Closure of the Marsden Point refinery would expose the country to the risk of a breakdown of essential services and hundreds of millions of dollars a day in costs if international oil supplies were cut
OPINION: Just one cent a litre. That’s the cost of insuring against the breakdown of essential services should oil imports be cut for an extended period.
Documents released by Refining NZ indicate that a levy on all fuels at about this rate would be enough to avert the country’s only oil refinery closing down.
In absence of such an insurance payment, similar to that Australia is making to its refineries, the company is seeking shareholder approval on August 6 to not just cease operating the refining plant – but to scrap it.
New Zealand would then lose the ability to process its own crude oil and would become entirely dependent on international deliveries of refined oil products.
It would expose the country to a new type of risk with huge costs at a time when geopolitical tensions are increasing.
If international oil supplies were cut now, New Zealand produces enough crude oil to meet around 20 percent of its demand and the local refinery could keep essential services in operation indefinitely. Without it, the transport network would break down once diesel stocks ran out.
This position is compounded by the low proportion of its oil stocks New Zealand holds onshore. While it has an international obligation to maintain 90 days’ worth of fuel supplies, the bulk of this is held under contract overseas. After a refinery closedown, there is projected to be only a 10 to 20 day reserve in the country at any one time.
So if international deliveries ceased, the nation would have just a few weeks at normal consumption rates to avert a level of service deprivation that most New Zealanders would find unimaginable.
Diesel can run a generator when power lines are down, but the nation’s electric vehicles will not put a scratch on unmet transport needs once diesel stocks are gone. A particular concern is the supply chains that keep food on supermarkets shelves as these are critically dependent on diesel trucking.
At the point food distribution is seriously threatened, the economic costs are already off the charts and the key issues become basic human welfare and social order.
The risk situation is not just the classical one of an outbreak of hostilities that blocks key shipping lanes. It is the extreme vulnerability New Zealand would face should any foreign agent exercise strategic power in a bid to gain something New Zealand would not otherwise offer.
That agent need only frighten maritime insurers enough to deter oil tankers from travelling to New Zealand in order to have the nation over a barrel.
‘Waiting it out’ is not going to work against such a strategic threat if the country has only stocks. And while New Zealand has coastal tankers of its own, a refinery closedown is expected to involve getting rid of these ships as well.
The extent to which New Zealand could or should rely on other countries to rescue it becomes a critical question.
The refining company last year asked the Government to consider the “strategic importance” of its Marsden Point operation remaining open.
It stated: “Being able to process crudes in New Zealand enables a great diversity of supply and therefore security of our transport fuels. This could be important when considering geo-political issues that may impact the supply of finished products to New Zealand”.
Yet when the Government sought specialist advice in response, this modelled all international disruption events as resulting in simply price effects. No scenarios consider the effects of a physical shortage of oil products stemming from imports being unable to match demand.
The most severe scenario is framed as a 10 percent cut in global crude oil output for 6 months – resulting in a significant rise in local fuel prices but no actual shortage.
In absence of the refinery getting financial recognition for the additional security of supply it offers, the company proposes converting Marsden Point into a hub for refined products received from overseas.
Making a top-up payment to the refinery to instead keep it going can be thought of as an insurance premium against the catastrophic risk of being unable to maintain essential services. Documents released by the company in advance of the shareholder meeting make clear that the refinery is not losing money – it is just not making much of a return, due to stiff competition from overseas.
Our analysis of these documents strongly suggests that a levy on all fuel sales equal to about one cent a litre would allow it to make an acceptable return and keep the refinery going – assuming the company is still willing to. The funds could be collected by increasing a security of supply levy that is already in place to cover the cost of fuel stocks.
When the Australian Government recently confronted this issue after a wave of refinery closures, it committed to a “sovereign refining capability” and agreed to pay a minimum of one cent a litre on the output of all remaining domestic refineries.
This is very similar to what New Zealand would need to pay – and provides a first check that such an insurance premium would be worthwhile.
A further comparison comes from the country’s experience during level 4 lockdown. The Treasury estimates that this cost New Zealand $230 million a day and took out 29 percent of GDP on those days.
So would the ability to deliver 20 percent of normal fuel demand through the refinery sustain at least an additional 29 percent of GDP, relative to the economy operating with no fuel?
The Government’s consultants did not look into such questions but if fuel was rationed to target maximum benefits, then it is quite possible the economic gain of having the refinery at that time would be at least $230m a day. And that is before counting any of the costs to human welfare and social order that would otherwise result if the pumps ran dry.
Whether it is economic to pay the insurance depends on the cost per day assumed, how long it would last, and the probability assumed for such an event.
There is a wide range of plausible cost scenarios that would justify the payment. For example: if the daily net benefit of the refinery was $400m, and it was thought to be a one in fifty year event, then the insurance would be worthwhile if the event lasted just 12 days – in addition to the time stocks would provide for.
An insurance arrangement would not need to be long term. It could initially be for a few years as part of a commitment to working through a much needed plan for the transition from oil fuels to sustainable transport options.
The refining company is on board with this transition and last April sought a partnership with the Government to devise such a plan.
It also noted that a refinery offers infrastructure to enable a lower cost transition to green hydrogen and bio jet fuel than if these were greenfield projects.
While paying about one cent a litre to keep the refinery open can be justified on the basis of improved security of supply alone, the net cost to the nation would be less as a result of additional benefits, including:
- $6.5 to $12m a year would not need to be spent on increasing fuel reserves;
- A skilled engineering workforce of around 120 would not be lost overseas;
- An anchor for the regional economy that accounts for 7 percent of Northland’s GDP and employs around 800 people directly and indirectly would be retained.
In addition to such offsetting economic benefits is the value to the nation of being more confident that its sovereignty can be protected.
New Zealand undertakes defence on the cheap and holds fuel stocks on the cheap by storing the bulk of it offshore.
Now is not the time to go cheap on the next layer of protection – a refinery that is core infrastructure and part of a secure transition to sustainable transport.
The pandemic has exposed the fragility of so many supply chains and how radically things can change when the unexpected happens.
