Appendix 2: Cost of Options

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Analysis of Feedback on Tendering Process for Additional Stock to Meet New Zealand's IEA Obligations - Key Issues Requiring Government Decisions - Next Steps and High Level RFP Design

Hale & Twomey Limited

[ Last Updated 19 January 2006 ]

Summary of Cost Analysis for Stock Ownership/Risk Options
IEA Stock Cost Calculation Spreadsheet
Option 1: Commercial Ownership with Risk - Cost Build Up
Option 2: Commercial Ownership without Stock Price Risk - Cost Build Up
Option 3: Agency Model Backed by Government - Cost Build Up
Option 4: Government Ownership Onshore/Investor Offshore - Cost Build Up

Summary of Cost Analysis for Stock Ownership/Risk Options

Total Capital Cost of Tanks, Land and Stock
	NZ$ million
Option 1	472.7
Option 2	472.7
Option 3	472.7
Option 4	472.7

Annual Cost of Total System
	NZ$ million	NZc/litre
Option 1	104.8	1.53
Option 2	65.6	0.96
Option 3	63.3	0.92
Option 4	63.1	0.92

IEA Stock Cost Calculation Spreadsheet

Note the model is single period for simplicity. For full analysis a multi-period model should be done. However as oil price is not directly impacted by inflation or depreciation the simplification is reasonable. For the tankage a annual payment function has been used although this has been compared to a full 20-year NPV model (with depreciation) to ensure it is a reasonable approximation.

	General Assumptions	New Zealand	Offshore	Basis for Assumptions
1.	Offshore/New Zealand Inventory Split	50%	50%	Assume an amount held in New Zealand for security reasons Balance offshore assuming that may be cheaper
2.	Crude/Product split
	Crude	80%	100%	Assume a portion of NZ stock to be product for security reasons
	Product	20%	0%	Assume all offshore stock to be crude

		In NZ		Offshore
	General Assumptions	Light	Heavy	Aus	USA	Basis for Assumptions
3.	Type of crude	25%	75%	50%	50%	Assume some crude in New Zealand is light (more expensive) with the balance being heavy (cheaper) but still acceptable for NZRC
		50%	50%	50%	50%	Assume half the offshore crude in Australia (more expensive) with the balance being in the USA (heavy & cheaper)
4.	Exchange Rate US$/NZ$ 0.70

	General Assumptions		Barrels to tonnes	US$ / tonne	Basis for Assumptions
5.	Crude/Product Price WTI	US$50.0	7.86	393	All crude prices work off a nominal WTI headline price
	average price landed in NZ (heavy)	US$46.5	7.50	349	Typical NZRC medium/heavy crude (Oman). WTI less $6.00/bbl + freight
	average price landed in NZ (light)	US$51.0	7.86	401	Typical NZRC light crude. WTI less $1.00/bbl + freight
	average price landed in Taranaki (light)	US$49.0	7.86	385	Typical NZ produced light crude (FOB - excl. freight). WTI less $1.00/bbl
	average price in Aus (light)	US$50.0	7.86	393	Typical Aus light crude (1/2 FOB/ 1/2CIF). WTI less $1.00/bbl + 1/2 freight
	average price other (US) (heavy)	US$44.0	7.40	326	Typical US heavy crude (e.g. Mars) cost in the US. WTI less $6.00/bbl
	average price product in NZ (landed)	US$60.0	7.86	472	Typical NZ product price (avg. petrol/diesel). WTI+$6.5/bbl + freight
	average price product offshore (FOB)	US$56.5	7.86	444	Typical product price (avg. petrol/diesel) FOB. WTI+$6.5/bbl
	New tank cost crude ($/tonne)	NZ$356.0			From Covec/H&T report
	New tank cost product ($/tonne)	NZ$391.0			From Covec/H&T report
	Cost of land ($/tonne)	NZ$43.0			From Covec/H&T report
	Recovery years for new tanks	20 years			Aim for new tank contracts is to recover investment over long period
	Existing Tanks Cost: crude (% of new cost)	NZ$70%			Assume existing tanks are charged between 50-75% of new tank cost
	Existing Tanks Cost: product (% of new cost)	NZ$70%			As above (note marginal cost for existing tanks could be quite low)
	Offshore tank cost (assume all existing tanks)	NZ$70%			As above
	Proportion of NZ crude tanks new build	NZ$50%			Proportion of tanks that need to be new built
	Proportion of NZ product tanks new build	NZ$0%			Proportion of tanks that need to be new built
7.	Operating costs: crude	NZ$2.0 / tonne			From Covec/H&T report: Only covers the terminal operating costs
	Operating costs: product	NZ$3.0 / tonne			From Covec/H&T report: Only covers the terminal operating costs
	Turnover Cost: product	NZ$2.5 / tonne			From Covec/H&T report
8.	Amount of Stock required
	IEA tonnes	500,000			Input cell - can vary
	Crude physical equivalent	578,704			Calculation based on IEA rules
	Product physical equivalent	462,963			Calculation based on IEA rules
9.	Total litres of domestic consumption	6861.8 million litres			All petrol, domestic diesel, domestic jet, domestic fuel oil (no bitumen/ special products). From MED data.
10.	Administration Costs				This section estimates government's administration costs.
	Base Government Costs (annual)
	Option 1	NZ$0.50m			In general the expenses will increase as responsibilities increase.
	Option 2	NZ$0.60m			The highest cost would be an agency structure which is the most flexible
	Option 3	NZ$1.00m			but also the most complex. Note stock management charges are
	Option 4	NZ$0.75m			excluded from these amounts.

Assumptions for Commercial Ownership with Risk (Option 1)
		New Zealand	Offshore	Comment
Pre-tax Cost of Capital (Nominal)	Stock	18%	18%	Assume a typical commercial return for business with some risks. Needs to be at least typical return for current NZ business to make it worthwhile (although this is below international oil company overall average return)
Pre-tax Cost of Capital (Nominal)	Tanks	18%	18%
Annual Risk Management Cost	US$/bbl	2.50		Estimate provided by industry
Annual cost built into offer	NZ$/bbl	0.30		Includes insurance cost, general risk, internal costs
Management Fee	NZ$/bbl	0.00		Not applicable for this option (built into return)

Assumptions for Commercial Ownership without Risk (Option 2)
		New Zealand	Offshore	Comment
Pre-tax Cost of Capital (Nominal)	Stock	12.5%	12.5%	This case assumes scheme attracts infrastructure investors who want returns between 2% & 3% (pre-tax) above risk free long-term rate for long-term low risk investment. Arguably offshore rate may be lower but offset by increased exchange rate risk. Government as counterparty reduces risk.
Pre-tax Cost of Capital (Nominal)	Tanks	12.5%	12.5%
Annual Risk Management Cost	US$/bbl	0.00	N/A	Not applicable as government takes pricing risk
Annual cost built into offer	NZ$/bbl	0.30		Includes insurance cost, general risk, internal costs
Management Fee	NZ$/bbl	0.25		Assume investor needs other party (e.g. oil company) to manage stocks and quality, turnover.

Assumptions for Agency Ownership (Option 3)
		New Zealand	Offshore	Comment
Pre-tax Cost of Capital (Nominal)	Stock	11.5%	12.5%	This case assumes an agency is set up to manage the whole scheme. As the agency is Government guaranteed its cost of capital should be similar. However for offshore we assume the stock still needs to be commercially owned so the cost of capital is the same as Option 2.
Pre-tax Cost of Capital (Nominal)	Tanks	11.5%	12.5%
Annual Risk Management Cost	US$/bbl	0.00	N/A	Not applicable as government takes pricing risk
Annual cost built into offer	NZ$/bbl	0.20		Includes insurance cost
Management Fee	NZ$/bbl	0.25		Agency needs someone to manage stocks: maintain quality, reporting surveying, turnover, etc.

Assumptions for Government Ownership (Option 4)
		New Zealand	Offshore	Comment
Pre-tax Cost of Capital (Nominal)	Stock	11.5%	12.5%	This case assumes govt ownership. The cost of capital is as supplied by MED. It reflects an equivalent "commercial" cost for government borrowing (6% after tax). As above offshore stocks are still commercially owned.
Pre-tax Cost of Capital (Nominal)	Tanks	11.5%	12.5%
Annual Risk Management Cost	US$/bbl	0.00	N/A	Not applicable as government takes pricing risk
Annual cost built into offer	NZ$/bbl	0.20		Includes insurance cost
Management Fee	NZ$/bbl	0.25		Government needs someone to manage stocks: maintain quality, reporting surveying, turnover, etc.

Option 1: Commercial Ownership with Risk - Cost Build Up

Cost of Stock In New Zealand
	Tonnes	Barrels	US$mln	NZ$mln
Crude	231,481	1,756,944	83.7	119.6
Product	46,296	363,889	21.8	31.2
Cost of Stock Offshore
Crude	289,352	2,207,755	104.0	148.5
Product	-	-	-	-
Total Stock Cost	567,130	4,328,588	209.5	299.3
Return on Investment in Stock
NZ				27.1
Offshore				26.7
Total				53.9
Tank Cost (including land) in New Zealand
Crude				78.5
Product				14.1
Cost of Tanks Offshore
Crude				80.8
Product
Total Tank Cost				173.4
Return on Tank Investment
NZ				17.3
Offshore				15.1
Total				32.4
Risk Management Cost (annual)			10.8	15.5
Other costs (annual)
Operating Costs				1.2
Turnover Cost Product				0.1
Annual costs built in offer				1.3
Management Fee				-
Government Administration Costs				0.5
Total Other Costs				3.1
Summary
Total Capital Cost (NZ millions)				472.7
Total annual cost for return on investment				86.3
Total annual costs				18.6
Total Annual Cost				104.8
Total Litres (millions)				6,861.8
Cost/litre domestic comsumption (NZc/litre)				1.53

Option 2: Commercial Ownership without Stock Price Risk - Cost Build Up

Cost of Stock In New Zealand
	Tonnes	Barrels	US$mln	NZ$mln
Crude	231,481	1,756,944	83.7	119.6
Product	46,296	363,889	21.8	31.2
Cost of Stock Offshore
Crude	289,352	207,755	104.0	148.5
Product	-	-	-	-
Total Stock Cost	567,130	4,328,588	209.5	299.3
Return on Investment in Stock
NZ				18.9
Offshore				18.6
Total				37.4
Tank Cost (including land) in New Zealand
Crude				78.5
Product				14.1
Cost of Tanks Offshore
Crude				80.8
Product				-
Total Tank Cost				173.4
Return on Tank Investment
NZ				12.8
Offshore				11.2
Total				23.9
Risk Management Cost (annual)			-	-
Other costs (annual)
Operating Costs				1.2
Turnover Cost Product				0.1
Annual costs built in offer				1.3
Management Fee				1.1
Government Administration Costs				0.6
Total Other Costs				4.3
Summary
Total Capital Cost (NZ millions)				472.7
Total annual cost for return on investment				61.4
Total annual costs				4.3
Total Annual Cost				65.6
Total Litres (millions)				6,861.8
Cost /litre domestic comsumption (NZc/litre)				0.96

Option 3: Agency Model Backed by Government - Cost Build Up

Cost of Stock In New Zealand
	Tonnes	Barrels	US$mln	NZ$mln
Crude	231,481	1,756,944	83.7	119.6
Product	46,296	363,889	21.8	31.2
Cost of Stock Offshore
Crude	289,352	2,207,755	104.0	148.5
Product	-	-	-	-
Total Stock Cost	567,130	4,328,588	209.5	299.3
Return on Investment in Stock
NZ				17.3
Offshore				18.6
Total				35.9
Tank Cost (including land) in New Zealand
Crude				78.5
Product				14.1
Cost of Tanks Offshore
Crude				80.8
Product				-
Total Tank Cost				173.4
Return on Tank Investment
NZ				12.0
Offshore				11.2
Total				23.2
Risk Management Cost (annual)			-	-
Other costs (annual)
Operating Costs				1.2
Turnover Cost Product				0.1
Annual costs built in offer				0.9
Management Fee				1.1
Government Administration Costs				1.0
Total Other Costs				4.2
Summary
Total Capital Cost (NZ millions)				472.7
Total annual cost for return on investment				59.1
Total annual costs				4.2
Total Annual Cost				63.3
Total Litres (millions)				6,861.8
Cost/litre domestic consumption (NZc/litre)				0.92

Option 4: Government Ownership Onshore/Investor Offshore - Cost Build Up

Cost of Stock In New Zealand
	Tonnes	Barrels	US$mln	NZ$mln
Crude	231,481	1,756,944	83.7	119.6
Product	46,296	363,889	21.8	31.2
Cost of Stock Offshore
Crude	289,352	2,207,755	104.0	148.5
Product	-	-	-	-
Total Stock Cost	567,130	4,328,588	209.5	299.3
Return on Investment in Stock
NZ				17.3
Offshore				18.6
Total				35.9
Tank Cost (including land) in New Zealand
Crude				78.5
Product				14.1
Cost of Tanks Offshore
Crude				80.8
Product				-
Total Tank Cost				173.4
Return on Tank Investment
NZ				12.0
Offshore				11.2
Total				23.2
Risk Management Cost (annual)			-	-
Other costs (annual)
Operating Costs				1.2
Turnover Cost Product				0.1
Annual costs built in offer				0.9
Management Fee				1.1
Government Administration Costs				0.8
Total Other Costs				4.0
Summary
Total Capital Cost (NZ millions)				472.7
Total annual cost for return on investment				59.1
Total annual costs				4.0
Total Annual Cost				63.1
Total Litres (millions)				6,861.8
Cost /litre domestic consumption (NZc/litre)				0.92

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Printed: 25/11/2009