Z Energy issued a blunt warning back in 2012 that the fuel industry was failing to invest in infrastructure, imploring the Government to force it to improve security of supply.
The recently formed company delivered what has turned out to be a prescient warning that the risk of disruption to the Auckland fuel pipeline was probably four times more likely than government officials predicted.
It also claimed the situation could be resolved through a levy of around 0.5c a litre on fuel over five years, undermining the Government’s claim that improved security could only come at a “massive” cost to the consumer.
In a submission on New Zealand oil security, Z Energy said it was part of an “unsustainable industry focused on the short term” which was investing in infrastructure below the rate of depreciation.
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“Customers don’t want to pay a cent more for a more secure fuel supply, and industry by and large does not want to invest.”
It urged the Government to intervene, warning that disruption to the Auckland pipeline would be highly disruptive, especially to Auckland Airport. In such circumstances, “government involvement is critical”.
“While Z very much favours markets as the preferred mechanism to deliver commercially optimal outcomes, the company has concerns around leaving fuel supply security and infrastructure investment solely in the hands of this market at this time.”
Energy and Resources Minister Judith Collins has acknowledged that the Government had repeated warning about the issue of Auckland’s vulnerability, but said the cost of solutions were prohibitive.
“The issue has always been around how do you get the resilience, without a massive cost to the consumer?” Collins said on Monday.
But Z claimed the situation could be “significantly improved” with a levy of 0.5c a litre on fuel across New Zealand.
“An expenditure of around $200 million would give New Zealand significantly improved contingency across all fuels. If spread across seven billion litres of fuel over five years, this would work out to a levy of about 0.5c a litre.”
It proposed a framework where the industry would invest in new infrastructure, paid for by a guaranteed return equivalent to the weighted average cost of capital (WACC).
Effectively, this is like making an investment at a return which matches the cost of borrowing money to make the investment, without profit.
“Clearly, WACC is not a commercial aspiration but such a system would enable industry to invest in non-commercial projects while covering costs.”
The Ministry of Business, Innovation and Employment (MBIE) put the risk of disruption to the refinery to Auckland pipeline as a one-in-100 year event.
But Z Energy said the risk was far higher, given the age of the pipeline.
“Z thinks that it is reasonable to expect the potential for major disruption every 25 years. This estimate recognises the fact that the industry’s assets are aging and not being replaced. The RAP is currently 25 years old, and as it gets older, its risk profile will necessarily increase.”
Prime Minister Bill English said on Tuesday that the incident “happens to have arisen in a way that no one expected”.
But Z had directly warned that MBIE may be underestimating the risk to the pipeline because it could face external threats such “accidental excavation damage”.
A spokesman for Z declined to comment, saying the company was focused on managing the current situation in Auckland.
Asked about the Z submission, Collins said supermarkets did not ask the government to “pay for” storage.
“The industry are the people who own the fuel, they are the people who own the infrastructure and they are the people who sell the product,” Collins said.
“There is in my opinion quite significant margins on the price of fuel anyway.”
Mobil New Zealand boss Andrew McNaught, who is acting as the industry’s spokesman, declined to comment on Tuesday about whether the incident was playing out exactly as the industry had warned.