Today's Marsden Point refinery is a legacy of the 'Think Big' days of the 1980s. Photo / Refining NZ
COMMENT
My first visit to the Marsden Point oil refinery was as a cub reporter in 1983.
The legendary investigative journalist Warren Berryman had "hired" me off the books at NBR and had no appetite for being shepherded around one of the largest of the Think Big projects by some PR flunky.
But he figured a night in a Whangārei hotel might impress a callow youth who was renting a damp basement flat off Grafton Rd at the time.
The refinery project was an expansion at the taxpayer's expense, justified by the second of two oil price shocks in the 1970s that set off a drive by the Muldoon Government for greater national energy self-sufficiency and a jobs boom to secure at least one re-election.
In the end, it cost $1.84 billion to complete — two years behind schedule, in 1986 — a massive cost in today's dollars, let alone nearly 40 years ago. Before the decade was out, the refinery had been sold to its main customers, the local arms of the five oil companies operating in New Zealand at the time.
Today, three such shareholders remain: BP, Mobil and Z Energy, which inherited its shares from Shell when it exited petrol retailing a decade ago.
Part of the Think Big era expansion was also to build a fuel pipeline from Whangārei to storage facilities at Wiri, in Auckland, where the city and international airport would get their regular supplies. More on that later.
On the day of my visit to what was, at the time, a sea of mud and reinforcing steel, the news angle was meant to be the unloading of the massive hydro-cracker unit that was at the core of the expansion. The choice of a hydro-cracker over a catalytic converter was one of the key decisions in the upgrade.
However, the real news was that the massive site, which at its peak hired 5000 workers, was at that time deep into the kind of prolonged strike action that New Zealanders have almost forgotten.
The alarming phrase "super-critical" was being used to describe the strike's impact on progress, tickling my embryonic sense of what might make a news story.
However, your clueless correspondent wasn't really up on the details and when ushered into a room with the project team leader, simply asked: "How are you going to solve this?" His contemptuous answer remains with me to this day.
"Is that some kind of funny question?" he sneered, clearly figuring that this was going to be an even less productive five minutes than he'd already assumed.
Fast forward to this week and a curiously bland announcement from Refining NZ, the NZX-listed company that operates the refinery today.
The company had already said earlier in the year that it was undertaking a "strategic review" — usually corporate code for maybe closing the whole thing down.
Driving the need for the review, despite the refinery recently completing a $365 million major refurbishment, is the fact that new, lower-cost refineries have been opening up in Asia, depressing the margins the refinery depends on to be profitable.
Covid-19 has exacerbated that trend by slashing global transport fuel demand for an unknown, but probably lengthy period of time. As a result, the refinery's oil company customers are basically paying the refinery to operate for the foreseeable future instead of profiting from its activities.
This appears to be more than just the usual cyclical swings and roundabouts that have made the refinery very profitable some years and not in others. It is a systemic change in market dynamics.
So Thursday's announcement — a masterclass in understatement — announced that phase one of the review was complete and the refinery would "now develop plans to simplify refinery operations and structurally reduce operating costs in order to improve the near-term viability of its current business model".
"The refinery will focus on fuel supply into the Auckland and Northland markets where it has a competitive advantage due to its Marsden Point infrastructure and Refinery to Auckland Pipeline.
"In parallel the company will continue to evaluate a possible future staged transition to an import terminal, including exploration of a commercial framework with customers, overseen by the independent directors." In other words, the refinery is on borrowed time.
While the directors representing the 43 per cent of the refinery owned by the oil companies won't lead the project, 15.4 per cent shareholder Z Energy's reaction suggests this direction of travel will meet no resistance.
In essence, it would mean the refinery's most significant strategic asset in the future would be the pipe to Wiri (known as the RAP). The pipe certainly matters. When it was ruptured by a digger in 2017, cutting jet fuel supplies to the airport and reducing international air services to the country at huge expense, the Government considered building a replica to avoid that ever happening again.
But it is hardly the same business as the major industrial process that is oil refining.
There would likely be more investment in petrol and diesel storage facilities of the kind that is about to be opened in Timaru, and there would be more intense competition from transport fuels shipped into the Port of Tauranga by the likes of cut-price petrol retailer Gull.
Refining NZ's competitive advantage would be that it can get a litre of fuel down the RAP at a third of the cost that it takes to truck it from Tauranga.
The national implications of the refinery's closures, however, are more significant and there is so far no sign that the Government is focused on the extent to which this:
• Reduces any national strategic interest New Zealand might have in being able to refine its own transport fuels — a non-trivial issue when Australia's four remaining refineries are in similar financial straits. If there were no refineries in Australasia, would there be secure transport fuel supplies in the event of a South China Sea or Indo-Pacific war?
• The potential for major job losses in Whangārei. Around 1000 people work at the refinery, many of them in high-skilled, high wage jobs. The politician who might worry about this first is Shane Jones, who is trying to win the Northland seat at the September election
• The loss of technology transfer and capability that the closure of another major industrial process implies, including the closure of the country's largest existing producer of hydrogen
• And perhaps most significantly, the fact that the refinery is just one of at least five of the country's largest energy users to face potential closure. The other four are the Tiwai Point aluminium smelter, the Methanex methanol plants in Taranaki, the Glenbrook steel mill, and the Huntly power station — not to mention question marks about energy-intensive pulp and paper processing.
On the one hand, losing such plant would assist the country's decarbonisation. If they don't run, they won't produce carbon emissions, but nor will they provide jobs or income for thousands of people.
And the cost of the national electricity and gas networks they use to access their energy will be shared among all other users, even if their absence cuts the cost of the energy itself.
These are not trivial outcomes.
But for now, they are gaining hardly any attention as the country focuses almost exclusively on the immediate challenges of Covid-19.
Achieving net zero by 2050 will require increased spending in the electricity sector.