Saturday, April 21, 2012

The Reasons Why The Marsden Point Refinery Expansion May Not Happen

Interesting news surrounding plans to significantly extend refining capacity at Marsden Point has come to light. It appears that not everyone involved is as enthusiastic towards the plans as was first reported. New Zealand Refining, the company that runs Marsden Point did not get unanimous support from its shareholders for the new development.

NZ Refining's shareholding consists of BP (24%), Mobil (19%), Z Energy (17%), Chevron (13%) and Canadian investor Garlow Management (8%). Minority shareholders make up the remaining 19%. The oil companies own 73% of the shares and their representatives have 70% of the seats at the board table. This means that two of the three major oil companies must approve of the plans before they can go ahead. A majority of the directors supported the project plans but some directors were opposed (I am unsure at this stage which ones). No explanation has yet been released detailing the reason for the opposition.  

NZ Refining plans to spend $365 million to expand and update its petrol refining manufacturing plant. The continuous catalyst regeneration (CCR) technology is expected to boost its share of the New Zealand petrol market from 55% to 65%. NZ Refining believes that once fully commissioned this will boost margins by U.S. $1.10 per barrel and and increase revenue by $70 million per year. 

The answer to the director opposition may come from what is happening overseas. It appears that the big oil companies are trying to reduce their stake in refining operations throughout the world in an effort to reduce the volatility seen in earnings since the 2008 recession. This comes even as profits from refining petrol and diesel have been increasing to their highest levels since 2007.

Their appears to be a mass exodus by big oil companies from refining in the United States. Sunoco is closing its two oil refineries in July 2012 in Philadelphia and Pennsylvania. Those two facilities alone process over 500,000 barrels a day. Last year ConocoPhillips announced two plant closures in Pennsylvania and New Jersey as well as another closure in Alaska. At the end of March this year The HESS Corp announced the permanent closure of the United States third largest oil refinery. Refineries on the East Coast of the U.S. supply 40% of the petrol sales and 60% of the diesel and other fuel oils. Of that, half comes from the Sunoco & ConocoPhillips plants that are targeted for closure.  

At the beginning of last year more refineries were on the market than at any time before. Prices for some refineries had plummeted by 80% compared to 2006 prices. Big profits can still be made from refining but their is increasing uncertainty with highly volatile oil prices. The average Brent crude price for March was 10% higher than the same time last year and 59% higher than the same time two years ago.

Because 90% of the feedstock for the Marsden Point refinery is shipped from overseas the refinery is especially vulnerable to swings in oil prices as opposed to refineries overseas that are situated close to sources of oil. Another problem is the scale of size. Marsden Point refines roughly 32 million barrels per year which is about the same as what the U.S. refines every two days. There is also evidence that New Zealand traffic volumes per capita have been decreasing since 2005 with an annual decline of 4-5%.

All these factors point towards the possibility that investment in oil refining might not be the sure game it once was. This has been reflected in the reluctance by some of the NZ Refining directors in signing off on the expansion plans. The final vote is due this coming Friday and it will be interesting to see what the outcome will be. Watch this space.

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