US embassy cable - 05WELLINGTON10

UNCLAS SECTION 01 OF 02 WELLINGTON 000010 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/ESC/IEC AND EAP/ANP 
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/GPAINE 
 
E.O. 12958: N/A 
TAGS: ECON, NZ, ENGR 
SUBJECT: INDUSTRY MAY FOOT BILL FOR COST OF BOOSTING NEW 
ZEALAND'S OIL RESERVES 
 
REF: 04 WELLINGTON 291 
 
(U) Sensitive but unclassified -- protect accordingly.  Not 
for Internet distribution. 
 
1. (SBU) Summary:  Oil companies are facing the prospect of 
shouldering the costly burden of bringing New Zealand's oil 
stocks up to an international standard.  With the country's 
reserves well below the 90-day supply recommended by the 
International Energy Agency (IEA), New Zealand's Cabinet has 
decided to impose the expense of expanded oil stockpiles on 
the four major oil companies and one independent company 
operating in New Zealand.  The companies say that if the 
government wants to meet the IEA standard, then it should 
bear the cost.  In addition, they contend that if the 
government allowed the market to work, oil supplies would be 
adequate.  The government will accept comments until February 
2 on a study it commissioned on the matter and then is 
expected to decide how it directs the stockpiling of oil. 
The two U.S. companies have not yet requested U.S. government 
advocacy of their position, but have asked that post continue 
to monitor the issue.  End summary. 
 
2. (U) While New Zealand depends on imports for about 80 
percent of its oil consumption, the government does not hold 
any reserves or require oil companies to maintain stockpiles. 
 However, New Zealand relies on industry stockpiles to meet 
its obligation as a member of the IEA to hold 90 days of oil 
reserves.  With the country now holding less than 60 days' 
supply, it must arrange storage of about 500,000 additional 
tons of oil to meet the IEA target, according to the 
government-commissioned study released December 14.  The 
study was launched in October after the government learned of 
New Zealand's shortfall, which was caused by inaccurate 
accounting of stockpiles and declining domestic production. 
 
3. (U) The report estimates the cost of building storage 
tanks and acquiring the extra oil to meet the IEA target 
would be NZ $640 million (US $448 million) in 2006. 
Inventories would have to be increased about 62 percent and 
capital investment raised about 26 percent.  In a statement 
accompanying the study, then Minister of Energy Hodgson said, 
"Cabinet has decided that oil companies should be responsible 
for providing adequate stocks, not the taxpayer."  (In an 
unrelated Cabinet reshuffle December 20, Trevor Mallard was 
named energy minister.)  The study expects the industry would 
pass the added costs to end-users, but this would raise pump 
prices no more than NZ 1 cent per liter. 
 
4. (SBU) Oil companies disputed the cost estimates, 
contending that the industry and ultimately consumers would 
pay more.  Mobil Oil New Zealand estimates the expense to 
each large oil company would be NZ $100 million to NZ $150 
million, which would increase Mobil's working capital 
requirements in New Zealand by 25 to 50 percent.  Caltex New 
Zealand said the estimates do not include the cost of land 
for new storage tanks and maintenance.  Two other large oil 
companies, BP New Zealand and Shell New Zealand, and an 
independent company, Gull, operate in the country. 
 
5. (SBU) Peter Thornbury, public affairs manager for Mobil 
Oil New Zealand, said the government confused the issue of 
security of supply with meeting the IEA target.  As the study 
noted, the oil companies in the country have operated on 
"sound commercial lines," maintaining reserves that have not 
compromised supply to their customers.  Peter Doolan, 
president of the ExxonMobil Refining and Supply Division in 
Singapore, said that if the government wants additional 
stockpiles, it -- and not private industry -- should fund 
them. 
 
6. (SBU) Separately, John Kerr, public affairs manager of 
Caltex New Zealand, said the government's desire to meet the 
IEA target is based on a "societal" assessment of the level 
of adequate reserves, rather than on a commercial view of the 
possibility of disrupted oil supplies.  Kerr asserted that an 
interruption of oil supplies from the Middle East over a long 
period of time -- the study's key scenario -- is unlikely. 
 
7. (SBU) New Zealand is unique among IEA members in being 
heavily dependent on distant imports, Thornbury and Kerr 
noted.  A long supply chain -- between 25 to 30 days from 
Middle East suppliers and between 15 to 20 days from Far East 
suppliers -- means that in-transit oil supplies might be 
considered as reserves.  They suggested the government seek 
the IEA's concurrence to count stocks in transit toward the 
reserves requirement.  This would enable New Zealand to 
satisfy the 90-day target without constructing additional 
storage.  The study, however, takes the opposite view: The 
long supply chain increases New Zealand's vulnerability to 
oil shortages.  The four major companies import mostly crude 
petroleum that must be processed at New Zealand's sole 
refinery.  Gull imports refined products. 
 
8. (SBU) The study also cites the need for official oversight 
of storage levels, for monitoring compliance and for 
implementing a penalties regime.  Companies expressed a 
wariness of increased regulation of their industry. 
 
9. (U) Minister Hodgson described the required 90-day reserve 
as a "sensible precaution."  He called on the government to 
consider even larger stockpiles, allowing New Zealand to draw 
from them rather than having to restrict demand during a 
supply disruption.  The study did not analyze the benefits of 
membership in the IEA, which New Zealand joined in 1976. 
 
10. (SBU) Comment: Despite the expected rise in gas prices -- 
which already went up 12 percent in September over the past 
year -- a decision to boost oil stockpiles is not a 
politically difficult one for the government in this election 
year.  It is the oil industry that likely will take the blame 
for a price bump caused by plumping the oil reserves. 
Directing oil stockpiling also would be consistent with the 
government's increasing intervention in the energy sector. 
This effort, sparked by its desire to ensure adequate energy 
supplies, has in the past year included re-regulating the 
electricity sector, instituting incentives for gas 
exploration and entering a risk-sharing agreement with a 
state-owned enterprise to get a new power project off the 
ground. 
Swindells