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AS OIL PRICES CLIMB, NEW ZEALAND DISCOVERS SCANDALOUSLY LOW RESERVES

by Matt Nippert

 

Rising petrol prices will soar further following systemic misreporting in the oil industry and government inaction. New Zealand’s oil reserves are in breach of international obligations and it will cost $600m to restore them to required levels. Petrol, having already increased in price by 21 percent since January and facing a 5c roading surcharge next year, is expected to rise another 5c as oil companies pass on the costs of this scandal at the pump.

The Ministry of Economic Development and representatives of the oil industry are presently talking and expect to come to an agreement in early November as to how quickly reserves need to be replenished. The size of petrol price rises hinges on the results of these meetings.

Energy Minister Peter Hodgson all but accuses the oil industry of deliberately misleading the government, after an investigation to ensure that New Zealand met International Energy Agency reserve requirements uncovered significant irregularities in reporting. Fuel stockpiles, required to meet 90 days of national demand, were discovered in August to cover only 60 days. Figures of up to 110 days of supply were being provided by the oil industry.

Oil companies were including oil tankers bound for New Zealand as part of their reserves. “In breach of IEA rules … they’ve been using methodology they shouldn’t,” Hodgson says. Instances of double-counting were “endemic”. A failure to take into account the decline of indigenous oil production in Taranaki (which counts towards national stockpiles) also contributed to the shortfall.

Hodgson says the government takes full responsibility for the failure to ensure stockpiles were adequate, and acknowledges that the problem has been going on “for quite some time”. Reporting of reserves now has to be done, he says, “with more accountability than before”.

National energy spokesman Roger Sowry says that questions about oil reserves were asked two years ago. “They said then things were under control. They obviously were not. Hodgson had his eye off the ball, and his ministry haven’t been doing their job.”

Oil company sources were unwilling to talk openly to the Listener this week, saying they were still “co-operating fully” and in discussions with the government. Privately, many expressed disquiet over the allocation of costs, estimated to exceed $600m, to meet the IEA minimums.

The IEA is a spin-off from the OECD, formed in 1974 to ensure “energy security” following the first oil shocks. The 90-day stockpile is maintained so that oil can be brought to market when there is a disruption to supply, such as during war in the Middle East.

Klaus Jacoby, head of emergency planning at the IEA, says, “Obligations are binding, but there is no sanction under inter-national law.” Hodgson says that, despite membership of the organisation being voluntary, “if you join, you play by the rules” and the government is taking its stockpile obligation seriously. He says the taxpayer will not be picking up the bill. “The costs will be borne by oil companies.” Costs include purchasing three million barrels of oil, as well as investing in new storage tanks.

Replenishing oil stockpiles to the obligatory 90-day level will not come cheaply. The price of a barrel of crude oil reached a record $US55 last week. Even the usually sober Economist wrote of the steep and steady 70 percent increase in prices this year that “increasingly, economists are abandoning their rules of thumb and crossing their fingers instead”.

Last Thursday the cost of purchasing enough oil to restore New Zealand stockpiles – 3.3m barrels at $US53.67 – would have been $260m. On top of this is the cost of using the Marsden refinery in Whangarei to convert crude oil into retail-ready petrol and diesel.

Storage space for such a quantity of oil is presently lacking, and new facilities may need to be built. The new 24m litre storage facility in Port Lyttelton is reported to have cost $15m. Assuming that construction costs will be similar, the bill to construct new tanks to store reserves will exceed $300m. An option under discussion between the government and the oil industry to reduce this expense includes renting storage space in Australia.

Although Hodgson insists that oil companies will pay the price to meet IEA minimums, he expects “the costs will be reflected onto motorists”. If the government requires reserves to be replenished within three years, a 5c increase in pump prices over this period would raise the necessary $600m.

This rise will come on top of the long-announced 5c surcharge to pay for planned roading projects. Following a year of pump-price increases, Treasurer Michael Cullen announced that implementation of the surcharge might be delayed from the proposed April 1 if petrol prices were deemed too high on that date.

Paul Gardiner, Treasury forecaster, says that around four percent of household incomes is spent on petrol. Recent cost increases in crude oil have caused petrol prices to “rise a bit, but obviously not to the full extent because of the high exchange rate”.

Although the price of crude oil is yet to reach, in real terms, the peak of 1980, Wellington energy consultant Richard Hale says it’s getting close.

Any depreciation of the New Zealand dollar against the greenback or further rises in oil prices will increase the expense of getting up to IEA standards.

 

October 30-November 5 2004 Vol 196 No 3364 by Matt Nippert