Refining NZ Operational Update for November/December 2019

HIGHLIGHTS o The Company earned NZD 19.2 million in Processing Fees for November/December. Full year 2019 Processing Fee income is NZD 242.0 million versus NZD 258.7 million for the same period in 2018. o Refinery throughput for November/December was 6.8 million barrels, which was lower than plan due to the unscheduled Transpower outage and late crude deliveries by our customers. o Refining NZ's Gross Refining Margin (GRM) was USD 2.62 per barrel which was heavily impacted by poor global refining margins and high crude oil freight costs. Full year 2019 GRM was USD 5.34 per barrel. o Global refining margins were poor in November/December as high sulphur fuel oil margins fell strongly due to the impact of the 2020 IMO MARPOL regulations, but diesel margins did not increase significantly. Margins were also impacted by high crude oil freight rates which increased due to the US imposed sanctions on several Chinese tanker companies. We have seen a material decline in crude freight rates following the 15 January 2020 USA/China trade deal. o Refining NZ achieved several production records in 2019 including the highest annual crude and condensate intake, and the highest annual refined product make and customer product offtakes. o The RAP achieved throughput of 3.8 million barrels in November/December earning income of NZD 6.2 million. Annual RAP throughput was the second highest on record. o Process and personal safety performance remained excellent: o No Tier 1 or Tier 2 process safety events for the entire 2019 - a first since records began; and o The recordable injury frequency is currently 0.27 per 200,000 work hours - the best since 2010 COMMENTARY Refining - Margins and throughput The refinery achieved throughput of 6.8 million barrels which was lower than plan due to an unscheduled Transpower power outage on 27 November 2019 and late crude deliveries by customers. Operational availability was high at 99.7%. This throughput, coupled with a GRM of USD 2.62 per barrel at an exchange rate of USD/NZD 0.65, has earned the Company NZD 19.2 million Processing Fee revenue in the November/December period. The Transpower outage on 27 November 2019 impacted the November/December GRM by circa USD 0.50 per barrel. For the full year 2019, Refining NZ achieved throughput of 42.7 million barrels and an average GRM of USD 5.34 per barrel earning the Company NZD 242 million Processing Fee revenue. Refining NZ achieved several production records in 2019 including the highest annual crude and condensate intake, and the highest annual refined product make and customer product offtakes. The Company also conducted test runs on four new crudes with the aim of broadening the slate of crudes that we process in order to refine lower cost crudes in 2020, thereby improving GRM. Global refining margins Singapore refining margins were negatively impacted by several factors during November/December. Crude prices trended up due to OPEC's decision to deepen production cuts. High sulphur fuel oil margins fell strongly as had been forecast due to the impact of the 2020 IMO MARPOL regulations. The USA/China trade war had a profound impact on the regional diesel demand and diesel exports from China and India were high. Diesel margins therefore did not increase significantly as had been forecast previously by market commentators. However, international energy consulting company FGE still expects diesel margins to increase in the near-term as MARPOL compliant fuel demand increases, thereby increasing hydrocracking margins. Crude freight rates increased significantly from October due to the US imposed sanctions on several Chinese tanker companies, including COSCO which owns ~6% of the global VLCC fleet. The sanctions came at a time when the available shipping fleet was already reduced with a number of vessels docked for installation of exhaust scrubbers and some being used to store MARPOL compliant fuel oil. While there was a surge in all crude oil tanker rates, including Aframax tanker rates which impact Refining NZ's GRM, product tanker rates only increased moderately. As was foreshadowed in our September/October update, the higher freight rates impacted the cost of crude processed by Refining NZ during November and December in the order of USD -1.00 per barrel as the Refining NZ GRM has a two month lag in the freight rates that are applied. Uplift over Singapore Dubai complex margin Refining NZ's November/December uplift over the Singapore Dubai complex margin was healthy at USD 4.16 per barrel. The Singapore Dubai complex margin for the November/December period was weak at USD -1.55 per barrel. Looking forward - Impact of temporary spike in crude freight rates As noted above, crude freight rates increased significantly due to the US imposed sanctions on several Chinese tanker companies. This continued until the USA/China trade deal was struck on 15 January which has already led to a 28% reduction in Mid-East Aframax crude tanker rates in a matter of days. Assuming this reduction is sustained, it should favourably impact Refining NZ's GRM from March. Distribution - Refinery to Auckland Pipeline (RAP) The RAP achieved throughput of 3.8 million barrels of gasoline, jet fuel and diesel which earned income of NZD 6.2 million, in line with the same period last year. Pipeline operational availability was high at greater than 99%. Annual RAP throughput was 20.8 million barrels, the second highest on record. Natural gas The natural gas market was stable during November/December and Refining NZ comfortably secured all its requirements. Refining NZ is pleased to have contracted all its natural gas requirements for the next three years with a credible market participant having diverse supply options. Health, safety and environment We continued our excellent process safety performance in November/December to achieve a full year without any Tier 1 or Tier 2 process safety events - a first since records began in 2010. On a personal safety front, we closed out the remaining two months of the year without any recordable injuries and achieved a recordable injury frequency of 0.27 per 200,000 work hours for 2019 - the best performance since 2010. These safety achievements are underpinned by the E tu Tangata safety culture programme introduced and embedded through the year. Costs Overall operating costs continue to be tightly controlled with a number of cost reduction initiatives underway, in response to the current weaker margin environment and the ongoing pressure from higher electricity prices. End CA:00347355 For:NZR Type:MKTUPDTE Time:2020-01-21 09:34:25