Research Team: Peter Bruce Dr Warren Hughes Lou van Es

The Social and Economic Impact of the Proposed CCR Project

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The Social and Economic Impact of the Proposed Continuous Catalyst Regeneration Platformer (CCR) Project
Table of Contents
Executive Summary .................................................................................................. 2 Introduction and background ..................................................................................... 4 Economic impact ....................................................................................................... 6 Materials ................................................................................................................ 8 Equipment needs................................................................................................... 9 Employment ............................................................................................................ 10 The impact of the CCR project on employment .................................................... 10 Apprentices.......................................................................................................... 12 Training needs ..................................................................................................... 12 The impact on contractors and the wider community ............................................... 13 Developing shared value ..................................................................................... 16 Social capital ....................................................................................................... 18 Appendix one: Refining NZContinuous Catalyst Regeneration Project: Economic Impacts For Northland & New Zealand .................................................................... 19 Appendix 1: Economic impact analysis.................................................................... 28 Corporations/facilities (e.g. Refining NZ Limited/Port of Tauranga Limited).......... 28 Festivals/events (e.g. Art Deco Weekend/V8 Supercars) ..................................... 28 APPENDIX 2: SECTORS IN THE 88-SECTOR ECONOMIC MODEL ..................... 30 Acknowledgements and research team ................................................................... 33 Research team .................................................................................................... 33

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Executive Summary
NorthTec has been commissioned by Refining NZ to assess the potential social and economic impacts of their proposed CCR project. Our findings can be summarised as follows: The total estimated expenditure of the project is $365 million. Of this, $147 million will be spent in Northland, $27 million in the rest of New Zealand and $191 million overseas. Applying economic multipliers to determine the downstream benefits from project activity, the benefits to Northland are $247.3 million and $67.5 million for the rest of New Zealand, providing a total economic revenue benefit of $345.8 million.

Figure 1: Eco nomic benefit of the construction project

Once in production, the increased capacity for gasoline will generate an additional $550 million in revenue for Refining NZ. After allowing for the additional crude required the net benefit is estimated at $100 million. Applying multipliers, this will generate $159 million impact gain for Northland annually and $223 million annual impact for the New Zealand economy.

Figure 2: Economic benefit of the increased sales of gasoline

The CCR project will employ 40 people in 2012 peaking at 350 in 2015. Of these approximately 67% will either be from Northland, or repatriated to Northland. When additional employment generated by the project is included, the total employed starts at 138 in 2012 peaking at 657 in 2015.

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Figure 3: Employment impacts of the project

Local contractors and an overseas project management expert praised project management practices developed during Refining NZs previous Point Forward project. The project manager of the time, who developed the improved processes has since been refinery manager and now returns to the project manager role for the CCR project. Our assessment is that a continued trajectory of proven project management processes and the close working relationships developed between the project team and local contractors provide strong prospects for delivering a successful project.

Alongside world-class project management processes, the refinery is acknowledged for other leadership roles such as exemplary health and safety practices. These make a significant contribution to building capacity in the industries that Refining NZ has become closely associated with, in Northland and the rest of New Zealand. As New Zealands only oil refinery the Marsden Point Refinery remains a significant strategic asset for nation. The CCR project will enhance its value, generate further economic and employment benefits for the region and nation and further strengthen local support industries.

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Introduction and background

This report was commissioned by Refining NZ to investigate the social and economic impact of the CCR project. Situated on the southern shores of the Whangarei harbour in the Northland region, Refining NZs Marsden Point refinery started production in 1964 as New Zealands first and only oil refinery. The refinery processes crude oil for their customers, and refines it into high quality fuels. Refining NZ is established as an important strategic asset for the nation supplying: all of the country's jet fuel nearly 80% of diesel around half of all petrol between 75 and 85% of bitumen for roading all fuel oil for ships.

The Continuous Catalyst Regeneration Platformer replaces equipment installed in the early sixties. The CCR Platform is designed to achieve the following: increase processing capacity by 8% reduce fuel loss by 15% by improving product yields increase gasoline production capacity from 11 million barrels annually to 13 million barrels improve refinery reliability and reduce imports of refined products increase refinery processing capability with the ability to use different crudes lower emissions by 120,000 tonnes of carbon per year increase Refining NZs market share in New Zealand from 72% to 80% (excluding fuel oils, bitumen) negate the need to spend $105 million and to shut down the refinery for 80 days to upgrade the original semi-regeneration unit If approved, construction will commence in 2012 with the project ready for commissioning in 2016.

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The company has effectively paid off the $190m Point Forward project just two years after commissioning the plant. 1 The CCR project emerges from Refining NZs growth strategy as the next step towards enhanced competitiveness: Continuously improve competitive position versus imports and target production capacity at 50-80% of New Zealand demand by developing robust options to close the gap.2 Report scope The CCR project is a modification to the existing Marsden Point Refinery, therefore the investigation of impacts is confined to the direct impacts of the project including the economic impact on the region and nation, the employment impact and impacts on local contractors and the wider community. Methodology Dr Warren Hughes, consultant economist conducted the economic analysis using an 88-sector (year ended) September 2011 economic model of the Northland 3 economy and the New Zealand economy. Information gleaned from interviews with 7 of the largest contractors helped to refine the data used. The contractor interviews also helped to determine the employment impacts and provided insightful information about project processes. Refining NZ documents, NorthTecs earlier research work with Refining NZ, Department of Labour employment data and media articles contributed to the research teams processes.

$365 Million Refinery Project Gets the Nod Stuff Business Day: http://www.stuff.co.nz/business/industries/6456765/365m-refinery-project-gets-nod 2 Fuelling New Zealands Future Strategic Plan 2012 2016 Refining NZpage 7 3 The Northland Region in this report refers to the area administered by the Northland Regional Council. Further references to the Northland economy, refer to this geographical area.

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Economic impact
Economic impacts of the CCR project have been estimated using 88-sector (year ended) September 2011 economic model of the Northland 4 economy and the New Zealand economy. While expenditures may be based at the Marsden Point refinery they involve expenditure throughout New Zealand and overseas. Only direct expenditures in Northland and other New Zealand regions will have economic impacts for the respective domestic regions. Approximately 48% of total expenditure on the project will occur somewhere in New Zealand with 40% realized within the Northland region. All 88 sectors in the model are listed in Appendix 3. The economic impacts are calculated at three levels: 1. for direct or first round expenditures associated with the project 2. for the revenue flow-ons through the region and nation 3. for forward impacts from increased revenue from refined gasoline. Four economic impacts are estimated. The Revenue impact shows the dollar sales value of activities while the Net Household Income impact after tax, saving and superannuation shows consumer purchasing power in the region emanating from the activity/event. The Employment impact is the full-year part-time and full-time headcount impact due to business unit operations or the project. Finally, the Value Added (GDP) impact is also estimated. Value added comprises gross wages and salaries of employees as well as gross operating surpluses of business units plus their depreciation. This measure shows the gross (before tax) returns to both employees and business units in the region subject to the impact. The construction expenditure for the programme is phased across 5 years.
Region & activity Northland Construction & Materials Labour at Site Other New Zealand Materials & Equipment Overseas Materials & Equipment TOTALS 2012 1.0 5.0 6.2 71.0 83.2 2013 15.5 15.0 20.3 93.4 144.2 2014 9.5 39.0 0.5 21.0 70.0 6.0 65.6 2015 4.6 55.0 2016 TOTAL 30.6 116.0 27.0 191.4 365.0

2.0

2.0

Table 1: Timeline and region for construction expenditure on the CCR Platformer in $ millions

4 Northland or the Northland Region in this report refers to the area administered by the Northland Regional Council.

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The economic impact is calculated for the Northland Region and for New Zealand and presented in Table 2 as the impacts for the project covering the years 2012 to 2016, and then the ongoing economic impact of the additional refinery output. Total economic impacts 2012 2016
Northland Region Total New Zealand Northland as percentage of NZ Revenue $ millions 247.33 345.80 71.5% Net Income $ millions 101.48 124.57 81.5% Employment Jobs 1313 1874 70.1% Value Added $ m 181.86 237.41 76.6%

Table 2: Total economic impacts from the CCR project for Northland and New Zealand for the years 2012 2016

A simple average of the four percentages at the foot of Table 2 shows the Northland economy capturing around 75% of the total New Zealand impacts from the CCR project. Of the four measures, perhaps the most important is the Value Added impact with a Northland percentage of 76.6%. Value Added, GDP or regional GDP as gross regional product (GRP) shows the gross return to a region or country from the activity under analysis comprising gross wages and salaries, gross operating surpluses of all business units plus depreciation on plant and equipment. It is the best measure of financial regional return for (in this case) the Northland economy from the CCR project. Taking the September 2011 year as a base, the project gains for the Northland economy due to the CCR project can be expressed as a percentage of these 2011 base year aggregates for Northland. These are detailed for the four impacts in Table 3.
Year of Impact Northland region year ended Sept 2011 Project gains Northland 2012-16 2012 2013 2014 2015 2016 Revenue $ millions 11,185.2 Percent 0.09% 0.50% Net Household Income $ m 2,138.3 Percent 0.20% 0.76% Employment Persons 53,018 Percent 0.12% 0.56% Value Added or GDP $ m 5,934.5 Percent 0.12% 0.54%

0.72% 1.57% 0.75% 1.02% 0.87% 2.13% 1.02% 1.33% 0.03% 0.08% 0.03% 0.05% Table 3: Project gains for Northland as percentage of Northland economy year ended Sept 2011

The projects starting and ending years 2012 and 2016 show very small percentage impacts for Northland as might be expected. At the peak years of the project 2014 2015, percentage gains for the Northland economy will be around 1% annually for the four impact measures allowing for some growth in the Northland region in the interim period 2012 2014.

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Gains from import replacement of $550 m annual gasoline production at Refining NZ Currently New Zealand imports approximately $550 m of gasoline products (wholesale price before excise tax) that the CCR project will enable Refining NZ to supply. While producing mogas will require increased crude imports there are at least
two ways the New Zealand economy will gain from the CCR project. First, the current imports valued at $550 million annually will now be produced in New Zealand. After allowing for the increased crude required for this increased motor gasoline production, the increase in annual value added of GDP for New Zealand has been estimated at $100 million. This direct impact from Refining NZ production will have flow-on effects to other sectors in a similar manner to those estimated for the construction of the CCR project. Using the sector 21 (the Refining NZ sector listed in Appendix 2) Value Added multipliers for the Northland and New Zealand economies respectively at 1.59 and 2.23, Northlands total impact gain is $159 million annually or 2.7% of annual Northland current GRP as in Table 3. This is a very significant annual gain for Northlands workforce and business units. For the New Zealand economy (including Northland), the gain is of course even larger at $223 million annually (after all flow-ons) making for a 0.11% gain in current annual New Zealand GDP at $204.5 b (December 2011 year figures). Secondly, this increased self-sufficiency in mogas usage gives the New Zealand economy greater security of supply for this strategic good. These self-sufficiency gains do not have a ready market value that can be quoted here but these gains can be approximated using the so-called forward linkages capability of the economic model. The model can identify those sectors most dependent on using gasoline with a $550 m annual wholesale value. Again, these linkages can be dichotomised between industrial users and households or Consumption linkages. The direct and flow-on aggregates are further elaborated in the full economic impact report in Appendix 1.

Materials
The total materials spend in New Zealand is estimated at $170 million, of which $30 million minimum will be purchases locally on items such as cables, cable trays, structural steel, insulation materials, paint and tools etc. Most of these items are manufactured outside the region. Materials such as timber, sand, cement and aggregates will be accessed locally. Contractors anticipate that Refining NZ will purchase bulk materials. Most contractors indicated that they would purchase consumables locally.

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Equipment needs
Contractors do not anticipate significant investments in capital equipment as most have adequate equipment from current and completed projects. Approximately 10 vehicles will be purchased for transporting staff, some specialist equipment and cranes.

Economic Impact highlights

$345 million economic revenue benefit for New Zealand from the construction phase. A 1.33 % increase in Northland's GDP at the peak of construction in 2015. $159 million annual economic gain for Northland and $223 million annual economic gain for New Zealand from additional fuel sales. An annual 0.11% gain in New Zealand GDP from additional fuel sales.

Completion of the CCR Platform at the Marsden Point refinery will first initiate large construction impacts throughout New Zealand but particularly in the Northland economy as estimated in this report. Secondly, it will increase security in supply of gasoline which is a vital intermediate input into much of New Zealands production activity as well as for the outdoor and mobile lifestyle currently enjoyed by all New Zealanders. In the current climate of environmental concern, the new plant will effectively lower carbon emissions, significantly supporting New Zealands commitment towards safeguarding the environment to the fullest extent possible.

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Employment
Northland has for decades had among the highest unemployment rates in New Zealand. From December 2009 to December 2011, unemployment rates have ranged between 7.3 and 9.8%.5 While the national unemployment rate was 6.3% in the December 2011 quarter, the Northland unemployment rate was 8.3%.

Figure 4: Unemployment rate by region6

At 29% (for the December 2011 quarter) the national youth (15 to 19 years) unemployment rate is a mounting concern. In June 2011, 48% of Northlands working age Mori were estimated to be on welfare payments.7

The impact of the CCR project on employment

The CCR project will employ 40 people in 2012 peaking at 350 in 2015. When additional employment generated by the project is included, the total employed starts at 138 in 2012 peaking at 657 in 2015 (see table 4). Refining NZs project management team will interact directly with a set of subcontractors who have a long association with Refining NZ. Seven of the contractors, comprising the bulk of the labour force have provided estimates of the number of employees required and, where possible, an indication of where these staff might be sourced.

Data accessed from the Statistics New Zealand website: http://www.stats.govt.nz/browse_for_stats/income-andwork/employment_and_unemployment/HouseholdLabourForceSurvey_HOTPDec11qtr.aspx 6 Department of Labour (2012) Employment and unemployment December 2011 quarter. Retrieved from: http://www.dol.govt.New Zealand/publications/lmr/lmr-hlfs-dec-11.pdf 7 Simon Collins (June 11, 2011). Where are the Jobs? Youth Unemployment in the North. New Zealand Herald. Retrieved from: http://www.nzherald.co.nz/maori/news/article.cfm?c_id=252&objectid=10731518

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Projected staff Supplier A Supplier B Supplier C Supplier D Supplier E Supplier F Refining NZ project staff Total 90 80 30 45 20 50 50 365

Northland 36 54 15 45 7 40 30 227

NZ 40 19 15 10 5 20 109

Overseas 10 1

Returning 4 6

Apprentices 14 4 7 2

3 5

11

18

27

62% 30% 3% 5% Table 4: Projections of the source of project staff for the main contractors (suppliers)

Table 4 presents estimates of six of the seven contractors interviewed. The seventh contractor did not have sufficient information to make estimates. Their estimates vary according to the nature of the trade involved. Civil construction labour including carpenters work on both domestic and civil construction. There is spare capacity in the construction sector as activity has been constrained by the slow economy all of the capacity required can be found in Northland. Other trades, more likely to be associated with large projects have migratory populations that move from project to project. Two contractors believe that some of the tradespeople who have moved to Australia to find work would want to return to Northland. In some cases they will still have family links and possibly property here. It is difficult to accurately estimate the numbers returning from Australia. For the relevant trades, these are estimated at between 5 and 15% of the Northland-based project workforce, accounting for approximately 5% of the total project workforce.
2012 Directly employed on the project Total employment impact for Northland Total employment impact for rest of New Zealand Total additional employment 40 21 77 138 2013 150 296 244 540 2014 250 399 120 519 2015 350 541 116 657 2016 10 16 4 20

Table 5: Total annual employment impact in New Zealand 2012 2016

Based on their current knowledge of the project six of the seven major contractors estimated the number of staff to be employed. After including Refining NZ project staff, an estimated 62.2% of staff will be sourced from Northland and a further 4.9% repatriated to Northland from work outside the region.

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Apprentices
Contractors have indicated taking on 27 apprentices. Some of these will be employed this year. This is a significant boost for skills increase for the region. While the project will require mostly experienced tradespeople, even a modest increase in apprenticeships will help address the disproportionate amount of young people unemployed.

Training needs
Some contractors, such as civil construction contractors envisage minimal training needs as they have a stable and experienced workforce. Some will require specialist trades training such as pipe welding. Apprentices will be trained following processes established by the relevant Industry Training Organisation. Established members of the core workforce may require supervisory or leadership training to enable them to work with larger gangs.

Employment impact highlights

At its peak in 2015, 350 people will be employed directly on the construction project. A further 307 jobs will be created from downstream impacts. Approximately 62% of the project workforce will be sourced from Northland with a further 5% repatriated to Northland from other regions or overseas. The major contractors plan to take on 27 new apprentices.

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The impact on contractors and the wider community

Construction started on the Marsden Point Refinery fifty years ago in 1962. Some of the contracting companies that will work on the CCR project worked on the original construction. Since the first construction project some of the contractors have staff based permanently at the refinery and have participated in further projects. Relationships between the Refining NZ and contractors in the past was more adversarial and arms length. During large projects, the relationship was sometimes through the intermediary of a managing contractor. Thus communication difficulties were commonplace. Given the 50-year timeframe of the Refining NZ contractor relationship, the communication processes need to be considered in the context of the times.

Figure 5: Contractor vehicles in the refinery car park

Refining NZ business plans reveal a strategic intent that maintains a focus on robust profitability and also emphasis values that support improved processes. The 2012 to 2016 Business Plan has five key strategies: leading in reliability, safety and environment Asia Pacifics best supporting New Zealands growth New Zealands supplier of choice robust profitability delivering in a volatile world people and performance being an employer of choice delivering on our promises developing mutual trust, understanding and support. The four key values that support Refining NZs strategic intent are honesty and integrity, winning together, leadership and respect. The winning together or one team value in the 2012-2016 business plan articulates values-based practices often espoused in organisations but, as evidenced by contractors interviewed, these are actualised at the Marsden Point refinery.

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Figure 6: Refining NZ's strategies and values

Changes to processes initiated during the Point Forward project (the most recent major project) created a more collaborative working environment. The Project Manager of Point Forward joined Refining NZs leadership team after the project as Refinery Manager. He returns to the project management role for CCR providing continuity and an important link to the leadership team. One contractor spoke of the benefits of co-locating supervisors with project management staff. Any problems could be addressed directly based on often longstanding working relationships, high trust and ease of communication. The contractors were enthusiastic about positive interaction with the project team and the absence of "hidden agendas". One of the contractors contrasted the project teams approach with the adversarial approach that remains the norm for most projects in New Zealand. These sentiments align with, those of Duke Johnas, Principal Project Manager of Worley Parsons providing an international perspective: The original Point Forward project FEED phase as well as a major part of the EP phase was executed following the standard parallel client / contractor project organizations. However, towards the end of Point Forward and throughout the construction phase an initiative by the Project Manager changed the way the project was being executed and we implemented the integrated project organization concept with great success. Members from client and contractor teams occupied positions to form the integrated project execution team depending on their qualifications and skill sets regardless of their company affiliation. The program immediately had great impact on improving teamwork as well as having a clear positive change in the ranks, creating sense of collective ownership and responsibility and the finger pointing incidents dropped noticeably.
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Fuelling New Zealands Future Strategic Plan 2012 2016 Refining NZpage 7.

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The success of working with an integrated organization had convinced all of us that for the next phase of the project we would not hesitate to implement it right way from the start of the project. The proposed Refining NZ Growth Project organization is in most part an integrated one with members from each company reporting to each other without any issues or problems what so ever. So much so that when an outside entity or peer team comes into the project to audit or review the project execution or assess progress, often times they could not tell the client from the contractor. The success of the collaborative approach depends very much on the readiness and flexibility of the organizations involved for any given project. Of course, this One Team approach will not work when one is dealing with a client completely ingrained in client / contractor separation mentality and deeply convinced that the dissection must remain in order to enable their staff to indiscriminately scrutinize and maintain the master slave relationship. I am convinced that the overwhelming majority of projects such as ours will qualify for the One Team strategy but there might be other project with clients not willing to embrace the concept and opt to execute their projects thru the standard method. The program will only succeed if the parties are aligned and willing to make it work. Fortunately for us the Refining NZleadership was adamant to make it work, their staff were willing to collaborate, and hence the success story. From these comments from contractors and an offshore project management specialist, there appear to be multiple benefits from the collaborative approach developed by Refining NZ: Benefits for Refining NZ Higher levels of trust and faster communication. Contractors highly familiar with the refinery, its protocols and systems. Contractors have a greater sense of ownership of the project. Reduced level of risk for the project through the development of this community of practice. Benefits for the contractors: Their needs are factored into the project, e.g. the phasing is favourable as the peak requirement for resources is less severe. Without a managing contractor they will enjoy a more direct relationship with Refining NZ. Their direct involvement in the project will help avoid "poaching" of staff from out of the region contractors. The size of the project will provide stability and business continuity in tight times. They will benefit from the learning consequent to involvement in a world-class

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project. These benefits translate to wider benefits for the region, and to a lesser extent the nation: The collaborative nature of the project generates valuable learning for contractors and technology transfer that should inform other project processes in the region (Refining NZ has generally lifted the bar regionally in processes such as health and safety). Local contractors have indicated they will take on some apprentices thus building the skills base for region. The use of local contractors will attract and potentially retain skilled trades people back to the region.

Developing shared value

Earlier relations between what was the New Zealand Refining Company and contractors reflected supply chain practices consistent with the broader global practice. The concept of the value chain articulated by Michael Porter in 1985 9 developed to an evolution of the concept he outlined as shared value. The shared value approach considers all stakeholders and takes a longer view of the sustainability of the business based on effective engagement with stakeholders. According to Porter, from his more recent work:10 A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? It is evident that Refining NZ has recognised this dynamic. In 2008 they commissioned a report to investigate their corporate citizenship 11. Their recent

Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter (1985) New York: Free Press 10 Creating Shared Value by Michael Porter and Mark Kramer (January 2011) Harvard Business Review. http://hbr.org/2011/01/the-big-idea-creating-shared-value 11 The New Zealand Refining Company: Our Contribution, an unpublished Report by NorthTec

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business plans include stakeholder-related KPIs. Their vision identifies aims for customers, stakeholders and shareholders. Their aspiration for stakeholders is: Attract, develop and retain talented individuals and business partners to sustain and grow the business and be recognised as a valued corporate citizen locally, regionally and nationally. 12 Building contractor capability The Point Forward project presented significant challenges, as the new plant was constructed in a live refinery. Refinery project personnel attributed part of the success of the project, to the capability of local contractors and the skill of their people. This capability has developed as most of the present contractors have worked with the refinery for decades. Project team members believe that participation in these projects builds capability for the contractors and their employees.

Figure 7: A large block of concrete being removed from amongst live refinery plant

Refining NZs winning together strategy, the enthusiasm of contractors for improvements in their working relationships and the success of the Point Forward project evidence that Refining NZ is serious about generating shared value. A continuation of this strong collaboration with contractors provides a solid foundation for the delivery of a successful project.

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Fuelling New Zealands Future Strategic Plan 2012 2016 Refining NZ page 7.

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Social capital
Refineries in different locations will be embedded in their communities to differing degrees. Some will be fortress-like with armed guards. Others will be co-located with a number of other refineries in industrial zones. Marsden Point Refinery has no armed guards and many of the staff live close by in neighbouring communities, a testament to safety and environmental standards. Their children attend local schools. Refinery staff participate in local community projects, such as recent improvements to the Takahiwai Marae (a meeting house and community complex for the local indigenous Mori) and conservation projects in the adjacent coastal environment. In summer, refinery staff swim at lunchtime, or after work in the harbour or nearby ocean beach. People catch fish from the Marsden Point wharf and gather shellfish on Ruakaka beach. Social capital reflects the community skills that have co-evolved with individual skills. People working together generate webs of social capital.
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Contractor and community impact highlights

Proven world-class project management processes developing in the previous project will be further developed during the CCR project. Local Northland contractors will be taking a leading role in the project. Capability for Refining NZs support industries will be further enhanced.

The embedded nature of the refinery in the community, the integration of project staff from companies with a long association with the refinery and the integration and further refinement of project management practices continues to accumulate social capital that can only benefit the region.

from Virtual Teams: People Working Across Boundaries With Technology, Jessica Lipnack and Jeffrey Stamps, (2008) Chapter 4: http://www.netage.com/pub/books/VirtualTeams%202/V2html/C4_Trust.html

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Appendix one: Refining NZContinuous Catalyst Regeneration Project: Economic Impacts For Northland & New Zealand

By Dr. Warren R Hughes Consulting Economist Auckland, New Zealand

March 2012

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INTRODUCTION
This report analyses the economic impacts from a $365 m project commencing in 2012 by Refining NZ to construct a Continuous Catalyst Regeneration Platform (CCR) taking four years to complete with commissioning in 2016. All economic impacts have been estimated using 88-sector (year ended) September 2011 economic model of the Northland Regional Council (Northland R C) economy and the New Zealand economy. While expenditures may be based at the Marsden Point refinery (Northland R C) they involve expenditure throughout New Zealand and overseas. Only direct expenditures in Northland region and other New Zealand regions will have economic impacts for the respective domestic regions. Approximately 48% of total expenditure on the project will occur somewhere in New Zealand with 40% realized within the Northland economy. All 88 sectors in the model are listed in Appendix 2 and are italicised in the report for easy identification.

IMPACTS FROM THE CCR CONSTRUCTION AT THE REFINERY

The CCR Platform is designed to achieve the following: increase processing capacity by 8% reduce fuel loss by 15% by improving product yields increase gasoline production capacity from 11 m barrels annually to 13 m barrels improve refinery reliability and reduce imports of refined products increase refinery processing capability with the ability to use different crudes lower emissions by 120,000 tonnes of carbon per year increase Refining NZs market share in New Zealand from 72% to 80% (excluding fuel oils, bitumen)

Construction will commence in 2012 with the project ready for production in 2016. Most of the construction will take place over 2013 and 2014 with materials and expertise sourced from the Northland region, other regions within New Zealand and overseas. The cost allocation over contributing industries and regions, including countries overseas, is summarised in Table 1. TABLE 1: COST ALLOCATION FOR THE CCR PROJECT NEW ZEALAND REGIONS AND OVERSEAS COUNTRIES Total Cost $ millions Regional/Overseas Allocation $ millions Other Northland Overseas NZ 8.5 45.0 96.4 1.0 6.0 10.0 3.0 12.0 9.0

Activity

Engineering Main Equipment Piping Electrical Material & Equipment Instruments Building Materials

53.5 96.4 7.0 13.0 12.0 9.0

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Structural Steel Building & Construction Services Cranes & Equipment Freight & Logistics Catalysts Insurance Project Management & Labour TOTALS

3.5 11.6 22.0 14.0 4.0 3.0 116.0 365.0

4.6 13.0 4.0

3.5 1.0

6.0 9.0 10.0 4.0

3.0 116.0 146.6 27.0 191.4

As detailed in Table 1, 52% of the total cost will be sourced from overseas. The engineering cluster in New Plymouth servicing New Zealands oil extraction and exploration activity gains $8 million in engineering work for the project. The total direct impact on Northlands economy will be $146.6 million and is concentrated in the construction and construction supplying sectors. As shown in Tables 3, 4 and 5 below, however, the economic impacts on the Northland economy are much greater after account is taken of the flow-on activities created by the CCR project. The timeline for the construction project is summarised in Table 2. TABLE 2: TIMELINE & REGION FOR CONSTRUCTION EXPENDITURE ON THE CCR PLATFORM IN $ MILLIONS REGION & NORTHLAND Materials & Labour at Site OTHER NEW Materials & OVERSEAS Materials & TOTALS 2012 1.0 5.0 2013 15.5 15.0 2014 9.5 39.0 2015 4.6 55.0 2016 TOTALS 30.6 116.0

2.0

6.2

20.3

0.5

27.0

71.0 83.2

93.4 144.2

21.0 70.0

6.0 65.6 2.0

191.4

365.0

From Table 2 it becomes clear that the main construction years are 2013 2015 with most equipment etc. purchases from New Zealand business units in 2013. The 2015 year sees the largest expenditure on construction labour and oversight at the Refinery. For the 2013 year, the direct and flow-on impacts are shown in detail for the Northland and New Zealand economies. The expenditures in Table 2 comprise the so-called direct or first round expenditures associated with the CCR project. These expenditures engender flow-ons in construction-related sectors as business units in Northland and the rest of New Zealand supply the materials and equipment required for the project. These flow-ons can be dichotomised into two segments. First, the Industrial flow-ons show the sales revenue, employment etc generated by sectors supplying the CCR project for building materials,

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equipment, construction services (e.g. plumbing, wiring, earthworks etc.) and other goods and services. Secondly, as construction workers at the site and employees in the supplying sectors just noted spend their wages and salaries in the Northland region and throughout New Zealand, they create the so-called Consumption flow-ons indirectly attributable to the CCR project. The total of all these indirect effects comprise total flow-ons attributable to the project. The sum of the direct and indirect (flow-ons) comprise the total economic impacts of the CCR project. Table 3 below shows these flow-ons in total for both the Northland and New Zealand economies for the 2013 year.

TABLE 3: NORTHLAND & NEW ZEALAND-WIDE ECONOMIC IMPACTS FROM 2013 EXPENDITURES ON THE CCR PROJECT Revenue $ millions Net Household Income $ m Employment Persons Value Added or GDP $ m

Impact Round

NORTHLAND R C Direct or First Round Expenditure Flow-ons to other sectors TOTAL NORTHLAND IMPACTS Northland Multiplier OTHER NZ EXPENDITURES Direct or First Round Expenditure Flow-ons to Other Sectors TOTAL NEW ZEALAND IMPACTS New Zealand Multiplier

26.00 29.97 55.97

12.66 3.68 16.34

201 95 296

21.32 10.97 32.29

2.15

1.29

1.47

1.51

20.30 34.91 111.18

4.01 6.90 27.25

90 154 540

9.56 16.43 58.28

2.40

1.63

1.86

1.89

The direct or first round Revenue impact for Northland is the first figure in Table 3 or $26 m. This comprises the $15.5 m of materials and equipment expenditures in Table 2 plus 70% of the gross salary impact of $15 m for a net income impact of $10.5 m. The other 30% of gross income covers PAYE, ACC levies, superannuation deductions etc. which do not impact on the Northland economy directly but only indirectly in the form of subsequent Government expenditure on education, health, welfare etc. and pension payments to Northland residents by superannuation funds etc. Accordingly the total direct impact for Northland becomes $15.5 m plus $10.5 m or $26 m. After accounting for Revenue flow-ons of $29.97 m, the total Revenue impact for the Northland economy in 2013 is $55.97 m. The multiplier associated with this Revenue impact at 2.15 indicates that every dollar spent on the CCR project in 2013

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engenders another $1.15 of sales revenue for business units somewhere in the Northland region. Multipliers for the other impacts applicable to the Northland economy shown in Table 3 can be interpreted similarly. After accounting for direct expenditures and flow-ons in other New Zealand regions, the New Zealand-wide (including Northland) Revenue multiplier increases to 2.40. In deriving the impacts shown in Table 3, the direct expenditures as in materials and equipment are allocated to the appropriate sectors in the 88-sector economic model as in Non-Metallic Minerals (lime, cement etc.), Road Transport, Vehicle & Crane Hire, NonBuilding Construction etc. The operation of the model then generates the resulting flow-on impacts in supporting sectors such as Electricity, Other Business Services, Fabricated Metal Products etc. as listed in Table 4 below. This allows derivation of the multipliers shown in Table 3 as total impacts divided by the direct expenditures. For example, the Northland Revenue multiplier is derived as 55.97/26 or 2.15 and the New Zealand Revenue multiplier as 111.18/(26 + 20.3) or 2.40. The multipliers are a concise way of expressing the flow-on impacts as in the conclusion that $1 of expenditure in the New Zealand economy on the CCR project generates another $1.40 of sales revenue (2.40 less 1) somewhere in New Zealand. The other multipliers can be similarly interpreted for Income, Employment and Value Added or GDP.

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As noted above, the flow-ons can be analysed in more detail to show which sectors in the Northland economy benefit most from the CCR project. The top 10 sectors for the Revenue and Employment impacts are shown below in Table 4. TABLE 4: TOP 10 NORTHLAND INDUSTRIAL SECTORS SUPPLYING THE CCR PROJECT IN 2013 FOR REVENUE & EMPLOYMENT REVENUE/OUTPUT Flows in supplying sectors due to CCR Project Sector $ mill Perce nt Petrol Chem 0.84 7.6 Wsaling Electricity 0.57 5.2 Mining & Quarrying Other Bus Services Vehicle Retail & Serv Financial Services Air & Transport Service Communications Water & Rail Services Real Estate Services 0.55 0.54 0.51 0.35 0.34 0.31 0.27 0.22 5.0 4.9 4.6 3.2 3.1 2.8 2.4 2.0 EMPLOYMENT Flows in supplying sectors due to CCR Project Sector Person Percent s Vehicle Retail & 3.70 11.3 Services Other Business 3.39 10.4 Services Legal & Accounting 1.31 4.0 Serv Personal Hhold Retail 1.05 3.2 Fabricated Metal 1.03 3.1 Product Mining & Quarrying 0.88 2.7 Timber & Wood 0.76 2.3 Products Building Supply 0.69 2.1 Wsaling Petrol Chemical 0.61 1.9 Wsaling Scientific & Technical 0.61 1.9 Res 14.03 18.70 32.73 62.34 34.4 65.6 42.9

# 1 2 3 4 5 6 7 8 9 10

# 1 2 3 4 5 6 7 8 9 10

Top 10 supplying sectors Remaining 78 sectors Total Industrial Flow-ons Total Consumption Flowons TOTAL REVENUE FLOWONS

4.50 6.56 11.06 18.91

40.7

Top 10 supplying sectors Remaining 78 sectors

36.9 63.1

Total Industrial Flow-ons Total Consumption Flowons TOTAL EMP COUNT FLOW-ONS

29.97

100.0

95.07

100.0

In reviewing the results presented in Table 4 we need to be aware that the CCR project is a unique one for New Zealand. The economic model used to estimate the above impacts reflect average activity in New Zealand for the September 2011 year. A typical construction project with direct expenditure of around $46.3 m somewhere in New Zealand will almost certainly involve Mining & Quarrying (as listed in Table 4 supplying for example construction aggregates) whereas the CCR project almost certainly will not or at least not to the extent shown in Table 4. The results in Table 4 therefore apply more to typical construction rather

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than the specialised construction of the CCR project which a general economic model of the type used here cannot accurately account for in terms of the most closely linked supplying sectors. However, results in aggregate are still useful. For example, Table 4 shows that the Consumption linkages at around 62% of the total significantly outweigh the Industrial linkages. For the CCR project in 2013, the gross income component at $15 m is a significant injection of spending power into the local Northland economy matching the materials and equipment total of $15.5 m. As a result, the Consumption linked flow-ons outweigh the Industrial linked flow-ons by almost a 2 to 1 margin. The listings in Table 4 do show the extensive industrial infrastructure required in an economy to support a project of this size and complexity. If a region cannot supply these inputs, they need to be imported from other New Zealand regions or overseas, significantly reducing the impacts for local business units. The Consumption flow-ons have not been analysed in detail since the sectors benefiting most are those sectors servicing households in the normal course of living. These include the 8 wholesaling sectors such as Food Drink & Tobacco Wholesaling and the 4 retailing sectors such as Department Stores as well as sectors such as Restaurants & Bars and similar sectors. All sectors are listed in Appendix 2. Tables 3 and 4 have analysed the 2013 year expenditures in some detail. Other years have not been similarly analysed but would show similar results with similar multipliers as reported above for the 2013 year. Table 5 below summarises the total economic impacts for all measures for the Northland and New Zealand economies over the 2012 2016 period. TABLE 5: TOTAL ECONOMIC IMPACTS FROM THE CCR PROJECT FOR NORTHLAND & NEW ZEALAND FOR THE YEARS 2012 - 2016

CONSTRUCTION YEAR & IMPACT REGION 2012

Northland Regional Council Other NZ Regions TOTAL NZ IMPACTS 2012

Revenue $ millions

Net income $ millions

Employment Jobs

Value Added $ m

10.14 15.99 26.13

4.32 3.39 7.71

61 77 138

7.37 7.42 14.79

2013
Northland Regional Council Other NZ Regions TOTAL NZ IMPACTS 2013 55.97 55.21 111.18 16.34 10.91 27.25 296 244 540 32.29 25.99 58.28

2014
Northland Regional Council Other NZ Regions 80.07 12.67 33.58 4.00 399 120 60.46 10.20

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TOTAL NZ IMPACTS 2014

92.74

37.58

519

70.66

2015
Northland Regional Council Other NZ Regions TOTAL NZ IMPACTS 2015 97.86 14.12 111.98 45.61 4.63 50.24 541 116 657 78.69 11.86 90.55

2016
Northland Regional Council Other NZ Regions TOTAL NZ IMPACTS 2016 3.29 0.48 3.77 1.63 0.16 1.79 16 4 20 3.05 0.08 3.13

TOTAL ECONOMIC IMPACTS 2012 2016

Northland Regional Council TOTAL NZ Northland as a Percent of New Zealand 247.33 345.80 71.5% 101.48 124.57 81.5% 1313 1874 70.1% 181.86 237.41 76.6%

A simple average of the four percentages at the foot of Table 5 shows the Northland R C economy capturing around 75% of the total New Zealand impacts from the CCR project. Of the four measures, perhaps the most important is the Value Added impact with a Northland percentage of 76.6%. Value Added, GDP or regional GDP as gross regional product (GRP) shows the gross return to a region or country from the activity under analysis comprising gross wages and salaries, gross operating surpluses of all business units plus depreciation on plant and equipment. It is the best measure of financial regional return for (in this case) the Northland regional economy from the CCR project. Taking the September 2011 year as a base, the project gains for the Northland economy due to the CCR project can be expressed as a percentage of these 2011 base year aggregates for Northland. These are detailed for the four impacts in Table 6. TABLE 6: PROJECT GAINS FOR NORTHLAND AS PERCENT OF NORTHLAND ECONOMY YEAR ENDED SEPT 2011 Revenue $ millions Net Household Income $ m Employment Persons Value Added or GDP $ m 5,934.5

YEAR OF IMPACT

Northland R C year ended Sept 2011 PROJECT GAINS NORTHLAND 2012-16 2012 2013 2014

11,185.2

2,138.3

53,018

Percent

Percent

Percent

Percent

0.09% 0.50%
0.72%

0.20% 0.76%
1.57%

0.12% 0.56%
0.75%

0.12% 0.54%
1.02%

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2015 2016

0.87% 0.03%

2.13% 0.08%

1.02% 0.03%

1.33% 0.05%

The projects starting and ending years 2012 and 2016 show very small percentage impacts for Northland as might be expected. At the peak years of the project 2014 2015, percentage gains for the Northland economy will be around 1% annually for the four impact measures allowing for some growth in the Northland region in the interim period 2012 2014.

GAINS FROM IMPORT REPLACEMENT OF $550 m ANNUAL GASOLINE PRODUCTION AT REFFINING NZ

Currently New Zealand imports approximately $550 m of gasoline products (wholesale price before excise tax) that the CCR project will enable Refining NZ to supply. While producing mogas will require increased crude imports there are at least two ways the New Zealand economy will gain from the CCR project. First, the current imports valued at $550 m annually will now be produced in New Zealand. After allowing for the increased crude required for this increased motor gasoline production, the increase in annual value added of GDP for New Zealand has been estimated at $100 m. This direct impact from Refining NZ production will have flow-on effects to other sectors in a similar manner to those estimated for the construction of the CCR project. Using the sector 21 (the Refining NZ sector listed in Appendix 3) Value Added multipliers for the Northland and New Zealand economies respectively at 1.59 and 2.23, Northlands total impact gain is $159 m annually or 2.7% of annual Northland current GDP as in Table 6. This is a very significant annual gain for Northlands workforce and business units. For the New Zealand economy (including Northland), the gain is of course even larger at $223 m annually (after all flow-ons) making for a 1.1% gain in current annual New Zealand GDP at $204.5 b for the December 2011 year. Secondly, this increased self-sufficiency in mogas usage gives the New Zealand economy greater security of supply for this strategic good.

CONCLUSIONS
Completion of the CCR Platform at the Marsden Point refinery will first initiate large construction impacts throughout New Zealand but particularly in the Northland economy as estimated in this report. Secondly, it will increase security in supply of gasoline which is a vital intermediate input into much of New Zealands production activity as well as for the outdoor and mobile lifestyle currently enjoyed by all New Zealanders. In the current climate of environmental concern, the new plant will effectively lower carbon emissions significantly supporting New Zealands commitment towards safeguarding the environment to the fullest extent possible.

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Appendix 1: Economic impact analysis

Corporations/facilities (e.g. Refining NZ Limited/Port of Tauranga
Limited) Festivals/events (e.g. Art Deco Weekend/V8 Supercars)
The region for which the economic impact of a business unit or event is required can be a Territorial Authority as in Western BOP District Council, a combination of TAs as in the Waikato Regional Council (WRC) or the country in total as in New Zealand. Frequently, two models are utilised in an impact study so that impacts can be estimated for say the WRC and the rest of New Zealand. For an event such as the Port of Tauranga Triathlon, we can estimate the impacts for Tauranga City and the rest of the BOP. All regions are modelled an with 88-sector economic model utilising the latest employment data from Statistics New Zealand as at February of the latest year. Currently we need to use February 2011 employment data since the 2012 data become available later in the year in October/November. The 88 sectors (example sectors are italicised) cover basic agricultural production (4 such sectors) as in Dairy Sheep & Beef Farming, follow-on processing as in Dairy Processing through other manufacturing sectors (Pulp & Paper Manufacturing), utilities (Water Supply), transport services (Water & Rail), business services (Legal & Accounting Services), government services (Higher Education) and community services (Sewerage & Waste Disposal). Four economic impacts are estimated for all analyses. The Revenue impact shows the dollar sales value of activities while the Net Household Income impact after tax, saving and superannuation shows consumer purchasing power in the region emanating from the activity/event. The Employment impact is the full-year part-time and full-time head-count impact due to business unit operations or the event in question. Finally, the Value Added (regional GDP) impact is also estimated. Value added comprises gross wages and salaries of employees as well as gross operating surpluses of business units plus their depreciation. This measure shows the gross (before tax) returns to both employees and business units in the region subject to the impact. Analysis using the economic model allows us to identify those sectors most affected by the impact generating facility or event. For example, the dollar amounts flowing to sectors such as Supermarkets & Groceries Retailing, Restaurants & Bars etc. from an event such as the V8 Supercars can be calculated for the host city and/or region. Alternatively, losses to a region from a plant or facility closure can also be quantified. Losses in such cases can be realized by supplying sectors to a plant or facility such as Electricity, Road Transport etc. as well as using sectors. For example, if a Meat Processing plant closed in the WRC region, using sectors such as Supermarkets & Groceries Retailing, Restaurants & Bars, Hospitals &

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Nursing Homes would need to import goods and services from other regions or lose revenue. These losses can be estimated via the so-called supply-side regional model. Of course, in some cases, the capacity of competing plants in the Waikato may be expanded with minimal (if any) resulting losses to the regional economy from a plant/facility closure. The results are restricted to economic impacts as described above. For example, the analysis does not show impacts for Employment across different age or ethnic categories. Other researchers at additional cost can be employed by Dr Hughes if such analysis is required.

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APPENDIX 2: SECTORS IN THE 88-SECTOR ECONOMIC MODEL

#
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

SECTORS
Horticulture and fruit growing Livestock and cropping farming Dairy and cattle farming Other farming Services to agriculture and hunting and trapping Forestry & forestry services Logging Fishing Mining and quarrying Oil and gas exploration and extraction Meat and meat product manufacturing Dairy product manufacturing Other food manufacturing Beverage, malt and tobacco manufacturing Textiles product manufacturing Clothing and footwear manufacturing Wood product manufacturing Pulp paper and paper board manufacturing Paper and paper board containers manufacturing Printing, publishing and recorded media Fertilizer, petroleum and other industrial chemical manufing Other chemical product manufacturing Rubber product manufacturing Plastic product manufacturing Non-metallic mineral product manufacturing Basic metal manufacturing Structural sheet and fabricated metal product manufacturing Motor vehicle and part manufacturing Ship, boat and other transport equipment manufacturing Photographic and scientific equipment manufacturing Electronic equipment and appliances manufacturing Industrial machinery manufacturing Prefabricated building manufacturing Furniture manufacturing Other manufacturing nec Electricity generation and supply Gas supply Water supply Refining NZ Limited

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39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82

Sewerage, drainage and waste disposal services Residential construction Non-residential building construction Non-building construction Construction trade services Unprocessed primary product wholesaling Petroleum, metal and chemical wholesaling Builders supplies wholesaling Machinery and equipment wholesaling Motor vehicle wholesaling Food, drink and tobacco wholesaling Personal and household goods wholesaling Supermkts, grocery, furniture, appliances, recreation w'saling Specialized food and liquor retailing Department stores Other personal and household goods retailing Motor vehicle retailing and services Accommodation Restaurant and bars Road transport Water and rail transport Air transport, services to transport and storage Communication services Finance Life and health Insurance Superannuation fund operation General Insurance Services to finance and insurance Real estate Investor in other property Vehicle and equipment hire Ownership of owner-occupied dwellings Scientific research and technical services Computer services Legal and accounting services Other business services Central government administration and defence Local government administration Pre-school, primary and secondary education Post school education Other education Hospitals and nursing homes Health and Dental Services Veterinary services Major oil companies as for BP, Mobil, Caltex etc.

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83 84 85 86 87 88

Community care services Motion picture, radio and TV services Libraries, museum and the arts Sport and recreation Personal & house services & household employed staff Religious organisations and interest groups

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Acknowledgements and research team

This study was commissioned by Refining NZ. Thanks to Jack Ariel for his assistance. The following senior staff from key contractors provided invaluable assistance with information about the workforce for the project and the nature of the working relationship with Refining NZ. John Cooper, Whangarei Branch Supervisor, Industrial Site Services Ltd (ISS) John Steenson, General Manager, SPI Lindsay Faithfull, CEO, McKay Neville Sander, Managing Director, Kerr Construction Whangarei Ltd Paul Mandeno, Operations Manager, United Civil Construction Ltd Raymond Pascoe, Contracts Manager, Ross Insulation Shane Culham, Managing Director, Culham Engineering

Thank you to Duke Johnas, Principal Project Manager of Worley Parsons for his insights into the project management processes of Refining NZ.

Research team
Peter Bruce is a researcher and lecturer for the Business Management degree and diploma programme at NorthTec. He led the research team that produced Our Contribution for Refining NZ in 2008. Peter is the author of Better Business for a Better World, published in 2000 and has more books in the pipeline. He was born in Northland and lived in the region most of his life. Peters Stakeholder Engagement blog is www.engagementedge.com. Dr Warren Hughes is a nationally renowned economics researcher and academic with extensive experience in econometric analysis. He engages in all types of economic analyses for businesses, cities and regions with clients including a wide range of local authorities, government agencies and businesses. His website is www.hugheseconomics.co.New Zealand Lou van Es is a researcher and lectures on the Business Management degree and diploma programme at NorthTec. In 2005 has published, with Professor Dr Paul Spoonley, a report entitled The economic impact of a zero-fees policy at Northland Polytechnic and he was a senior researcher on the research team that produced Our

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Contribution for Refining NZ in 2008. In that same year, he published Does businessrelated training increase business continuation rates? He is currently in the process of finishing a project entitled The financial impacts of the Emissions Trading Scheme on Northland businesses. Lou can be contacted by email at lvanes@northtec.ac.nz