New Zealand’s only oil refinery closed in April, moving the country to a refined oil import-only model. Simon Day finds out what this means for our fuel supply.
This content was created in paid partnership with Z.
Although carless days are now a distant and peculiar memory, that tension captured by the 1979 crisis still exists. Oil is New Zealand’s largest and most important fuel source. And our fuel security remains tied to a global supply – we import almost 100% of our oil as refined fuel – that is highly vulnerable to geopolitical events.
Like it or not, New Zealand’s economy and social fabric is deeply dependent on oil. Even as we transition to more sustainable energy sources we still heavily rely on petrol and diesel to run our cars, our public transport, our construction industry, our farms, our supply chains and our planes. It accounts for nearly 50% of our consumer energy demand. Each year we use around 46 million barrels of crude oil – more than 1,600 litres per person. That’s 23 million litres a day.
But as we’ve seen this year, that supply comes from a volatile global market. When Russia invaded Ukraine in February 2022, petrol prices hit record highs, surging to over $3 per litre. While New Zealand traditionally only got a tiny portion of its oil from Russia, and no longer gets any oil or oil products directly from the world’s second-largest oil exporter, the invasion and sanctions against Russia caused global crude oil prices to skyrocket.
“Russia’s incursion in Ukraine means that there’s suddenly a huge amount of global supply that gets impacted,” says Julian Hughes, GM of supply at Z Energy. “History shows us that the industry is resilient to shocks of this nature, but when you take that much out of global supply, it does have a big impact.”
The government defines fuel supply resilience as “the ability to withstand a fuel supply disruption, limit its consequences, and recover quickly.” So how much fuel does New Zealand need to have on hand to ensure it can withstand global supply chain disruptions? Where does New Zealand’s fuel come from? And how do we build that resilience at the same time as we transition away from fossil fuels?
Marsden Point supplied 70% of the country’s refined oil, with the majority of the crude sourced from the Middle East. The remaining 30% of the country’s fuel supply was imported as refined fuel product directly from refineries in Singapore, Australia, South Korea and the Americas.
On April 1 this year the Marsden Point refinery stopped processing crude oil and became an import-only terminal serving Northland, Auckland and Waikato. This closure followed two years of industry and government consultation, as well as a strategic review into the refinery’s viability in the face of historically low refining margins, rising costs, increased competition and the impact of Covid-19 which reduced demand for fuel. CEO of Z Energy Mike Bennetts says it was simply impractical for the refinery to stay open given its scale compared to other refineries in the region.
“The refinery was increasingly being outcompeted by global refineries that are more efficient and in some cases five to 15 times its size,” he says.
New Zealand has always relied on oil imports for its domestic fuel supply. The closure of the refinery moves New Zealand to a nearly 100% refined fuel import model. While we extract from several fields in the Taranaki region, this high quality product fetches premium prices on the international market and the Marsden Point refinery was never built to be able to process New Zealand’s crude, so it is almost entirely exported. Each year we produce between 10 and 20 million barrels of sweet and light crude oil that is sent mostly to Australia and Singapore.
“New Zealand has always had an import model – we’ve just moved from importing oil to refined fuel. The refining of oil in New Zealand was always going to stop, it was just a question of when and Covid-19 sped up that investigation,” says Hughes.
“Under a refined model we actually have more flexibility and security of supply, because there are more ships coming to the country at any one time. While there is always a risk of a potential disruption to one of those vessels – say for example with a regional conflict in a certain part of Asia where we’re buying product from – our flexibility means we could buy that product from any part of the globe,” Hughes says.
New Zealand will now source refined fuel from a greater number of sources, from locations with less journey times. And that means less chance of disruption, says Bennetts.
“When we had to refine crude oil at Marsden Point, the types of crude we were buying meant it would take twice as long to get here. That meant if something went wrong during that journey, like a geopolitical event, we were more likely to be disrupted,” he says.
“Our supply points have become much more diversified and the journey times have become less, so the risk of disruption is less. We have more eggs in more baskets and those baskets get delivered much quicker,” he says.
The 100% refined fuel import model is also regarded as more resilient to domestic disruption (like a digger hitting a pipeline) because there is no longer a single site handling 70% of the country’s refining.
But how much fuel do we need for our supply to be considered secure? New Zealand is a member of the International Energy Agency (IEA) International Energy Programme, and each member “has an obligation to hold emergency oil stocks equivalent to at least 90 days of net oil imports”. During severe disruptions to oil supply IEA members can release stocks to the market to preserve access to oil. In April the government released 483,000 barrels from its emergency oil stocks in Spain and the UK as part of action by International Energy Agency (IEA) member countries in response to the Ukraine crisis’s impact on global energy security.
For New Zealand, this 90-day figure also includes products at sea, being loaded on to ships, or tickets that effectively guarantee purchase rights from suppliers. Z, the country’s largest holder of oil, has about 400 million litres of stock held in tanks across New Zealand – the equivalent of 17 days cover. However, under the new important-only model Z will always have three ships within seven days of a New Zealand port carrying another 144 million litres. There is an estimated 440 million litres of additional fuel within three weeks of sailing.
The government makes up the gap between the stock levels held on shore by the commercial fuel suppliers and the 90-day requirement by the IEA by purchasing “tickets” of reserve oil stock, which guarantee the government the right to purchase fuel at market prices in the event of an IEA declared oil supply emergency. This stock is held offshore.
“The idea is to ensure that you have enough stock so that if you have interruptions to your supply chain, you can provide a level of contingency or insurance, so that the economy that relies on these products doesn’t stop or get impacted in a negative way,” says Hughes.
The MBIE paper has three proposals for creating this baseline onshore stock: the government having responsibility for the stock or equivalent tickets; fuel wholesale suppliers investing in a minimum onshore stockholding of fuel; or the creation of a stockholding agency to make sure the wholesalers and government meet the minimum on shore supply requirements.
Under the proposal for a minimum onshore stockholding for fuel wholesalers – the government’s preference – fuel that is in transit to Aotearoa or held in other countries will not be part of the stockholding. This would require fuel companies investing large amounts of capital to meet the stockholding requirements. Z estimates that increasing onshore stock to the proposed levels would come at a cost of $100m-$300m to them alone and it is likely that those costs will be passed on to the consumer.
“That’s generally how business works, if you need to invest capital then you need to recoup that investment. At a time where fuel prices are already high, investing in additional fossil fuel infrastructure would be a pivot from our strategic approach to investing in renewable alternatives to eventually move out of the petrol business. It would also put even more pressure on the price of fuel which is an important factor that needs to be seriously considered,” says Hughes.
That cost will likely be carried by communities who will rely on fossil fuels for mobility for longer and can’t afford to move to alternative forms of transportation, according to Z. Making an investment of this scale in long-life fossil fuel assets designed to last for 60 years with a predicted decline in fuel demand by 2026 when the focus is on trying to decarbonise the economy is shortsighted, says Bennetts.
“We are committed to making significant capital investments towards the transition to a low carbon future – bringing biofuels to market and EV charging infrastructure. We do not believe that the building of significant additional long-life fossil fuel assets to meet the stockholding proposals for minimum resilience benefits align to our shared goals of a decarbonising economy,” he says.
However, in light of the closure of the Marsden Point refinery and the war in Ukraine, experts have advocated for even greater domestic fuel storage than the government has suggested. Special counsel for national law firm Buddle Findlay, Bassam Maghzal, has called for New Zealand’s minimum stockholding levels to not just be increased to 28 and 24 days cover, but be doubled to 40 days of cover. The price of creating that security is insignificant compared to the potential cost of a significant fuel shortage crisis, he says.
“If the government settled on just doubling the current minimum stockholding level (40 days of cover for transport fuels in total – twice what the wholesale suppliers currently hold), the additional onshore fuel storage costs would be about NZ$80m a year (versus NZ$22m a year for the stockholding level the Government is proposing),” he wrote in the New Zealand Herald.
“To put this difference in cost in context, a major disruption resulting in some fuel shortage for up to six weeks (before supply can be restored by new imports) could cost more than $2 billion or 0.8 per cent of GDP.”
Z argues the insurance policy of the onshore stockholding proposal represents a disproportionate cost to the actual risk of supply chain disruption. Fuel Wholesalers such as Z Energy say that fuel supply is the very essence of their expertise and that without secure fuel supply, they do not have a business.
The industry is experienced in managing disruptions to supply chains and complicated global crises, and Bennetts says that the current geopolitical climate is not dissimilar to any other major event they have seen before. Even with the war in Ukraine now the largest European conflict since World War II, while prices have continued to increase, the supply chain has stayed strong.
“If you look back over time, and I mean five or six decades, there’s never been a significant material or physical interruption to supply of fuel, be it jet, diesel, petrol, or crude to New Zealand,” Bennetts says.
The government is expected to make final decisions on Onshore Stockholding policy shortly.