NEW ZEALAND GOVERNMENT CHOOSES OIL-STOCKPILE OPTION

UNCLAS WELLINGTON 000248

SIPDIS

STATE FOR EB/ESC/IEC/ENR-JSTEELE AND EAP/ANP-TRAMSEY
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ABENAISSA

SENSITIVE

E.O. 12356: N/A
TAGS: ECON NZ ENGR
SUBJECT: NEW ZEALAND GOVERNMENT CHOOSES OIL-STOCKPILE OPTION
FAVORED BY INDUSTRY

REF: (A) WELLINGTON 10; (B) 04 WELLINGTON 291

(U) Sensitive but unclassified -- protect accordingly. Not
for Internet distribution.


1. (SBU) The New Zealand government announced March 23 that
it would hold a tender for additional oil storage in an
effort to meet an international standard to maintain 90 days
of reserves. The decision pleased oil companies, which had
feared that the government would significantly raise their
costs by ordering them to hold additional stocks. The
Ambassador on February 25 wrote two government ministers
expressing concern that alternative strategies for resolving
the stockpile issue might ultimately reduce U.S. oil
investment in New Zealand. Shortly before the March 23
announcement, Minister of Energy Mallard called the
Ambassador to thank him for his letter. The Minister said
he appreciated the Ambassador's drawing his attention to the
issue and implied that the Ambassador would welcome the
government's decision.


2. (U) In his statement announcing the decision, Mallard
said, "I believe that tendering best meets the government's
objectives of minimizing costs while avoiding any adverse
effects on competition between the oil companies and ongoing
investment in the sector." A levy on oil companies that
pays for monitoring fuel security and quality will be
increased to cover the tender's costs. The five oil
companies in New Zealand -- BP New Zealand, Caltex New
Zealand, Mobil Oil New Zealand, Shell New Zealand and the
independent company Gull -- are likely to pass the increased
levy on to consumers. That cost is expected to be NZ 0.7
cents to NZ 1 cent per liter, spread over all petroleum
products. The additional oil stocks -- 500,000 tons of oil,
or about 30 days of net oil imports -- are expected to cost
about NZ $500 million (US $363 million). In addition, new
storage capacity probably will need to be built.


3. (U) New Zealand has relied on voluntary industry
stockpiles to meet its International Energy Agency (IEA)
obligation to hold 90 days of oil reserves. However, rising
oil consumption and decreasing domestic oil production had
led to a stockpile shortfall that had not been detected
until last year because of inaccurate accounting of
reserves. New Zealand depends on imports for about 80
percent of its oil consumption. The government expects the
country to be about 28 days under the 90-day obligation in

2005.


4. (SBU) A government-commissioned study, released December
14, outlined options and costs for boosting New Zealand's
oil reserves (ref A). The oil companies had worried that
the government would force them to pay for additional oil
stocks and storage capacity. Peter Thornbury, public
affairs manager for Mobil Oil New Zealand, said such a plan
would have affected each company differently -- depending on
the company's obligations and investment requirements -- and
thereby distorted the market. While the companies initially
wanted the government to pay for the additional reserves,
the industry ultimately pushed for the tendering option
because the added levy would be relatively easy to pass on
to consumers and would affect the five companies equally.
John Kerr, public affairs manager for Caltex New Zealand,
said the government's decision also opened the door for more
consultations with industry on a number or remaining issues.


5. (U) The government may discuss with other IEA countries
in the region -- Australia, Canada, Japan, Korea and the
United States -- the possibility of holding some of New
Zealand's oil stocks in those countries, as allowed by the
IEA. An IEA review team is scheduled to visit New Zealand
in late April. Post has requested a briefing from the team
on its views of New Zealand's energy policies.


6. (SBU) Comment: The government's apparent shift in
strategy may be due in part to a change in energy ministers.
The previous minister, Pete Hodgson, had said that the
Cabinet had decided to impose the expense of expanded oil
stockpiles on the oil companies. He was replaced in an
unrelated Cabinet reshuffle December 20 by Minister Mallard,
who may have been more open to considering industry's
concerns. Newspaper coverage of the announcement led with
the cost to consumers, then detailed the government's
decision.

SWINDELLS