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Tenders to be held for oil storage

23 March 2005

Tenders to be held for oil storage

The government will hold tenders for additional oil storage to meet our obligations to the International Energy Agency (IEA) to hold 90 days of reserves, Energy Minister Trevor Mallard announced today.

"This decision follows the on-going decline in our oil stocks as a result of rising oil consumption and declining domestic production," Trevor Mallard said.

"It is very important that we meet our obligations to the IEA which is charged with reducing countries' vulnerability to oil shocks and with helping stabilise world oil markets.

"The IEA agreement also requires oil sharing between IEA members in an extreme emergency. As an IEA member, this may be particularly beneficial to New Zealand given our small size, remote location and oil import dependency.

"We have carefully considered the submissions on a consultant’s report released late last year on options and costs. I believe that tendering best meets the government’s objectives of minimising costs while avoiding any adverse effects on competition between the oil companies and ongoing investment in the sector."

The government projects that New Zealand will be about 28 days under the 90-day obligation in 2005 and 2006, and the shortfall will reach 34 days by 2009.

The cost of the tenders will be met by an increase in the petroleum fuels monitoring levy, which is paid by the oil companies based on petrol and diesel sales. The levy is currently 0.025c/l and pays for monitoring fuel security and quality.

The new rate for the levy will depend on the outcome of the tenders, but is expected to be about 0.7c/l to 1.0c/l spread over all oil products.

"The increase in the levy is not expected to take effect until around mid next year. Legislation will be required to amend the rate and purpose of the levy and considerable design work will be needed to ensure we get the best value for money from tenders.

“The Minister of Foreign Affairs and I also want to explore whether we should hold some of our stocks in other IEA countries. This will require discussions with IEA countries in our region to determine whether this is viable,” Trevor Mallard said.

Questions and answers, and the relevant cabinet paper are attached. Contact: Astrid Smeele (press secretary) 04 4719080 or 0274 664438.
Questions and Answers

What is the International Energy Agency? The IEA was set up in 1974 in response to the first oil crisis. NZ joined in 1976. All OECD countries are members (except Slovakia, Mexico, Iceland and Poland). The IEA requires member countries to hold 90 days of oil reserves, and to have emergency demand restraint plans for responding to oil crises. The objective is to reduce vulnerability to oil shocks and help stabilise world oil markets.

The IEA agreement also requires oil sharing between IEA members in an extreme emergency. This may be particularly beneficial to New Zealand given our small size, remote location and oil import dependency.

The IEA is also active in improving energy security generally. It undertakes comprehensive statistical and forecasting work, provides advice on energy policy, climate change and energy efficiency, and has extension programmes with non-IEA members such as Russia and China.

Have the IEA’s oil emergency measures ever been activated? No, although detailed contingency planning was undertaken in response to the Gulf crisis in 1991 and ‘Y2K’.

Do other IEA members meet their oil reserve obligations? Yes, and some, like the USA and Japan, hold very large reserves. From time to time some countries have fallen below the 90 days, but on a temporary basis and all have taken steps to rectify the situation.

Why has our stock holding situation arisen? New Zealand has been virtually unique in relying on voluntary commercial stockholding by oil companies to meet our obligations. (Australia also relies on voluntary commercial stocks, but its obligations are relatively low because it produces and exports oil).

Voluntary stock holding, combined with domestic oil production, has been successful in meeting our obligations until relatively recently. However this is no longer the case as a result of two trends:

Increasing oil consumption (about 3 percent a year for the last 10 years) Decreasing domestic oil production (50 percent reduction in the last 5 years). (Because obligations are measured as net oil imports, domestic production and exports affect the level of stockholding obligations).

Our non-compliance did not become apparent until mid last year as a result of data errors in stockholding reports (eg some double-counting arising from sharing of tank storage).

The IEA doesn’t allow stocks on the water to be counted towards our oil reserves. Doesn’t this unfairly penalise New Zealand? IEA rules do not allow stock on the water to be counted. We have taken this issue up with the IEA, but it has advised that any change in the rules could only be made by agreement of member countries. Such agreement is unlikely because other countries would also have to be allowed to count stocks on the water and the effect of this would be to lower overall oil security.

How much will the additional oil stocks cost? Consultants have calculated the capital costs at about $500m for 500,000t of oil (about 30 days of net oil imports). This is $50 to $75m a year on an annualised basis (including on-going operational and management costs).

Who will run the tenders? The Ministry of Economic Development.

What is the expected cost of administering the tenders? These costs have yet to be determined in detail but they are expected to be in the order of $0.5m set-up and $0.5m annually.

Will new storage capacity need to be built? If so, how long will this take? Some new capacity is expected to be required, and large-scale new capacity may take 3 to 5 years to complete planning and construction. However, the consultants estimate that over 150,000t of spare capacity is available or could be made available within six months. In addition, the IEA allows oil to be stored overseas in IEA countries provided that there is legal entitlement to the oil and it can be accessed in an IEA-declared emergency.

What are the IEA countries in our region? Australia, Korea, Japan, Canada and the USA.


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