Refining NZ Operational Update for January/February 2020

HIGHLIGHTS o The Company earned Processing Fees of NZD 23.0 million in January/February including Fee Floor payments by our customers. o Refinery throughput for January/February was 6.9 million barrels, lower than planned due to late crude deliveries by our customers. o Refining NZ's Gross Refining Margin (GRM) was USD 1.04 per barrel which was heavily impacted by poor global refining margins, high crude oil freight costs and the building of residue for the planned turnaround. Fee Floor payments boosted the GRM to an effective USD 3.09 per barrel. o Global refining margins were weak in January/February initially due to high gasoline exports from China, new regional refineries ramping up production, and lower than expected diesel margins. The coronavirus outbreak then had a significant impact on margins due to a large reduction in Chinese manufacturing activities and 80% of domestic flights in China being cancelled. o At the date of this Update, the oil market is facing both a surge in crude oil supply due to the collapse of the OPEC+ group and an extremely weak demand environment due to COVID-19. We are working with customers on their supply chain management and expect to see a reduction in refinery production and pipeline throughputs. o The RAP achieved throughput of 3.5 million barrels in January/February earning income of NZD 6.9 million, 13% higher than the same period last year. o Process and personal safety performance remained excellent: o There have been no Tier 1 or Tier 2 process safety events for more than a year; and o The recordable injury frequency remains at 0.27 per 200,000 work hours - the best since 2010. COMMENTARY Refining - Margins and throughput The refinery achieved throughput of 6.9 million barrels which was lower than planned due late crude deliveries by customers. Operational availability was high at 99.8%. The GRM was low at USD 1.04 per barrel due to poor global refining margins, high crude oil freight costs and the building of residue for the planned April/May turnaround. The GRM was boosted to an effective USD 3.09 per barrel by the customers' Fee Floor payments, earning the company Processing Fee revenue of NZD 23.0 million. Global refining margins The Singapore Dubai complex margin for the January/February period was weak at a negative USD1.58 per barrel. The margin was initially impacted by high gasoline exports from China, new regional refineries ramping up production, and lower than expected diesel margins offset somewhat by fuel oil margins recovering due to supply tightness. The coronavirus outbreak had a significant impact on margins in February due to a large reduction in Chinese refinery utilisation rates and manufacturing activities and 80% of domestic flights being cancelled in China. Crude oil tanker rates were high in November and December due to the sanctions the US imposed on several Chinese tanker companies. This impacted Refining NZ's January/February GRM as there is a two month lag in the freight rates that are applied in the GRM. Higher crude freight rates negatively impacted the cost of crude processed by Refining NZ during January and February by around USD1.00 per barrel. Since the US sanctions were lifted crude oil tanker rates have returned to normal levels. The Refining NZ GRM will not be negatively impacted by distorted freight rates in the March/April period. Uplift over Singapore Dubai complex margin Refining NZ's January/February uplift over the Singapore Dubai complex margin was USD 2.62 per barrel. Our uplift was weighed down by the surge in crude oil tanker rates as outlined above. Distribution - Refinery to Auckland Pipeline (RAP) The RAP achieved strong throughput of 3.5 million barrels of gasoline, jet fuel and diesel in the January/February period. This earned income of NZD 6.9 million, 13% higher than the same period last year. Pipeline operational availability was high at greater than 99%. Global economic conditions including COVID 19 The global refining environment was challenging towards the end of 2019 due to difficult geopolitical and economic conditions and the impact of the IMO MARPOL regulations. This has now been exacerbated greatly by the impacts of COVID-19 and the failure of the OPEC+ group including Russia to reach agreement on crude oil production cuts to support prices. The oil market is facing both a surge in crude oil supply and an extremely weak demand environment. FGE has revised its 2020 global oil demand and is currently forecasting a demand reduction of 1.3 million barrels per day, whereas it forecast an increase of 0.9 million barrels per day as recently as late January. New Zealand is being impacted significantly and the situation is evolving. It is therefore not possible to forecast refining margins or NZ product demand accurately, but the risks are material and to the downside. Our customers are dealing with great volatility caused by COVID-19 and are responding daily to the market impacts of the virus and Government imposed restrictions. In view of the changing demand profile, we are discussing with our customers how we may be able to assist them with their supply chain management by rebalancing the refinery to reduce our jet fuel production (by moving kerosene to petroleum or diesel). We expect that this will result in reduced refinery production and throughout on the Refinery to Auckland pipeline. At the same time, we are discussing with our customers the possibility of reducing product imports planned to cover our April/May planned maintenance turnaround. Refining NZ has a measure of support due to the Fee Floor, currently set at NZD 140 million, irrespective of the number of barrels processed. In addition, on 14 March FGE forecast that COVID-19 cases outside of China may peak in April and that demand may recover much faster than occurred after the 2008 global financial crisis where the fundamentals, such as credit tightness, were quite different to those existing currently. Planned Turnaround Preparations for the planned maintenance turnarounds during March-May, are progressing to plan, with additional controls and procedures instituted as part of our overall pandemic plan. We remain focussed on delivering a safe and quality turnaround while the margin environment is low, such that we are well placed to capitalise on higher margins when the business environment improves. Health, safety and environment Our excellent health, safety and environment performance has continued in January/February and we have now achieved over a year without any Tier 1 or Tier 2 process safety events. On a personal safety front, we again had no recordable injuries and our recordable injury frequency is 0.27 per 200,000 work hours. In addition, 211 days have elapsed since our last lost time injury. Costs As part of our response to the low margin environment and the impact of COVID-19, the primary focus has been to reduce our cash spend immediately and significantly. We have reduced our 2020 capital programme and have materially rationalised operating costs through significant scope reductions, while ensuring continued safe operation of our refining and distribution business to support a resilient fuels supply to New Zealand. ENDS For further information: Greg McNeill Communications and External Affairs Manager greg.mcneill@refiningnz.com 021 873623 End CA:00350350 For:NZR Type:MKTUPDTE Time:2020-03-20 11:52:41