Energy security - to borrow a definition from Australia’s 2019 Liquid Fuel Security Review - comes down to ensuring reliability of supply, and that it is resilient enough to withstand the most likely disruptions. With the global economy facing upheaval after two years of a global pandemic and now, high inflation, the Russia-Ukraine conflict underscores the need for sovereign governments to protect and manage their strategic assets; in this case, energy supply and the risks associated with them. 
For that reason, Marsden Point’s decision to become an ‘import only’ terminal calls into question New Zealand’s approach to energy security. Considering the Government struck a deal with Rio Tinto to keep the Tiwai Point Aluminum Smelter open, it puts the spotlight on the government’s decision not to underwrite the refinery. That light shines even brighter when you compare New Zealand’s approach to Australia’s, which is subsidising its two oil refineries on both strategic and national security grounds.
For that reason, Marsden Point’s decision to become an ‘import only’ terminal calls into question New Zealand’s approach to energy security. Considering the Government struck a deal with Rio Tinto to keep the Tiwai Point Aluminum Smelter open, it puts the spotlight on the government’s decision not to underwrite the refinery. That light shines even brighter when you compare New Zealand’s approach to Australia’s, which is subsidising its two oil refineries on both strategic and national security grounds.
Australia, like New Zealand, faced similar problems with its refineries – challenges of scale and distance, and therefore cost. The growth of mega-refineries in Asia fundamentally changed the market landscape. With much larger economies of scale and lower operating costs, Australia’s operators were simply unable to compete. While these competitive pressures were well-known, the closure of BP’s Kwinana refinery in January 2021, which wiped out more than one-fifth of Australia’s fuel-making capabilities, forced the Government’s hand.
In the event of a total fuel supply stoppage, it is estimated Australia’s GDP would fall by almost 32% in six months, the equivalent of a reduction of around $225 billion. Meanwhile, the cost to New Zealand over the same period would be $2 billion or 0.8% of GDP (and these are 2018 figures as well).
Canberra announced in September last year that it would subsidise the nation’s final two oil refineries. The decision to do so – which received cross party support – was described by Australian Prime Minister Scott Morrison as “securing jobs, giving certainty to key industries, and bolstering the nation’s national security.” In doing so, Australia’s policymakers acknowledged that liquid fuels still make up 52 per cent of Australia’s final energy consumption; that diesel demand – in both mining and agriculture – was growing faster than the economy; and that transport (i.e., freight, rail, and air transport etc.) comprised around 75 per cent of fuel demand.
At the same time, Canberra’s thinking was almost certainly influenced by the Indo-Pacific’s changing geopolitical landscape. Besides a growing reliance on Chinese fuel imports, there was the not so small problem of Beijing’s hefty tariffs on Australian goods as ‘’punishment’’ for calling for an independent investigation into the origins of Covid-19.
In the event of a total fuel supply stoppage, it is estimated Australia’s GDP would fall by almost 32% in six months, the equivalent of a reduction of around $225 billion. Meanwhile, the cost to New Zealand over the same period would be $2 billion or 0.8% of GDP (and these are 2018 figures as well).
Canberra announced in September last year that it would subsidise the nation’s final two oil refineries. The decision to do so – which received cross party support – was described by Australian Prime Minister Scott Morrison as “securing jobs, giving certainty to key industries, and bolstering the nation’s national security.” In doing so, Australia’s policymakers acknowledged that liquid fuels still make up 52 per cent of Australia’s final energy consumption; that diesel demand – in both mining and agriculture – was growing faster than the economy; and that transport (i.e., freight, rail, and air transport etc.) comprised around 75 per cent of fuel demand.
At the same time, Canberra’s thinking was almost certainly influenced by the Indo-Pacific’s changing geopolitical landscape. Besides a growing reliance on Chinese fuel imports, there was the not so small problem of Beijing’s hefty tariffs on Australian goods as ‘’punishment’’ for calling for an independent investigation into the origins of Covid-19.
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Despite Marsden Point supplying approximately 40% of New Zealand’s energy and 70% of transport fuel needs, the view was very different in Wellington. Advice put to the Minister of Energy and Resources in November last year described the import-only model as more flexible, allowing greater sourcing of the finished product from multiple countries. This was a point underscored by Z Energy (now Ampol), which estimated that it would see around 175 tankers arrive annually.
Ahead of Marsden Point’s closure, the Government tasked officials with investigating the options available for New Zealand to increase its minimum onshore fuel stockholding levels. As outlined in the MBIE’s January consultation document, the Minister’s preferred option is to mirror the levels proposed in Australia, namely 28 days of fuel cover for diesel, and 24 days for petrol and jet fuel. Another reason it found favour was due to the modest investment entailed (approximately $22 million a year).
Yet the Government’s preferred 28-day option is only a slight improvement on the status quo. It still leaves only eight days of onshore reserve cover for diesel, and 4 days of reserve cover for other transport fuels. Given New Zealand’s longer supply line, and the fact that our capacity to refine crude oil no longer exits, the minimum stockholding level should arguably be twice what wholesale suppliers currently hold.
Having weighed the arguments for and against, Ministers noted in December that the case for revisiting the costs and benefits of closing the refinery was not strong. Interestingly, the Government’s position was markedly different to that of MFAT’s, which viewed the supply the chain risks to be far greater. Not only did they request the Government consider delaying the refinery’s closure (until a such a time when New Zealand is less dependent on imported fossil fuels), they recommended 110 days of coverage, and even raised the option of the Government taking the lead in building additional storage.
The gap between Ministers and our foreign affairs boffins is puzzling. What explains MFAT’s risk-averse reasoning?
A lead role for Government in building additional fuel storage is by no means a new idea. In fact, it was a point noted by the Commerce Commission in its 2019 Fuel Market Study Report. In their judgment, several of New Zealand’s domestic ports lacked the capacity to be efficiently serviced by direct imports. Another observation was that longstanding infrastructure-sharing arrangements, whereby large fuel firms ‘share’ infrastructure such as fuel terminals, had disincentivized investment and not kept up with increases in demand.
Unlike New Zealand, Australian policymakers (of both stripes) appear willing to tie national security to that of their essential industries. Canberra has spoken frequently about the risks of relying solely on overseas supply, tying potential disruption to higher prices and job security. For the New Zealand government, the upcoming release of the first Emissions Reduction Plan complicates the picture. However strong the arguments, the Government could probably sense it would be criticized for extending the supply of the very fuel types it has committed to phasing out.
Even if the Government were to go beyond its preferred 28-day option, the current legislative environment is still not conducive to building generational infrastructure. For instance, take the RMA reforms and the likely inclusion of environmental limits, what does that mean for future development? As we have seen with Port of Tauranga – our largest port by cargo volume – the granting of consents is not a sure-fire thing.
Covid-19 has created the opportunity to address New Zealand’s reliance on ‘’just in time supply chains’’. It has also created a once-in-a-lifetime chance to reassess many of the assumptions that have underpinned previous policy decisions. It goes without saying that our key energy products have an oversized role to play. However, at the end of the day, a shift from ‘’just in time’’ to ‘’just in case’’ will only come about via regulatory change and significant public investment.
