Monday 13 June 2011

New Zealand's oil security. How dependent are we on oil imports?

By Denis Tagg

New Zealand imports 97% of its oil. Oil is the lifeblood of our economy. So a vital question must be -- how vulnerable is New Zealand to oil supply shocks? -- Whether from short term disruption, or due to an on-going and perhaps permanent decline in world oil exports?

You would think that discussion about this vital issue would be front and centre of political and economic debate, given the current high oil prices, unrest in the Middle East, and with the UK government developing and oil shock response plan.  Instead there is close to zero public discussion about New Zealand's oil security.

What are the key facts?

1. New Zealand imports 97% of its oil. About 37 million barrels is imported as crude oil each year and refined at the Marston Point refinery. The remaining 17 million barrels per ann is imported as already refined petroleum products. ( source -- New Zealand Energy Data Files 2010   -- for the 2009 calendar year.)

2. New Zealand’s oil fields produced 20 million barrels in 2009 but only 1 million barrels of this domestically produced oil (3% of our consumption) is refined in New Zealand. The remaining 19 million barrels is exported because of its high quality and therefore high value on international markets. Note : New Zealand's domestic oil production has started a steep decline so the oil production figure for 2011 will be substantially lower than it was in 2009. So where does this leave us in terms of oil import dependency? The blue line in the graph below is the official position government on oil dependency. This takes oil imports and deducts domestic oil production. On this basis the government rated New Zealand's oil import dependency at about 63% in 2009.

But should there be any disruption to oil imports could the Marsden Point refinery be re-engineered to accept New Zealand's domestic oil, and if so how quickly? 41% of New Zealand's oil consumer energy is diesel and 6% is aviation fuel. But according to the July 2010 report of the Parliamentary Commissioner for the Environment on Biofuels "New Zealand crude oils are generally too light and waxy to make good aviation and diesel fuel". If these limitations are correct then New Zealand's oil import dependency is closer to 97% -- as shown in the red line in the graph -- than the 63% official position. In the event of an oil supply shock, New Zealand’s almost 100% import dependency would remain unchanged for months, perhaps years, until the Marsden Point refinery could be transformed to accept New Zealand oil. The government has powers  to require New Zealand oil to be refined within New Zealand and prohibit its export in the Crown Minerals Act. Even then we would remain around 70% dependent on imported oil.

3. New Zealand's long supply chain is another vulnerability. Hale and Twomey prepared a report on oil security for the government in 2005. They pointed out..
“Whatever the level of New Zealand domestic production (current production has declined from historical levels), it is likely that NZRC would continue to source the majority of its feedstock from these international sources. Therefore the length of the supply chain will continue to be characterised by the time required to ship crude oil and feedstock from these regions.”

4. Unfriendly Sources.

Where does New Zealand’s oil import come from? Less than 20% of our crude oil imports come from "friendly" nations who might be sympathetic to New Zealand in an oil crisis -- Australia, Papua New Guinea, Korea, and Malaysia. The other 80% of oil suppliers are either politically unstable, run by despotic dictators, or are nation's decidedly unsympathetic to the West. Iran, Iraq, Saudi Arabia and other Middle East Nations supply 60% of our imports, and other contributors include Russia, Nigeria, and Indonesia.

5. Small is big. History tells us that a relatively small disruption to imports can cause chaos. The oil shocks of the 1970s reduced imports to New Zealand by about 7%-10% and lasted just a few months. Yet they plunged New Zealand into a deep recession and caused major disruption to our transport networks. -- carless days, lowered speed limits and "think big" energy projects.

6. What really matters is peak world net exports.  As an oil importer what is absolutely critical for New Zealand is how much oil is available for export from producers ie. net exports. Net exports are far more important to New Zealand then the level of world oil production per se. Why? Because net exports are the amount of oil left after deducting the internal consumption of oil producers. 
As Jeff Rubin points out, OPEC has an  "insatiable thirst for its own oil. With the price of gasoline less than bottled water, Saudi Arabia already burns 3 million barrels a day with internal demand claiming a third of its oil production. At the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production.”

Geoffrey Brown has studied world net export trends . He :-
1. calculated the rate of increase in domestic oil consumption of oil producers
2. calculated the rate at which China and India (Chindia) are taking an ever greater slice of world oil exports and
3. assumed a very modest decline in overall world oil production of 0.5% per year from 2005 to 2015.

His startling conclusion from these projections is that for every three barrels of oil non Chindai countries like New Zealand imported in 2005 they would have to make do with just two barrels in 2015.

Why the Kiwi "she'll be right" attitude?
The stark conclusion has to be drawn that New Zealand is almost totally dependent on imported oil, and that  we will become even more dependent as domestic production rapidly declines  Even if new oil fields were discovered off shore of New Zealand, it takes between 10 - 15 years to bring any such oil into production.
The kiwi "she'll be right" attitude pervades our response to our precarious oil security situation. Yet the reality is that we are a far worse position than other oil importers. The government commissioned Hale and Twomey Report sums it up like this -

"New Zealand has an unusual combination of supply vulnerabilities. It faces the same broad range of possible external supply disruptions as do all IEA members but these are exacerbated by such things as its current level of import dependency, remote geographical location at the furthest extent of the international supply chain and relative isolation from other countries from whom relief could be expected in some situations."

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