New Zealand’s management of its strategic assets: just right or in need of recalibration (and in learning from Canberrra)?

This article has been contributed by CHRISTIAN NOVAK, who has undergraduate and postgraduate degrees in history from the University of Sydney.  He currently works for a Wellington based communications company. 

With the global economy already massively disrupted after two years of a global pandemic and now, high inflation, the Russia-Ukraine conflict demonstrates the need for sovereign governments to protect and manage their strategic assets – in this case, energy supply and the risks associated with them.

Amid soaring fuel prices and cost-of living pressures, the closure of our sole oil refinery at Marsden Point 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. This is because the smelter is not a ‘lifeline utility,’ as defined under New Zealand’s Civil Defence Emergency Management Act 2002.

Compare our policy on Marsden to Australia, which is subsidising its two oil refineries on both strategic and national security grounds. The question posed, therefore, is: how does our government view security of supply of a strategic resource?

Australia, like New Zealand, faced similar problems with its refineries – scale and distance, therefore cost.

The growth of mega-refineries in Asia had fundamentally changed the market landscape. With much larger economies of scale and lower operating costs, Australia’s operators were simply unable to compete.

In September last year, Australia’s Federal Government announced that it would subsidise the nation’s final two oil refineries as it sought to secure its long-term fuel supply. The decision to do so – which received cross-party support – was framed as safeguarding Australia’s economic prosperity.

In doing so, 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.

Canberra’s thinking was also driven by increasing geo-strategic uncertainty in the Indo-Pacific, particularly Chinese moves to create military relationships in the Pacific Islands.

The view is very different in Wellington. Advice put to Ministers in November last year described the import-only model as more flexible, allowing greater sourcing of the finished product from multiple countries, such as Singapore where refining margins are set. It also framed the model as more resilient, as shipments can be redirected to ports in the event of a local disruption.

This was a point underscored by Z Energy – a proponent of the transition and a 13 per cent shareholder of Refining NZ – who estimate that it will see around 175 tankers arrive annually with the finished product. And then there’s the fact that New Zealand’s fuel prices are set by the marginal import barrel, meaning that the refinery’s shutdown should have no price impact.

This, however, views the world in a linear fashion and fails to touch on some of the ‘unseen’ considerations.

While offshore reserves might be fine now, they are very much dependent on ‘just in time’ supply chains and availability of maritime assets – two areas that the pandemic has shown to be far less predictable than provides surety for the security of oil supply.

Risks exist for the primary sector, whose growth is underpinned by traditional fuel sources.  Yet, it is the sector’s export earnings which underpin the income to purchase the manufactured and consumer products we import.

Then there is the not-so-small problem of insufficient infrastructure and capacity domestically. In 2014, an expert report commissioned by the refinery weighed up its two supply route options: continue import of crude for process or shift to importing finished product. The authors noted that excluded in their analysis was what overall new storage investment would be needed for importing finished product.

This was likewise noted by the Commerce Commission in its 2019 Fuel Market Study Report. They judged that several domestic ports lacked the capacity to be efficiently serviced by direct imports.

Even before the current price shocks, there have been red flags for our policymakers that the fitness of purpose of the fuel supply chain infrastructure is not where it needs to be for a strategic resource. One was in 2017, when the sole fuel pipeline between Auckland Airport and the refinery ruptured. The fallout saw Auckland’s fuel supply disrupted for 10 days and hundreds of flights delayed.

Unlike New Zealand, Australian policymakers (of both stripes) are willing to tie national security to that of essential industries. New Zealand’s equivalent would be to apply it for agriculture. They have also publicly addressed the ‘grey areas’ in moving to an import model, such as additional infrastructure need and the risk from supply chain realities. But here in New Zealand, the approach is less clear. With the RMA likely to prescribe environment limits, what does this mean for future development? As we’ve 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 many of New Zealand’s enduring security vulnerabilities and policy challenges. It has also created a once-in-a-lifetime chance to reassess many of the assumptions that have underpinned previous policy decisions.

With the Ministry of Business, Innovation and Employment looking at its options around increasing minimum stockholding obligations, New Zealand should take a leaf from Canberra’s book and do the same.

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