The company that owns New Zealand's only oil refinery, at Marsden Point in Northland, is considering getting out of fuel refining altogether and operating solely as a fuel import business.
At the moment Marsden Point produces about 70% of the fuel used for transport in this country.
The refinery's owner Refining NZ said in a release to the NZX on Wednesday that it was starting a "Strategic Review" to determine the optimal business model and capital structure for its assets that will maximise “through the cycle” returns to shareholders, and deliver secure, competitive fuel supply to New Zealand. External advisers have been appointed to help with the review, though the company did not state who they were in the release.
As at the end of last year Refining NZ employed over 400 staff and about 250 contractors, but didn't break down where those staff were specifically employed.
The company says it has invested to expand processing capacity, improve product quality, reduce emissions and maintain facilities, "but these investments have not delivered an acceptable return over the last 10 years".
It says "significant new supply" has come online in China, Korea, Singapore and India, "and these larger integrated refining facilities in low cost economies are producing large volumes of low cost product putting significant downward pressure on regional margins".
Low margins have been compounded by significant increases in the market price of electricity in New Zealand, meaning that at the fee floor in the processing agreements Refining NZ does not cover its cash costs, the company says.
Four options outlined by the company include: Continuing the current "refinery model", altering this "model" through adjustments to processing and distribution agreements, separating the refining and infrastructure assets, or converting to an import terminal.
The company says some of its assets and capabilities "could facilitate New Zealand’s transition to a lower carbon economy, including hydrogen and biofuels".
While it doesn't say so implicitly the statement suggests the company is looking at generating capital that might be returned to shareholders at some point. Its three biggest shareholders are Mobil, Z and BP. The share price has languished, falling by over 50% in the past 12 months, but it did rise 5c to 91c after the review announcement on Wednesday.
Refining NZ says that while Covid-19 is affecting its operations in the short term, it actually believes that "the market conditions that have necessitated the review are structural".
Chairman, Simon Allen said: "Refining NZ has quickly responded to the current COVID-19 situation but is challenged by structural conditions resulting in low refining margins globally and oversupply in the Asia region. It is appropriate for us to review the fundamentals of the business and the Company’s future within the New Zealand fuel supply chain."
The company has confirmed it will be talking to a number of parties - including the Government. It is expected to provide an update on the review in June.
In terms of the review, the company says it will: "Look at opportunities to improve the competitiveness of refining operations and options to separate the refining and infrastructure assets or convert to a fuel import business model.
"The review will also look at the capital structure required for the preferred option to maximise value for shareholders."
In the year to December 2019 Refining NZ made a net profit after tax of just $4.2 million, down from $29.6 million the year before. This was achieved with assets of nearly $1.4 billion and shareholders' funds of $750 million.