Fuel importers ‘ready for international shocks’

Julian Hughes is tasked with overseeing the supply chain that brings Z Energy’s fuel from far-flung destinations into New Zealand – keeping an eye on everything from shipping and fuel storage to trucking and delivery.
“I always think it’s a really privileged role: if you think about the role that Z plays, we’re close to 50 percent of the fuel market, and we’re providing fuels to mums and dads, schools and institutions, and businesses.”
A momentous change in New Zealand’s fuel supply system came in 2021 with the decision to close the Marsden Point oil refinery.
The refinery, which would have marked its 60th anniversary this year, met roughly 70 percent of the country’s fuel demands by processing crude; now, New Zealand imports 100 percent of its fuel in refined form.
While there was handwringing at the time about whether the Marsden Point closure would undermine New Zealand’s fuel security, Hughes is clear in his view that the move to a full-import model has been a net positive for the country.
Having a domestic operation was not without its benefits, but having 70 percent of fuel supply come from one refinery in one part of the country meant “having a lot of eggs in one basket”. Now, Z ships its fuel directly from a wide range of refineries around the Asia-Pacific region, giving it flexibility should any one supplier run into problems.
The move to full imports has also cut Z’s lead times for fuel supply in half, with the shorter supply chain offering additional resilience.
“Previously, you had one big ship of crude coming across every six weeks, and now we’ve got four to five vessels in play at any one time: you can speed some ships up, you can slow some down, you’ve just got more options,” Hughes says.
Choosing which locations to source fuel requires a careful balance between diversity of supply and cost management. At present, New Zealand’s imports come overwhelmingly from Asian countries such as Singapore, Malaysia, South Korea, Japan and China – countries which Hughes says offer a high quality of product, and enough refineries for further diversification within any one country.
But how well equipped are we to handle some of the worst-case scenarios for a disruption to our fuel supply?
To find out, Z decided to ‘stress-test’ New Zealand’s fuel system against the four most likely extreme-risk scenarios:
On the whole, it seems like the country’s supply would hold up relatively well. In an event where New Zealand lost all of its current supply from North Asia, the country would still have roughly 90 days of petrol supply, 60 days of jet fuel and 50 days of diesel from existing storage and remaining trade flows.
This means that fuel suppliers like Z would have enough time to establish new supply chains from different countries. As an example, it would take around 30 days to establish new supply chains from existing suppliers in South East Asia, and around 50 days to do the same for new markets like India, the United States and Middle East.
While a South China Sea blockade or a Chinese invasion of Taiwan might seem like the scenarios most likely to keep Hughes awake at night, he says fuel importers are relatively accustomed to dealing with international shocks.
“Think of Russia invading Ukraine in 2022, and 10 percent of the crude oil in the world being shut off overnight – the markets have had to deal with those sorts of shocks through geopolitical events.”
Companies also need to “draw a line” somewhere, rather than trying to prepare for a new world war whose consequences would be incredibly difficult to model.
Instead, it is a domestic disruption that Hughes says could be most problematic for fuel companies, given New Zealand’s lack of experience in dealing with significant local shocks.
The most recent example was in 2017, when a digger cracked the pipeline bringing fuel from Marsden Point to Auckland and caused a rupture, leading to the cancellation of more than 100 flights at Auckland Airport and causing some petrol stations to run out of fuel.
Hughes describes the Auckland jet fuel supply chain as an “asymmetric risk”, with 80 percent of the jet fuel sold in New Zealand going to the city’s airport through a complex supply chain with little redundancy.
To help build additional resilience, he is in favour of increasing storage at the existing Wiri facility, bolstering the supply chain between Wiri and Auckland Airport, and ultimately considering whether another pipeline should be built to the airport.
“If demand increases as forecast over the next decade, that pipeline ultimately gets to  capacity.”
Last month, Energy Minister Shane Jones announced he was planning to seek Cabinet’s agreement on regulations that would mandate a sufficient supply of jet fuel to be held near Auckland Airport, saying fuel companies had made little progress in doing so despite a recommendation from the government inquiry into the 2017 pipeline disruption.
Hughes appreciates the Minister’s desire for urgent action, but believes the industry is already moving to put extra storage in place; in August, Z and Channel Infrastructure announced a deal to more than double the fuel company’s private jet fuel storage at Marsden Point by the start of 2027.
New “minimum stockholding obligations” will also enter force from January 1 2025, requiring fuel importers to hold 28 days’ cover for petrol, 24 days for jet fuel, and 21 days for diesel.
Given Z’s modelling, Hughes believes we could consider increasing our diesel reserves and cut back on our petrol stockholding, although he is in favour of reviewing the existing settings 12 months after the minimum obligations take effect rather than making a change now.
He is also supportive of making tweaks to the country’s National Fuel Plan, created to set out how government agencies and the fuel sector will work together during a crisis.
While the plan as it exists is good, it could benefit from clearer guidelines around how those minimum stockholdings can be used during a crisis. While there could similarly be benefit in setting out how fuel specifications can be relaxed in such a scenario and developing a plan to ensure there are enough trucks available – and people to drive them.
“During the crisis in 2017 … we actually had enough trucks, but we didn’t have enough drivers to drive the trucks to deliver the fuel,” Hughes says.
But one other potential change to the country’s fuel supply – reopening the Marsden Point refinery, a proposition being explored by the Government as part of New Zealand First’s coalition agreement with National – does not win his favour.
Hughes says a reopening would need to stack up both economically and in terms of fuel security, a tall ask given the conditions that led to its closure.
While the refinery could produce up to 115,000 barrels a day at its absolute maximum, its equivalents in South Korea can make six times this, and without private investment a reopening would fall to the taxpayer.
“I think we have moved on – that’s probably a good way to describe it.”
Instead, Hughes and Z are focused on making the most of our brave new world.