Z Energy and Norske Skog, which operates a paper mill at Kawerau, are seeking majority government funding for a proposed $50 million demonstration plant to turn wood waste into transport fuels.
Z chief executive Mike Bennetts announced the plan at a conference in Wellington, at the same time as revealing the 100 percent New Zealand-owned fuel retailer is close to committing around $15 million on a project to blend bio-diesel made from tallow into its conventionally sourced diesel supplies.
Mr Bennetts told BusinessDesk that Z and Norske, which halved newsprint production at its Kawerau plant last year, will seek government support under the four-year-old Primary Growth Partnership scheme, which sets aside $70 million a year for partnerships with industry to generate economic growth from the country's primary sector.
More than $650 million has been jointly invested in such projects since the PGP fund was established in 2009.
Mr Bennetts says the two firms' "stump-to-pump" strategy aimed to make use of the fact that sawdust and forest residues could generate "about 10 percent of our crude oil requirements", although that would require investment of perhaps $1 billion over several years for 10 such industrial plants.
If the proposed demonstration model proved the potential for a commercially viable industry, that would add value to 1.6 million tonnes of underused wood residues annually.
"The benefit may be as high as $460 million per annum by 2030," said Mr Bennetts in his speech, and could help New Zealand's chronic balance of payments gap while creating jobs.
Norwegian industrial giant Norske Skog is seeking to diversify out of traditional paper products as the digital revolution eats into its historic sources of revenue.
A "green chemicals" industry opportunity could also be created.
The project would seek to take wood waste from the so-called "wall of wood" that will start coming to market from about 2019 onwards, as forests planted in the 1990s come to harvest.
Mr Bennetts told BusinessDesk that Z has, for now, abandoned plans to add ethanol to its 91-octane petrol because of signals from the government that a big shift towards ethanol blends could see an end to the current subsidised rate of excise on ethanol.
The subsidy allows competitor Gull Petroleum to retail petrol more cheaply than other fuel providers, although the ethanol blend is less powerful and gives motorists lower mileages per litre.
In a letter from the then Energy Minister Phil Heatley on December 5, Z was warned that "any significant increase in the consumption of ethanol, with the commensurate reduction in revenue to the Crown, would likely result in the existing position being revisited".
Z says this unfairly entrenches Gull's competitive advantage, but that it may look at the option again if customers continue to choose the lower-priced ethanol blend because of its attractive pricing.
The bio-diesel project is in the final stages of evaluation, and would go ahead despite the government axing a subsidy.
It would produce 20 million litres annually, would require additional storage tanks and mixing equipment, and was likely to be green-lit as long as the total cost was in the region of $15 million to $16 million, using inedible animal fats that would otherwise be exported for use in soap and candles.
Even then, Mr Bennetts warns that financial modelling suggested the project had a 42 percent chance of losing money, Z would still consider the opportunity for brand positioning, first-mover advantage, and because of the potential for change in the regulatory environment.
"Z is sending a clear message ... we are open for business on alternative fuels, even when that threatens what we already sell," says Mr Bennetts, who also suggested no country outside Brazil has created a successful bio-fuels business without government incentives or mandates.
Because of its local ownership, he says Z had a particular responsibility to pursue initiatives that reduces reliance on fossil fuels and acknowledges the growing contribution of carbon emitting transport fuels to global climate change.