Z hibernates beleaguered biofuels plant

An international bidding war for tallow - a fatty waste product from meatworks - has closed Z Energy’s biodiesel plant just 18 months after the company finally got it up and running.

You couldn’t make it up. 

Production at the plant has stopped after rising global tallow prices combined with falling international diesel prices to make production uneconomic.

Staff were told last week the plant wouldn't reopen after the Covid-19 shutdown. Now the equipment is being prepared for hibernation for at least a year, after which Z will make a decision whether conditions have improved enough to open up again. 

Or whether the plant might shut down for good. 

“Z will look to restart production of biodiesel if the economic and regulatory environment for local production of biofuels improves,” chief executive Mike Bennetts said in a statement to the stock exchange on Monday.

The announcement came as Z Energy reported a net after-tax loss of $88 million for the year ended March 31 2020, a massive fall compared with a $186 million profit for the previous year.

“The result highlights the competitive intensity of the retail fuel market in New Zealand and the severity of the low refining margins we saw in the last quarter,” Bennetts said.

The board has cancelled the final dividend for the year and says it will raise $350 million in new capital.

The biofuels conundrum

Biofuels is just a tiny part of Z Energy’s problem. Although the company spent $26 million to build New Zealand’s first commercial-scale biodiesel facility, that’s a drop in the ocean compared to the company’s $2.85 billion-worth of assets in 2019.

Still it’s an interesting conundrum, given the oil industry’s inevitable search for life after fossil fuels. 

Tallow was around $700 a tonne when the plant opened. Now it’s nearer $1000 a tonne.

When Z first mooted the biodiesel project in 2014, it could hardly have foreseen tallow would become a hot international commodity. Places like California and Ireland are looking to green their transport fleets and are happy to subsidise biofuels as part of the process. 

That creates an unnatural market for tallow, and local producers just can’t compete.

Tallow was around $700 a tonne when the Te Kora Hou plant opened, Z Energy's general manager Dave Binnie says. Now it’s nearer $1000 a tonne.

At the same time diesel prices have fallen 20 percent, meaning Z’s biodiesel just can’t compete.

“Two extraordinary circumstances have come together. And it looks dire for the next year.”

A tortuous history

If a wicked fairy had put a curse on Z’s admirable intentions to explore making biofuel-from-waste, the project could hardly have been beset with more problems.

First mooted in 2014 and set to be operational by the end of 2015, the plant in the Auckland suburb of Manukau didn’t start producing commercially until the end of 2018. By then there had been land issues, technical issues, power cut issues, problems with the gaskets, with a faulty vacuum pump, and then with the distillation tower. 

See Newsroom’s story, written in 2018, before the plant opened

When it was forced into hibernation last week, the plant was still producing only 8 to 10 million litres a year - half the potential 20 million litre-capacity. It had not yet made a profit. 

“But we were headed in the right direction,” Binnie says. The company had built up a base of commercial customers, companies like Fonterra, Fulton Hogan and New Zealand Post, which were keen to introduce some non-carbon fuel into their fleet.

The next stage was to expand capacity at the plant so they could start selling the biodiesel mix at the pumps.

“We made a small operating loss in the first year. Normally you would build up confidence in your product, grow your market base. And the more volume you have, the lower your variable costs.

“We were trying to get volumes up and negotiate a small premium from our customers,” Binnie says. 

No help from government

The final part of the puzzle is government assistance. Other countries give subsidies to alternative fuel projects.

As the Z website says: “The plant was built without any government grants, subsidies, tax incentives, or mandates, the first in the world we can find.”

But that doesn’t mean Z wouldn’t be pretty pleased if our Government chose to offer some help.

A subsidy would be very helpful.

“There is still a live debate about whether government could put in place mechanisms to create a level playing field for non-carbon-emitting fuels,” Binnie says. 

“A low carbon project without market certainty or a level playing field has a risk associated with it. We never banked on a government subsidy, but things have moved and government policy has moved. 

"It would currently be very helpful.”

Putting a plant to bed

In the meantime, hibernating a biodiesel plant isn’t unlike preparing a car for a winter in the garage, Binnie says. 

You empty out some vessels, do a bit of cleaning, and from time to time you turn some of the main bits over to stop them rusting up. 

“You want to avoid moving parts getting stuck.”

Some parts of the plant could remain open to supply imported biodiesel. Photo: Nikki Mandow.

And some parts of the plant could remain open if Z’s commercial customers choose to still use some biofuels in their vehicles. 

“Z will continue to use Te Kora Hou as an import terminal to honour our commercial commitments for the supply of biodiesel to our foundation customers,” Mike Bennetts says. 

Will the plant reopen one day?

Binnie remains hopeful.

“We have the option. If we see a different economic picture or a different political picture with a government mandate, we can bring production back in three to four months.”

Perhaps there’s a good fairy out there.

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