NZ Refining pushing hard to shave $4m off likely annual loss

A combination of cost cutting, more efficient processing and one-off market factors should limit New Zealand Refining's [NZX: NZR] expected loss for the year to around $23 million, instead of the $27 million it would otherwise face, says managing director Sjoerd Post.

"The world is difficult and unkind but we are taking a phenomenal amount of different shaded actions to come out of this," said Post, who likened the approach to the refinery as that of a private equity investor, trying to "squeeze the last drop of blood from the business."

"There is a terrific response from 500 people to trying circumstances."

At a media briefing in Wellington after Thursday's announcement of a $7 million half-year loss, Post also outlined the refinery's desire to return to taking larger shipments of crude oil, which will involve additional dredging for Whangarei's harbour, and to increase it use of natural gas in the refining process.

That could yield an uplift of between 20 and 50 US cents per barrel on crude once refined, although whether that benefit would flow entirely to the refinery or to its customers remains unclear at this stage and consultations with local iwi is at a preliminary stage, with the refinery trying a new approach of seeking engagement prior to having a technical solution identified, although additional depth of between one and two metres is likely to be necessary.

While tankers capable of carrying one million tonnes of crude currently berth at the Marsden Point refinery, they come in under-laden to cope with current port depths.

On the natural gas front, Post said the refinery typically uses around 1.5 Petajoules of natural gas annually to provide heat to the refining process, has increased that to 2.5 PJ's and is in discussions with gas transmission provider Vector to take that to 4.5PJ's. The opportunity for increased local gas use reflects how far the price of gas has fallen and that pipeline capacity from Taranaki gasfields improves, thanks to lower demand from gas-fired electricity generators.

Post declined to say how much Refining NZ currently pays for natural gas, but said that "our energy costs are competitive, both gas and electricity, compared to both Singapore and Korea", the benchmarks for Asia-Pacific refineries.

However, he discussed how the refinery's move to be more active in crude oil procurement, by working with major shareholders BP and Z Energy to optimise crude shipments, had allowed it to enjoy the one-off benefit of opportunistically buying a shipment of Russian crude, which is well-specified for New Zealand's only refinery, when a temporary threat of sanctions on Russian oil exports to Europe and the US dropped the price of Russian product earlier this year.

While Caltex and Mobil, also shareholders in the refinery, had so far not taken up the opportunity to be involved in more strategic buying, the offer remained open, said Post. Local subsidiaries of global players had traditionally dictated Marsden Point's crude oil inputs by reference to their global operations, but the creation of New Zealand-owned Z Energy, the transport fuels distribution business sold by Shell, had changed that dynamic in New Zealand.

"Z changed the dynamics by not having a regional supply chain or other refineries," said Post. "They just want the cheapest. We said, 'if you let us in the tent where we could have a veto right over certain cargoes and decisions about what crude goes through in a jointly agreed process, we can give you commercial opportunity."

While the refinery expects to achieve a refining margin of US$4 to US$5 a barrel better than its Singapore equivalent, its returns are dictated by Singapore margins, which represent the cost of imported alternatives to locally refined product.

The largest single investment occurring on the refinery site is the $365 million replacement of the petrol-making facility, dubbed Te Mahi Hau, which is scheduled for commissioning late next year, and is expected to yield an additional US$1.10 per barrel to the refinery's margins, along with 66 US cents of gains from a range of initiatives to improve the productivity of the plant. A further US 50 cents per barrel of improvement is expected from a range of cost-cutting measures, including a reduction in permanent and contracting staff from around 587 to 500.

In the current financial year, the company also expects a short-term 35 US cents per barrel gain from the fact that it has additional residues available from the refining process, owing to unexpectedly long shutdowns related to an upgrade of its hydrocracker unit, which will help reduce losses expected in the current financial year, which Post said should see a forecast loss of $27 million reduced to $23 million.

(BusinessDesk)