UPDATED: Extra oil imports are organised to avoid disruption from NZ Refining strike action

UPDATED 3 PM: Oil companies are forging ahead with a contingency plan to import more fuels into the country to minimise disruption if planned industrial action at New Zealand Refining [NZX: NZR] goes ahead next month.

BP external relations manager Jonathan Mills, speaking on behalf of the industry, said they were currently assessing how much fuel across all grades is being held in storage at the refinery, on ships and in terminals nationwide before deciding how much needs to be imported to meet demand over the threatened 11-day shutdown of the refinery.

Two unions representing 160 of its workers, or about half its workforce, have served notice of a two-day strike on Oct. 7 and 8, a move that would require the company to shut down processing units at the Marsden Point Refinery, and given restart times, could result in 11 days of disruption.

Mills said the most urgent priority was securing further supplies of jet fuel as the refinery supplies 100 percent of the local market. Auckland International Airport is understood to be likely to run short of aviation fuel within three days.

When asked if it was concerned about the proposed industrial action, Air New Zealand said, in a written response, that it didn't anticipate any impact on its fuel supply. It can typically take up to a month to arrange a shipment of imported oil from scratch but BP's Mills said shipments on the water now could be diverted if necessary.

The NZ Refining Company said there had not been a complete shutdown of the refinery since the 1980s so there is some uncertainty over the time it would take to shut down and restart. It would continue to operate the refinery to Auckland pipeline. The four oil companies that are both customers and shareholders in the refinery - Mobil Oil New Zealand, Z Energy, BP New Zealand Holdings and Chevron New Zealand - already import some refined oil with the refinery supplying around half of the petrol market and nearly 80 percent of the diesel.

It's hoped the full withdrawal of labour - the first since 1984 - can be averted with further mediated talks set down for tomorrow in Ruakaka between the company and First Union and the New Zealand Engineering, Printing and Manufacturing Union. The unions gave the required 14 days notice of strike action required under the Essential Services Act.

The company's half-year result showed a net loss of $6.9 million for the six months ending June, compared to a $5.2 million profit at the same time a year ago, due to a global downturn in refining margins. It means that the fee floor included in the processing fee arrangements with the four oil companies has come into play for the first time since 1999. They will be required to pay $36 million in the first six months, although this payment could be offset by the processing fee revenue earned over the rest of the year if that exceeds the annual fee floor. 

The controversial processing fee paid to the oil companies which sees them get a rebate of 30 percent of the gross refining margin, has come under attack by minority shareholders who have faced significant falls in the share price, now trading at $1.61.

Earlier this month NZ Refining released an independent review by Hale and Twomey of the processing arrangements, the third such independent review in the past five years. It found the current processing free structure and split of gross refining margin provided an appropriate balance between NZ Refining's return and customer competitiveness. Four alternative structures it considered were unlikely to provide the same balance and alignment and wouldn't prove sustainable over the typical business cycle for refineries.

The report also found NZ Refining had provided shareholders with an appropriate return - a margin above the weighted average cost of capital (WACC) over a ten-year period, though it had done so only once in the past five years.

(BusinessDesk)

EARLIER 8 AM: Tight fuel supplies expected due to NZ refinery industrial action

Contingency plans are being put in place to prevent any potential shortfall in fuel supplies from pending industrial action next month at New Zealand Refining [NZX: NZR], the nation's only oil refinery.

Two unions representing 160 of its workers, or about half its workforce, have served notice of a two-day strike on Oct. 7 and 8, a move that could result in about $9 million of lost processing fees. The strike would require the company to shut down processing units at the Marsden Point Refinery, and given restart times, could result in 11 days of disruption. The disruption could even taken longer than estimated as the restart is the riskiest part of the process to do safely.

Industry players are concerned it could result in a very tight supply of fuel with airlines likely to be worst hit, but it could also impact consumers filling up at the petrol pumps. It's understood Auckland International Airport would start to run short of aviation fuel within three days.

The refinery produces nearly all the country's jet fuel and an extended outage earlier this year led to airlines being effectively rationed on filling up with jet fuel at Auckland. Flights were coming in with more jet fuel on board than they would normally require to avoid running short here during the outage.

BP external relations manager Jonathan Mills said there were a number of uncertainties over the impact of the proposed shutdown and a contingency plan was now being worked on to fill in any gaps. He expected to be able to give a clearer update on the situation tomorrow.

Mills said a potential option was bringing in imported refined fuel by ship but it can take up to a month to organise that, depending on availability. It may also be necessary to defer imports of crude oil due to be processed at the refinery. The NZ Refining Company said it would continue to operate the refinery to Auckland pipeline.

Around half of the refined petrol sold in New Zealand comes from Marsden Point but it accounts for around 80 percent of diesel. NZ Refining said a contingency plan was being worked through with its customers' supply teams and the Minister of Energy and Ministry of Business, Innovation and Employment had been briefed on the contingency planning which included a number of its number of trained staff ready to step in and assist with running the operation during the period of proposed action.

Road Transport Association chief executive Dennis Robertson said any disruption to road transport operators will depend on how much stock is being held at the various fuel storage depots around the country and holding more in storage had been discussed after fuel supplies ran short in the wake of the Christchurch earthquake.

First Union and the New Zealand Engineering, Printing and Manufacturing Union gave notice of strike action covering refinery operators, emergency servicemen, mechanical, instrument and maintenance workers, which would amount to a complete withdrawal of labour over those two days the Whangarei-based company said. NZ Refining has been in talks with the unions over their collective employment contracts since May and will continue to try to reach agreement, it said. The refinery is deemed to be an essential service under the Employment Relations Act. The union notice had given the refinery a very short window to work in and that was something it was looking at, refinery chief executive Sjoerd Post said.

First Union organiser Jarod Abbott said while the unions had given notice of industrial action before, there hadn't been a full stoppage since the mid 1980s.

"You'd have to question the management's motives if we did end up in industrial dispute," he said. While the unions had accepted there would be a nil wage increase this year, they wanted to see workers required to work only 12-hour shifts for a maximum of seven consecutive days rather than for 14 days as NZ Refining wanted. Members were also concerned by the company's decision to contract out previously secure jobs, he said.

Some IT jobs had been contracted out and the company had indicated it was looking at others with maintenance workers most likely to be at risk, Abbott said.

The refinery has been losing money for around 18 months, largely due to a major global downturn in refining margins. NZ Refining's half-year result for the six months ending 30 June showed a net loss of $6.9 million, a turnaround from the $5.2 million profit it made at the same time a year ago. Its big decline in operating revenue was mainly caused by a 32 drop in processing fees compared to the previous corresponding period.

Chairman David Jackson said while the result was expected due to weakening refinery margins and a strong Kiwi dollar, it also reflected the robustness of the processing arrangements the company has with its oil company customers. A fee floor comes into effect if the total processing fee for a calendar year is below $126 million, and they then have to shore up the difference. The refinery operator's biggest shareholders are the energy companies that use its services - Mobil Oil New Zealand, Z Energy, BP New Zealand Holdings and Chevron New Zealand.

Despite the current problems, the plant is undergoing a $365 million upgrade.

NZ Refining shares fell 1.2 percent to $1.61 today and have tumbled about 21 percent this year, while the NZX 50 Index gained about 11 percent.

(BusinessDesk)