2. Feedback Summary
The feedback from the respondents to the questionnaire has been very useful. While there remain issues and differences about some of the key design features there is broad agreement in a number of areas. In addition a number of stock holding opportunities are mentioned that could be cost effective if allowed by the design. Broadly the issues can be put into two categories - those areas where respondents generally thought that flexibility would give the government the most effective outcome and those areas where decisions need to be made and certainty is required.
The largest design issue remains the issue of changing stock value and who should carry the exposure. We analyse this issue and assess options for the government in progressing this issue. Some commercial and competition issues are starting to come out in the responses. We identify these and comment on how they might be managed.
Table 1: Feedback Summary| Where Flexibility is desired |
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| Location | Government should be open on NZ/offshore split until relative costs/benefits can be assessed and G to G agreements in place |
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| Stock Type | Government should be open to both crude and product stocks |
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| Separate Stock / Flexibility | There might be better value if there is some flexibility over the separation and use of the stock. Allowing synergistic benefits may reduce costs. |
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| Length of Term | Best to have a portfolio approach to meet the changing requirements. No need to define exactly. |
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| Where Certainty is required |
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| Rules for release | Needs to be defined and confirmed prior to the RFP/tender round |
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| Stock specification | Needs to be well defined but those proposed in the questionnaire were reasonable (slight modification for product) |
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| How stock is released | Who owns the stock and what happens to it if required in an IEA event needs to be defined so exposures are known. |
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| Costs, payment, payment frequency | Companies need to know frequency of payment, currency of payment and other details. |
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| Assessment Criteria | Need to be known before the tender. Transparent and to include "total system cost" |
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2.1 Feedback by Subject
2.1.1 Price Risk and Stock Ownership
This remains the major issue in the design with some companies suggesting that the risks involved might mean they don't tender. All agreed that having tenderers managing the risk would increase the cost to the government/consumer. This issue is explored in more detail in a Section 3.1.
2.1.2 Flexibility/ Separate Stock
A number of companies suggested that if the requirement on how stock should be held is too tightly defined the government will miss out on cost effective stock options. These involve stock options where stock would be held in tanks that are not physically isolated from normal stocks but could be isolated administratively and on an accounting basis.
Effectively this might enable redundant tanks within existing terminals to be recommissioned, allow stock to be turned over (maintained) or enable companies to get some synergistic benefits, all having the effect of reducing overall cost. Companies believe that the issue of not affecting the market and normal commercial drivers can be managed.
These options include:
- Spare tanks in product terminals that could be recommissioned
- Spare capacity in crude oil/condensate tanks that could be used
- Increasing stock levels permanently in certain tanks
- Investment in new tanks that increase stocks but also give oil companies more delivery flexibility (i.e. not necessarily isolated).
This issue is discussed in Section 3.3.
2.1.3 Location
Companies generally thought the location split proposed was reasonable as a first pass although the government should be open to changing the split based on the Request for Proposal (RFP) responses.
One company1 suggested the government needed to decide what role security had in the stock holding and set the New Zealand requirement based on that information. They suggested the stock number recommended by the Covec/H&T Oil Security Report (190,000 tonnes) was a reasonable basis. Beyond the base security level the decision on location should be price driven. Another company's2 view was that stock should all be held in New Zealand because freight to New Zealand might be difficult to obtain in an emergency.
A number of companies suggested Marsden Point was the logical place for any new crude oil tank construction because of its proximity to the refinery.
This issue is discussed in Section 3.4.
2.1.4 Stock Type/Specification
Companies agreed that both crude and product should be considered. In discussion with some companies there was comment that for true "security stock", 20-30% should be held as product as that is the percentage of the market supplied by direct imports. If there were a major incident it would affect product imports as much as crude and if New Zealand only has crude stocks the market will be 20-30% short.
One company3 suggested that fuel oil should be excluded, as it provided no real security. Fuel oil is the cheapest option (cheaper than crude) and yet is included in the stocks that have a multiplier when calculating oil stocks. Therefore the cheapest option to meet IEA targets would be a lot of fuel oil stocks. However fuel oil can't be refined and is less than 3% of the domestic market. Therefore it does not provide any real security (except for that 3% of the domestic market).
Companies agreed with the specifications proposed with some minor adjustments as follows.
| Crude held in New Zealand | Must be refinable at NZRC - companies suggest there might also be a split by grade type (e.g. high/low sulphur split) to ensure processing feasibility at NZRC. |
| Product held in New Zealand | Must meet the appropriate New Zealand specification for the region where stored (slight change from the most severe seasonal specification as some companies indicated if they held product they would probably turn it over with each seasonal change). |
| Offshore crude | Must be saleable (refinable) in the location held (within Australia and NZ for stock held in Australia). |
| Offshore product | Fungible (i.e. readily marketable) grade for that region. |
The specifications are basically agreed so no significant decisions are required. NZRC has supplied a table on crude type requirement based on feedback that some limits are required to ensure crude stored in New Zealand is refinable. This can be used as the basis for the specifications. The issue of requiring some product stock for security reasons is discussed in Section 3.4. We suggest fuel oil is not excluded but limits are placed on the total amount that will be accepted (in line with market percentage) so over provision of fuel oil does not occur.
2.1.5 Length of Contracts
Companies felt it was in the government's interest to keep this flexible to see what is offered and for the government to select a portfolio of contract lengths to best meet its stock requirement (and manage price risk if relevant). The length varied between stock (short if companies had price exposure) and tanks (at least 10 years, preferably longer for new tanks).
This issue is discussed in Section 3.6.
2.1.6 Rules for Release of Stock
All companies felt these need to be defined prior to any RFPs or tenders. This is included in the list of work required for the next steps.
2.1.7 How Stock Would Be Released in an Emergency
Companies also saw this as critical to be well defined prior to the RFP and tenders. The decisions required will depend on stock pricing risk and ownership decisions. This is discussed in Section 3.2. In addition to the decisions needed, a process for releasing stocks needs to be developed. This is included in the work list.
2.1.8 Payment Issues and Other Risks
There were a number of issues raised/clarity required around payment issues and managing other risks. These include:
| Frequency / Timing of Payment | Needs to be set up front |
| Currency of Payment | Decision is required |
| Interest rate exposure | How this might be managed |
| Standard of Bidders | Government must be assured that bidder will meet appropriate safety and environmental standards and is of suitable financial stability. |
2.1.9 Cost and Expertise
One company4 raised the issue of the costs of managing the tender process and management of the stock system. They believe these costs are underestimated and quoted the costs of a European stock agency, which are 4 mln Euro/annum (NZ$7.3 million/annum) with a staff of more than 30+ people. They also raised the issue of sufficient available expertise within the government to run the stockholding.
It is difficult to comment on the issue of cost and expertise until the decisions are made as to where responsibilities sit (i.e. what is paid for in the tender and what the government has to do). However we would comment that stock holding agency mentioned holds approximately 25 million tonnes (product equivalent which means actual tonnes would be a bit higher) and has strict requirements to meet for product categories and location. This is about 50 times the level of stock New Zealand requires, with rules and restrictions that are likely to require more management. Therefore direct cost comparison is difficult. We would comment that an agency system may result in somewhat higher administration costs but this may be more than offset by savings if it resulted in a more efficient system.
2.1.10 Type of Options
The feedback suggested a number of storage options that might be proposed depending on the final contractual arrangements. For information we have summarised these in the tables below.
Table 2: New Zealand Options
[Withheld under section 9(2)(b)(ii) of the Official Information Act 1982]
Table 3: Offshore Options
[Withheld under section 9(2)(b)(ii) of the Official Information Act 1982]
2.1.11 Commercial Issues
A number of respondents raised issues that highlight different commercial positions of companies that might tender. These include:
Quality standards for stand alone storage: A number of companies said they may not tender if they were required to hold stock in tanks they felt were not of suitable standard or increased their risks.
Offshore storage: One company5 raised a number of objections to holding stock offshore including that revenues (PFML levy revenue) will go out of the country.
Subsidising alternate routes: Some companies were concerned that payment for stocks could end up subsidising new terminals affecting their business model
Commercial difficulties: There were comments that those who don't refine/sell oil in New Zealand had a disadvantage in some areas such as sale (and use) of stored oil. A role for government in coordinating deals was proposed.
These issues do not require immediate decisions except the setting of tank standards which has been included in the work list. We see the heart of the issue being concern that the IEA levies may be used to "subsidise" the setting up of competitive terminals which could undermine others' competitive position. [Withheld under section 9(2)(b)(ii) of the Official Information Act 1982]. We don't think the government needs to make a call on this at the moment but it does need to be aware of the conflicting commercial interests as it proceeds with the process.
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