Circuit-breaker needed for Auckland Airport fuel investment

By Gavin Evans

June 10 (BusinessDesk) - A circuit-breaker may be needed to free-up “problematic” joint venture arrangements that are delaying investment in additional jet fuel capacity for Auckland International Airport, an inquiry panel heard last week.

Jet fuel storage at the Wiri oil terminal is at capacity, as is storage at the joint user hydrant installation – JUHI – at the airport. Extra capacity is also required on the pipeline from Wiri supplying the airport and the pipeline to Wiri from the Marsden Point oil refinery.

Z Energy chief executive Mike Bennetts told the hearing that delays getting agreement among joint venture partners in the sector are not a new issue.

Competing commercial interests and differing views on investment returns can result in “less than timely” outcomes, he said.

He said upgrades proposed for Wiri and the JUHI and the two pipeline systems will be able to meet projected demand growth at the airport for the next 15 years.

But he said that – right now – the industry isn’t responding fast enough to give the public, the airlines and the airport, the confidence that the investment will be made early enough.

“We do think this does require some form of different approach if all participants are able to have confidence in the outcome and do what’s best for New Zealand,” he told the inquiry on Friday.

“If you want to create a break-through here that works for New Zealand Inc at a system level, I would suggest it would require that sort of intervention to make it work.”

Jet fuel demand at New Zealand’s biggest airport is projected to grow by about 3.5 percent a year, adding close to a billion litres to annual demand by 2030. BP told the inquiry team – Elena Trout and Roger Blakeley – that supplementing the current assets with extra truck deliveries can meet expected demand through to 2025.

BP and Z Energy are ready to invest in extra storage at Wiri - partner Mobil less so. The trio are further split on the relative merits of extra storage at the JUHI, over expanding the capacity of the pipeline supplying it, or adding a second pipeline to provide additional redundancy.

A workshop convened by the inquiry in late May settled on 10 days’ fuel supply at 80 percent of peak demand as the security standard the parties should aim for.

But the airlines want to remain part of the conversation to be confident that that level of security is actually affordable. The airport also wants greater transparency around investment planning.

Anthony McGivern, the airport’s strategic commercial manager, said it has provided all the parties its forecasts of demand, but has no power as lessor of the JUHI site to require minimum days of fuel supply or details of the venture’s investment plans.

“We would like to see a good view of future capacity too, and what’s planned,” he said. “We would like some exposure around at least timelines of investment in those things. Those are things that we have asked for.”

The inquiry was established to review the industry’s handling of the failure of the fuel pipeline from Marsden Point to Wiri in September 2017 and to examine the overall resilience of fuel supplies for Auckland.

The 10-day shutdown required tight fuel rationing by airlines, cancellation of many services and the emergency conversion of fuel tanks around the country to hold jet fuel. The panel heard the impact of the shutdown was compounded by the tight storage situation, tank maintenance shuts at Wiri and the JUHI, and low stockpiles in Christchurch, the country’s main alternative jet fuel supply.

The inquiry spent Friday considering whether giving other suppliers “open access” to those joint venture assets would improve investment decisions and thus make supply lines more resilient. It also sought views on whether other funding options – such as levies or surcharges – were potential tools to ensure timely investment in critical infrastructure.

Bennetts said Z Energy is ready to invest in the existing infrastructure, or a secondary supply route to the airport if that is wanted.

The company doesn’t necessarily favour a levy, but now might be the time to consider that option “given the criticality of this infrastructure” and the seeming failure of market forces to deliver a timely result.

He said a New Zealand Inc approach could also speed coordinated investment across the four assets, rather than the “bit by bit” investment that had proved unsatisfactory to customers during the past decade.

Air New Zealand and the Board of Airline Representatives – BARNZ – questioned the need for a levy when returns from the JUHI operation were sufficient to prompt Gull to try and join the venture in order to supply fuel at the airport. Providing a levy to cover under-investment by commercial operators also risked sending the wrong signal.

BARNZ chief executive Justin Tighe-Umbers said a levy or some other “circuit-breaker” could be required if there had been a complete market failure, but he didn’t believe that point had been reached.

He urged the joint venture partners to “get creative”. Given new assets are being built, and that Gull is currently trying to join the JUHI venture to supply fuel at the airport, it should be possible to bring in new capital to get the assets built.

“There is a significant market opportunity there – we’re talking about a doubling in demand into the 2030s. The risk is low. They just need to find a way to get the parties together to invest appropriately.”

Bennetts told the inquiry people shouldn’t assume the JUHI partners are earning more than their cost of capital there.

The last major investment there was $15 million in 2013. Market dynamics since then mean that, from Z Energy’s perspective, that investment “was not remunerated at all,” he said.

The panel heard that opening up access to the joint venture arrangements would not, of themselves, reduce the risk to fuel supplies from a failure on the existing chain from Marsden Point, through Wiri and to the JUHI. Only an alternative supply route could genuinely reduce that risk

Gull earlier this week said it believes it can commercially deliver imported jet fuel from its facilities at Mount Maunganui. That could provide an alternative to supply up to 8-10 percent of current demand.

Bennetts told the inquiry that Z and BP had confirmed that jet fuel could be imported into Mt Maunganui - either from Marsden Point or overseas - railed to Wiri, and then delivered to the airport. KiwiRail and a landowner at Wiri were supportive and Z owns major storage at Mt Maunganui.

The total cost of that – including new storage at Wiri and the JUHI - would be about $150 million, he said, and it could be developed by both existing and new participants.

The question for the inquiry was whether that investment was warranted to reduce risk from the low probability-high impact type of event that occurred in 2017.

BARNZ and Air NZ wouldn’t commit to cover that cost through long-term fuel contracts.

Refining NZ chief executive Mike Fuge noted that an alternative supply from Mt Maunganui would require annual revenue of $20-30 million to sustain it.

He said pipeline systems are highly efficient and reliable. The proximity of Wiri and the JUHI provide an almost unique opportunity for further optimisation over time to help contain costs for customers and the airport has a role in facilitating that, he said.

The inquiry is due to report back to the government by Aug. 19.

(BusinessDesk)

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