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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. This was New Zealand's

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Speaker 1: last remaining oil refinery. Now it's an import only terminal.

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Speaker 1: How this still critical asset plans to fuel our energy future.

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Speaker 2: We can't restart it. And you know, we've completely changed

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Speaker 2: our business model. Our shareholders want us to be an

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Speaker 2: infrastructure operator rather than a manufacturer of fuels.

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Speaker 1: Now, welcome to Northland's Marsden Point. This was once home

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Speaker 1: to New Zealand's last oil refinery, but it was shut

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Speaker 1: down permanently in April twenty twenty two. The CEO of

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Speaker 1: the company that owns it, Rob Buchanan, is taking us

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Speaker 1: on a tour. It's the first time anyone's been allowed

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Speaker 1: to film the site since the refining operations were decommissioned.

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Speaker 1: It even looks old, it's rusted.

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Speaker 3: Yeah, that's right.

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Speaker 2: Well, that's what happens when you switch a piece of

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Speaker 2: process equipment that's used to being hot and operating twenty

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Speaker 2: four hours a day, when you switch it off, clean

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Speaker 2: it out, make it safe. You know, the equipment does

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Speaker 2: deteriorate over time.

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Speaker 1: Refining margins were under pressure. The company couldn't compete with

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Speaker 1: cheaper offshore refineries, so the decision was made by the

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Speaker 1: board and the company's shareholders to convert to an import

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Speaker 1: only fuel terminal. Hundreds of workers lost their jobs. The

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Speaker 1: site that was once a hyber activity is now almost silent.

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Speaker 2: Credibly sad thing for the community and Northland to see

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Speaker 2: this asset closed down in terms of economic opportunity and jobs,

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Speaker 2: and our management team is determined to use these assets

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Speaker 2: to bring some of that back.

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Speaker 1: Physital reminders everywhether refining end ZZ the company is investing

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Speaker 1: for its future and has built these new fuel tanks

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Speaker 1: leaning into their infrastructure purpose as a port that accepts

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Speaker 1: already refined fuel, mostly from Asia and stores it on

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Speaker 1: site on mass before sending it to Auckland down this

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Speaker 1: one hundred and seventy kilometer long pipeline. Three point four

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Speaker 1: billion liters of fuel passes through this facility each year.

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Speaker 1: That's forty percent of New Zealand's total petrol and diesel

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Speaker 1: demand and eighty percent of jet fuel demand. So this

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Speaker 1: is jet fuel.

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Speaker 3: This is a jet tank that's right.

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Speaker 1: The company, now called Channel Infrastructure, is paying dividends to shareholders,

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Speaker 1: with a compound annual total return to shareholders of almost

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Speaker 1: twenty nine percent since the conversion. Its shareholders were once

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Speaker 1: all the major fuel companies, but Mobile and BP has

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Speaker 1: since sold out. Channel just announced a half year profit

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Speaker 1: that is sixteen point six million dollars, an increase on

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Speaker 1: the previous year of forty five percent, with fuel throughputs

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Speaker 1: increasing and a new jet fuel storage contract signed with

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Speaker 1: z Energy. But the company is preparing for demand for

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Speaker 1: petrol and diesel to drop off over the next few decades.

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Speaker 1: Is our economy aims to lower its emissions, but now

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Speaker 1: we have an energy system in crisis with gas set

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Speaker 1: to be imported and cold being burned to keep the

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Speaker 1: lights on. So how could this facility be repurposed to

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Speaker 1: fit the reality of fuel resilience requirements? Rob, good to see, thanks.

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Speaker 3: Lotch having you ye right, Thanks for coming up.

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Speaker 1: I want to start by talking about the shutdown decision.

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Speaker 1: I know its history, but partly that decision was made

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Speaker 1: by the company and also its shaholders at the time

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Speaker 1: because of these zero carbon aspirations, this shift to a

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Speaker 1: lower carbon economy. How do you think that decision is

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Speaker 1: aged well?

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Speaker 2: Actually, you know, the decision itself was made more on

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Speaker 2: the funnda mentals of refinery operation in New Zealand at

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Speaker 2: the time, and it was an eighteen month process, and

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Speaker 2: the company at the time was actually criticized for taking

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Speaker 2: too long with its decision making process, but did it

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Speaker 2: because it wanted to consult widely with all stakeholders. And

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Speaker 2: the outcome of that strategic review was that there was

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Speaker 2: no support for a continued operation of the refinery, and

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Speaker 2: that was an economic decision fundamentally around the economics of

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Speaker 2: running what is globally a relatively small refinery in a

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Speaker 2: small country like New Zealand versus large international refineries in

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Speaker 2: Asia who were able to produce refined product at much

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Speaker 2: lower cost. And I think in terms of your question

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Speaker 2: as to how well it's aged well, I think the

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Speaker 2: thesis has actually played out as expected. If you think

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Speaker 2: about what's happened to energy costs, the refinery used a

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Speaker 2: significant amount of gas to run every year. So if

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Speaker 2: we found ourselves in a situation that a number of

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Speaker 2: other companies are finding themselves in at the moment, then

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Speaker 2: we would be back to a very very difficult situation.

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Speaker 1: I totally respect that it was a financial decision at

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Speaker 1: the time. Refining margins were very much struggling when that

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Speaker 1: decision was made. But what about the environment and the

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Speaker 1: zero carbon economy future sort of played into that because

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Speaker 1: I know that there has been some messaging around how

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Speaker 1: that was part of the decision too.

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Speaker 3: Yeah. Well, look, there was certainly no.

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Speaker 2: Support or political support at that point in time from

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Speaker 2: the government of the day for a continued operation in

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Speaker 2: the refinery. And that's just a matter of fact, because

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Speaker 2: you know, it's shut down. We consulted with the government

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Speaker 2: and it's fully decommissioned now. So that was the environment

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Speaker 2: that we were in and that decision was made, and

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Speaker 2: I think it doesn't change the fact, however, that fundamentally

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Speaker 2: your ability to operate a small refinery and a small

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Speaker 2: location like New Zealand and compete with the large global refineries.

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Speaker 2: You know, it just it was a real challenging situation

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Speaker 2: for this business, and I don't think those fundamentals have changed,

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Speaker 2: even if people's perception around what constitutes a low low

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Speaker 2: carbon economy has changed.

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Speaker 1: The reason I asked about the zero carbon economy is

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Speaker 1: because you commissioned some research which you shared at your

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Speaker 1: annual meeting late last year, which showed that petrol demand

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Speaker 1: was going to start declining from twenty thirty and on

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Speaker 1: that forecast completely disappear by twenty fifty. You've now actually

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Speaker 1: in the past few months past year, seen petrol and

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Speaker 1: diesel demand stabilize. It's actually increased by one and roughly

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Speaker 1: two percent. Do you still expect petrol demand to disappear completely?

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Speaker 1: Has your view changed on that with things how things

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Speaker 1: have played out now?

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Speaker 2: Yeah, I think it's easy for sort of short term

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Speaker 2: fluctuations to impact your thinking, but I don't think our

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Speaker 2: long term out knock has changed. Our long term thesis

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Speaker 2: continues to be that whether this government incentives or not,

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Speaker 2: electric vehicles will grow and share it as they become

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Speaker 2: a better and better product for a consumer. So I

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Speaker 2: think the key challenge to talk about evs today is

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Speaker 2: that from a product perspective for a number of consumers

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Speaker 2: doesn't actually serve what they want, which is they're concerned

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Speaker 2: about range. They want to be able to head away

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Speaker 2: to Corimandel or wherever it is camping in the weekend,

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Speaker 2: and they don't want to have to stop for half

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Speaker 2: an hour to recharge their battery. That problem will be

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Speaker 2: solved in time, and I think you only need to

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Speaker 2: look at what's happening in China around production of very

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Speaker 2: low cost evs to see that. I think that trend

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Speaker 2: will play out. Now we put out an outlook to

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Speaker 2: twenty fifty, by definition, it'll be wrong, but I think

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Speaker 2: our thesis is unchanged around the outlook for long term

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Speaker 2: outlook for petrol use.

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Speaker 1: Let's talk about the decommissioning. What's actually happened in the decommissioning.

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Speaker 1: How turned off of things now? Is there any possibility

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Speaker 1: of turning them back on?

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Speaker 2: Yeah, So it's important to understand the difference between mothballed

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Speaker 2: and decommissioned. Those are two very different terms. So back

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Speaker 2: in twenty twenty one, when there was no support for

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Speaker 2: continued operation of the refinery, the decision that was made

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Speaker 2: by this company and its shareholders was the to decommission

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Speaker 2: the refinery. So when you mothballer refinery, that probably would

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Speaker 2: have cost us two to three times more. And remembering

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Speaker 2: our conversion budget was two hre and twenty million, so

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Speaker 2: not an substantial amount of money.

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Speaker 3: And when you.

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Speaker 2: Mothball it, you are able to preserve aspects of the

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Speaker 2: refinery for running in the future. But remember the environment

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Speaker 2: when we were in At that time, there was no

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Speaker 2: prospect of future operation of the refinery, so it was

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Speaker 2: fully or it has been fully decommissioned. So the refinery itself,

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Speaker 2: the decommissioning was completed the beginning of this year. It

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Speaker 2: has been made safe, it has been completely cleaned out,

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Speaker 2: and it has been fenced off. There is no prospect

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Speaker 2: or no possibility of turning it back on. What you

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Speaker 2: are looking at to restart the refinery is not quite

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Speaker 2: a complete rebuild, but a very substantial rebuild at cost

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Speaker 2: of billions of dollars I would expect to get that

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Speaker 2: piece of equipment going again. So the decommissioning is completed

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Speaker 2: and there's no big green lever to turn it back on.

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Speaker 1: So that sounds like it's impossible to turn back on.

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Speaker 1: You haven't just fenced it off, but you may have

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Speaker 1: even pulled concrete down the pipes.

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Speaker 2: For example, No concrete has been poured down any pipes,

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Speaker 2: so I don't know where that were in the books started.

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Speaker 2: But you can't restart it, well, it can't be restarted.

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Speaker 2: Anything can be done with infinite amounts of money. Of course,

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Speaker 2: but as I've said, it would be billions and billions

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Speaker 2: of dollars, which is funds that this company doesn't have.

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Speaker 1: So if there is a political wish to restart it,

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Speaker 1: that would need to be a nationalized if it's not

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Speaker 1: a company decision, because it's not at all feasible.

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Speaker 2: Yeah, well, as I said, we can't restart it. And

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Speaker 2: you know, we've completely changed our business model. Our shareholders

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Speaker 2: want us to be an infrastructure operator rather than a

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Speaker 2: manufacturer of fuels now and that's been very clearly voted

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Speaker 2: on several times by our shareholders, and so that's the

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Speaker 2: direction that we're going in now. You know, as I said,

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Speaker 2: we don't have the billions of dollars, and then the

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Speaker 2: other aspects in terms of logistics, as the staff and

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Speaker 2: the time and so you know, it would be a

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Speaker 2: number of years to assemble the workforce, do the things

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Speaker 2: that you need to do to get it rebuilt. And

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Speaker 2: then you stand back and go, where am I going

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Speaker 2: to get my electricity and my gas from at competitive

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Speaker 2: prices to run it competitively versus those big Asian refineries.

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Speaker 1: Well that's impossible right now, as we know, just on

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Speaker 1: gas quickly, would you want an aling liquefied gas terminal here.

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Speaker 2: Yeah, well, look at a number of folks have spoken

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Speaker 2: about several locations in New Zealand where you could build

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Speaker 2: an LNG two. Certainly Marston Point has a number of

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Speaker 2: the characteristics which would be attractive for import of energy.

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Speaker 2: I spoke about our substantial landholding and consent, the jetty

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Speaker 2: that we own with the natural deep water harbor, and

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Speaker 2: we happen to have a gas pipeline pretty much to

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Speaker 2: our front door. The challenge with our gas pipeline is

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Speaker 2: that its capacity constrained visa me some of the pipelines

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Speaker 2: and Taranaki. So you know, from my perspective, and I've

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Speaker 2: said this a number of times, we are absolutely here

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Speaker 2: to lean into energy security for New Zealand.

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Speaker 3: And if industry wants us to.

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Speaker 2: Get on and work on an LNG terminal and there's

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Speaker 2: an economic model around it where our shareholders can get

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Speaker 2: a return, then that's absolutely something that we would look at.

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Speaker 2: But I think you know where are we way away

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Speaker 2: from that at the moment.

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Speaker 1: On fuel security, what would be your summary of how

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Speaker 1: secure our fuel supply is given that we no longer

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Speaker 1: have the ability to refine.

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Speaker 2: Yeah, so I think like at the highest level, I

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Speaker 2: think you have to remember that when we were a refinery,

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Speaker 2: we were importing crude and now what we do as

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Speaker 2: we import refined product. So in terms of being exposed

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Speaker 2: to international shipping lines, those types of geopolitical events that

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Speaker 2: might interrupt shipping, nothing's actually really changed, to be honest.

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Speaker 2: And I think the other thing that you've got to

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Speaker 2: stand back and consider is when we had a refinery here,

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Speaker 2: we had a single point of failure. Now it ever happened,

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Speaker 2: but we have seen recently, actually last year in Australia

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Speaker 2: an example of a refinery that was in a maintenance

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Speaker 2: turnaround had an issue and had to be offline for

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Speaker 2: a number of months. And if that had happened when

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Speaker 2: we hadn't transitioned to kind of a stable import terminal

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Speaker 2: system and a logical and sensible way with the fuel importers,

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Speaker 2: then that would have been a pretty challenging event for

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Speaker 2: the New Zealand. So I think when you think about risk,

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Speaker 2: you've got to think about all the risks, including the

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Speaker 2: fact that we now are able to procure product from

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Speaker 2: multiple refineries internationally and that shipping aspect. I don't think

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Speaker 2: that's really changed much from where we were previously.

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Speaker 1: Interesting because everyone talks about the shutdown of this place

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Speaker 1: as exposing us to supply shoks, to geopolitical conflict, But

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Speaker 1: actually what you're saying is that now we can import,

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Speaker 1: and we do import more already refined products as opposed

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Speaker 1: to just mainly crude, So it's actually done the opposite.

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Speaker 2: Well, look, that would be our perspective is that the

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Speaker 2: transition from operating refinery to an import terminal has actually

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Speaker 2: gone very smoothly. From a consumer perspective. You know, we

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Speaker 2: haven't seen an interruption of fuel supply. You know, we've

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Speaker 2: seen you know, we get I think it was last

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Speaker 2: half thirty three thirty three shipments into this place. They

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Speaker 2: come from all around Asia, and there's plenty of refined

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Speaker 2: product out there that can be procured for New Zealand's needs.

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Speaker 1: We have minimum security obligations MESOL requirements, so they're called

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Speaker 1: it's effectively how much fuel supply we have to have

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Speaker 1: for different types of fuel, Correct me if I'm wrong.

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Speaker 1: Twenty eight days for petrol, twenty four days for jet

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Speaker 1: fuel and twenty one days for diesel. Do you feel

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Speaker 1: like that's enough because there's talk about increasing at least

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Speaker 1: some of those.

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Speaker 2: Yeah, look, I think we need to remember what channel's

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Speaker 2: role in the industry is here.

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Speaker 3: So absolutely, if there's.

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Speaker 2: A requirement to store refined product, we've got empty tanks

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Speaker 2: that we can use to provide that storage.

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Speaker 1: Can you give me a percentage on extra capacity you have?

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Speaker 2: So currently we have around two hundred and ninety million

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Speaker 2: liters of storage in service on the site and we

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Speaker 2: have about four hundred million liters of unusualized tank capacity.

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Speaker 1: Oh wow, So if they did increase, you'd be okay

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Speaker 1: to do.

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Speaker 2: That verificant amount of unused tank capacity. There will be

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Speaker 2: cost in converting that tank capacity. There's absolutely no challenge

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Speaker 2: with available tank capacity to deliver more storage. And sort

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Speaker 2: of coming back to your original comment around the strategic

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Speaker 2: nature of mass and point, that's exactly what we offer

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Speaker 2: New Zealand the ability to deliver that if that's required.

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Speaker 2: I think on the question of is it enough, I

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Speaker 2: think that's a matter for government and the fuel companies

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Speaker 2: to form a view on because none of this is costless, right,

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Speaker 2: and the only entity that's able to make that decision

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Speaker 2: and trade off cost of additional onshore storage and the

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Speaker 2: impact to the consumer on pricing versus fuel security.

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Speaker 1: Is the government on pricing. That's an interesting point because

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Speaker 1: the more that we have to hold that price that

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Speaker 1: those fuel companies are paying to store, it would ultimately

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Speaker 1: passed on to the consumer. But you here, channel infrastructure

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Speaker 1: would earn that money. So from a shareholder perspective, it

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Speaker 1: would actually be in your benefit if storage minimum obligations

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Speaker 1: are increased, because then you earn the revenue of it

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Speaker 1: being stored here.

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Speaker 2: That's true, but we've got a number of other opportunities

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Speaker 2: that would chasing as well. And I think, you know,

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Speaker 2: in the last I think in the last six months,

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Speaker 2: we've delivered an addition of seventy five million dollars of

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Speaker 2: contracted revenue with PPR escalation, and you know that's been

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Speaker 2: driven by commercial deals with our customers to make their

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Speaker 2: supply chain more efficient. And you know, I think if

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Speaker 2: you think about our fresh strategy, which we launched last year,

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Speaker 2: which was to be a world class operator, customer focused

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Speaker 2: lean into these opportunities, you know, I think if we

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Speaker 2: continue to do that, those.

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Speaker 3: Type of opportunities come to us.

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Speaker 2: I think we're going to sort of stand back and

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Speaker 2: let the government make its mind up around what the

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Speaker 2: right strategic storage number is because as I said, they're

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Speaker 2: they're the right people to apply in on those trade offs.

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Speaker 1: As a company, your finances have absolutely turned around post conversion.

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Speaker 1: You've gone from declining refining margins to now absolutely increasing margins.

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Speaker 1: Just being an important terminal. Can you just clarify for

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Speaker 1: me exactly how you make money. You effectively hold on

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Speaker 1: to the fuel and the customers. The fuel companies pay

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Speaker 1: for that privilege and that goes straight to your revenue. Correct.

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Speaker 2: Yeah, So, I mean if you think about gas distribution businesses,

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Speaker 2: electricity lines businesses, those types of infrastructure businesses which are

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Speaker 2: sort of sometimes referred to as tolling businesses. So effectively,

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Speaker 2: what we're paid to do by our customers is to

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Speaker 2: make our infrastructure, including the gety where they birth their ships,

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Speaker 2: the tanks and storage equipment that we've got on our site,

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Speaker 2: and then our pipeline to Auckland available to them.

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Speaker 3: And so the revenue.

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Speaker 2: Model has an element of fixed fees and it's got

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Speaker 2: an element of throughput or variable fees. But given the

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Speaker 2: demand for fuel year on year tends to be very stable,

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Speaker 2: that produces relatively stable revenues and the benefit to us

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Speaker 2: as a business if you sort of stand back and go, well,

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Speaker 2: we're looking for opportunities to make the supply chain more efficient,

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Speaker 2: or invest in more storage or whatever it is. Means

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Speaker 2: we've become an infrastructure business. With an infrastructure like cost

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Speaker 2: of capital, we can deliver our shareholders a relatively certain

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Speaker 2: earnings profile and that gives.

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Speaker 3: Us a much lower cost of capital.

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Speaker 1: And there's no refining here anymore, so there's no operational

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Speaker 1: costs really other than a bit of maintenance. Yeah.

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Speaker 2: So the opera, well, we're very clear in our results

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Speaker 2: what our opics costs. So electricity is about a quarter

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Speaker 2: of it. We're you know, staff's another quarter, contractors would

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Speaker 2: be another quarter, and their materials another quarter.

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Speaker 1: So yep, let's talk about the opportunities of this place.

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Speaker 1: Because you have one hundred and twenty hectares of unnusedland currently,

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Speaker 1: what's your plan for what are you going to put

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Speaker 1: on it?

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Speaker 3: Yep.

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Speaker 2: So we've got some big piece of work that's been

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Speaker 2: undertaken over the last six months to try and.

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Speaker 3: Understand the venue of it.

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Speaker 2: And if you stand back, we sit on a piece

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Speaker 2: of land that's part of a special sort of local zoning,

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Speaker 2: the Mars Point Energy precinct, and we've obviously got our

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Speaker 2: consent around operation of the operation of the fuels manufacturing.

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Speaker 2: We've got right next door to us, very significant electricity connection,

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Speaker 2: so the two twenty kV main line comes in very

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Speaker 2: close to our site. We've got a gas pipeline, we've

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Speaker 2: got a deep border harbor energity, and so for the

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Speaker 2: right opportunities and the right projects, that's an incredibly valuable

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Speaker 2: piece of real estate that's quite difficult to replicate really

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Speaker 2: anywhere else in New Zealand, perhaps even further afield. So

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Speaker 2: we're working through our energy precinct plan or concept at

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Speaker 2: the moment. I think, you know, the first part of

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Speaker 2: that is about, you know, where are those additional storage opportunities.

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Speaker 2: How can we deploy those unused tanks where there's an

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Speaker 2: opportunity to do so. I think there are other potential

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Speaker 2: customers that we are talking to and.

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Speaker 3: Could talk too.

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Speaker 2: Purely for storage, Yeah, that's right, maybe different kinds of

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Speaker 2: storage products. And then there's what I call kind of

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Speaker 2: the new energy projects.

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Speaker 3: So we've spoken about our.

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Speaker 2: Work with four Toeskew around sustainable aviation fuels, which we

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Speaker 2: think is a really interesting and exciting application for our site.

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Speaker 2: If you think about being able to locate fuels manufacturing

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Speaker 2: right on the fuel supply chain and deliver that product

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Speaker 2: into Auckland Airport.

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Speaker 1: Do you think saf sustainable aviation fuel is legit? Are

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Speaker 1: we actually looking at a future where we will have

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Speaker 1: sustainable fuel going into planes.

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Speaker 2: Yeah, So we've done quite a bit of work on

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Speaker 2: the physics and the chemistry associated with how you decarbonize aviation.

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Speaker 2: And if you think about our fundamental challenges are small

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Speaker 2: island nation a long way away from the west of

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Speaker 2: the rest of the world that's reliant on tourism to

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Speaker 2: generate our GDP as well as exports off and which

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Speaker 2: go in the belly of a plane to generate our GDP.

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Speaker 2: Leaning into that decarbonization of aviation as a real challenge

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Speaker 2: and opportunity for New Zealand. As it happens all around

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Speaker 2: the world, people are already leaning into it. So we're

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Speaker 2: seeing in Europe and the United Kingdom, Singapore, Japan's talking

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Speaker 2: about one mandates which are basically mandating that a certain

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Speaker 2: percentage of the jet fuel that's consumed in those countries

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Speaker 2: is sustainable aviation fuel. And you know, really the benefit

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Speaker 2: of sustainable aviation fuel over electrically powered planes for example,

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Speaker 2: or hydrogen powered planes. Is your fundamental challenge for New

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Speaker 2: Zealand is how do you get a big, heavy plane

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Speaker 2: with ten and fifty people on it twelve.

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Speaker 3: Hours to LA or New York or wherever it is.

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Speaker 2: And really you need a very kind of dense energy

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Speaker 2: energy dense fuel like jet fuel, and sustainable aviation fuel

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Speaker 2: is dropping so can go into existing gas turbine engines

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Speaker 2: today goes in all of our infrastructure, all the airport

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Speaker 2: infrastructure everywhere in the world. If you think about your

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Speaker 2: alternative of trying to fuel aircraft by hydrogen or electricity,

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Speaker 2: not only do you have to come up with a

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Speaker 2: whole new airplane concept, but you have to change the

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Speaker 2: infrastructure out at every single airport everywhere in the world.

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Speaker 2: And just imagine the billions and billions and trillions of

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Speaker 2: dollars that that would cost. So I think from our perspective,

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Speaker 2: sustainable aviation fuel was a very logical and sensible and

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Speaker 2: achievable next step to start on the decarbitization of aviation.

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Speaker 1: Interesting, and what do you do with those hydrocracking old

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Speaker 1: refinery now decommissioned assets. I can still see them the

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Speaker 1: red and white piles. Is that what you call it?

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Speaker 3: Yep?

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Speaker 1: So what do you I mean? I understand you're selling.

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Speaker 3: Them, yep.

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Speaker 2: So there is a process that's ongoing to sell those assets.

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Speaker 2: So we struck an option agreement with an entity called

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Speaker 2: Siadra last year and they've spent the best part of

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Speaker 2: the last year undertaking fronting engineering and design for their project.

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Speaker 2: I can't talk about it because it's commercially sensitive, but

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Speaker 2: you're welcome to talk to them. We did say at

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Speaker 2: our last results that the other parties that are involved

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Speaker 2: in that project are Quantas Reneva, who are a Japanese

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Speaker 2: renewed by electricity company, Kent and A and Z Bank.

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Speaker 2: So that gives you a bit of a sense of

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Speaker 2: what those assets might be purposed for.

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Speaker 1: But bottom line, that's going that will then create space

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Speaker 1: for you to do something else like sustainable aviation fuel.

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Speaker 2: Or more storage.

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Speaker 3: Well that's the plan.

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Speaker 2: Remembering that it's an option arrangement, so whether it goes

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Speaker 2: or not, it's not actually our decision, it's somebody else's.

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Speaker 1: Thank you so much for your time, Rob really appreciate

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Speaker 1: you having us yet.

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Speaker 3: No worries.

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Speaker 2: Thank you