
New Zealand has some of the longest fuel supply lines in the world and will remain utterly dependent on petroleum supplies for quite a few more years - whatever the level of commitment to decarbonising the economy. And refining fuel offshore rather than at home does not significantly change the amount of carbon the atmosphere sees.
Reserve capability is about taking out insurance against the worst. Level four lockdown showed us that removing 39% of the productive economy and 38% of fuel use cost $230 million a day.
The Government has not done the work to find out what it would cost if New Zealand ran out of fuel altogether – it is flying blind on that. But it would clearly be a great deal more and the costs would not just be economic. As food distribution broke down, followed by social order, the human costs would be the ones that hit most deeply.
If that scenario seems unimaginable, take two straws in the wind from this week alone.
The head of the world’s largest asset manager, BlackRock, said that with the Ukraine invasion, the globalisation of the last 30 years is over and that it will “prompt companies and governments worldwide to re-evaluate their dependencies”. He added, "energy security has joined the energy transition as a top global priority."
And an emerging agreement between China and the Solomon Islands that our Foreign Minister describes as “very concerning” is reported by the New York Times as allowing China “a base of operations between the United States and Australia that could be used to block shipping traffic across the South Pacific”.
New Zealand got lucky the last time we underprepared for a crisis. It turned out that closing the border was not only a reasonable workaround to having so few ICU beds per capita, it actually made good sense regardless in the pandemic.
Once the onshore reserves are gone, there is no such workaround if the tankers stop coming and the refinery has gone to the scrap yard.
