Refining NZ kicked off an investor roadshow this week to try and muster shareholder support for its planned $365m plant upgrade, which comes at a time when many refineries in the developed world are shutting down.
Across the Tasman, Shell has decided to stop refining operations at its 79,000 barrel-per-day Clyde Refinery in Sydney because the refinery was no longer competitive against the newer Asian "mega" refineries.
In 2009, Exxon Mobil said it had opted to demolish its Port Stanvac, South Australia, refinery, which had been in mothballs since 2003, and a cloud hangs over the future Caltex Australia's two refineries, as they too suffer from competitive pressure from the more up-to-date Asian refiners.
In United States, the 126-year-old refining business, Sunoco, has shut up shop, and refining in Europe is also going through a downturn.
Refining NZ's Marsden Point plant has gone through several upgrades since it was built in 1964 - the biggest of which was the $1.8 billion expansion and construction of the 170 km pipeline from the refinery to Wiri.
In February 2012, a majority of the company's directors resolved to support an investment of $365 million in a Continuous Catalyst Regeneration Platformer (CCR)). The size of the investment means the CCR Project requires shareholder approval and an ordinary resolution will be put to the annual meeting on April 27. Dividends will reduce while the project is under way.
Refining NZ wants to expand its petrol refining capacity to meet 65 per cent of New Zealand's needs from the current 55 per cent. If approved, the CCR project should be finished by 2016, replacing the refinery's 1960s processing unit which would increase capacity by 3 million barrels of crude a year, or 8 per cent, improve energy efficiency and reduce fuel losses by 15 per cent.
In 2010 a consortium, including New Zealand Superannuation and investment company Infratil acquired Shell's downstream assets - in petrol stations and its 17 per cent shareholding in the refinery.
Today the company is 23.6 per cent owned by BP, 19.2 per cent by Mobil, 14 per cent by Z Energy and 12.7 per cent owned by Chevron. Individual shareholders account for around 17 per cent of the company.
The refining industry worldwide has faced a number of issues over the last few years.
Rising petrol prices rise has curbed demand in the developed world since the global financial crisis and there has been additional capacity coming on stream in the developing world, particularly in Asia.
Increasingly, the major oil companies have turned their backs on the so called "downstream" part the energy business - refineries and petrol stations - to focus on the upstream side - exploration and production of oil and gas.
But Refining NZ's chief executive Ken Rivers said he had confidence in the CCR project, despite what he agreed was a dire environment for refining.
Rivers said the Marsden Point refinery had a good track record for competitiveness. In 2009, when refining margins crashed from around from US$12 a barrel to just US$1 within the space of just 10 months, he said the refinery was running "flat tack" right the way through.
"If you look at this project and what it does, we can demonstrate that whilst Asia-Pacific will have a lot of petrol around, we can still make it here cheaper, more reliably, and with less of an environmental impact than you can bring it here in boats from overseas," told APNZ.
He said if the CCR project doesn't go ahead, then about $105 million will need to be spent on the existing 1960s platformer to extend its operational life beyond 2015.
If approved, the project will be debt-funded through a new $300 million bank facility currently being negotiated with several banks and from Refining NZ's operating cash flows. Refining NZ's net debt is expected to increase to a peak level of approximately $240 million in 2015.
The company expects to have the bank debt cleared by 2020.
The New Zealand Shareholders Association chairman John Hawkins said it was in favour of the proposal, but he noted the proposal does not have the unanimous support of directors. Hawkins said he thought retail shareholders would accept some short term reduction in dividend returns in order to gain significant long term benefits.
- APNZBy Jamie Gray Email Jamie