Z Energy promised so much but has delivered so little in playing a part in the clean energy transformation NZ needs, writes Rod Oram

This is the global climate crisis, as described in the UN’s latest report:

This is the response by Z Energy, our largest seller of fossil fuels. Its products account for almost 10 percent of New Zealand’s greenhouse gas emissions. It is our second largest source of emissions after Fonterra, which accounts for almost 20 percent of our total emissions.

“Overall, this is not a story of energy disruption, but one of energy substitution,” Z tell us in its Long Term Demand Study

Phew! What a relief. Bags of time to nip down to your local Z for another 200 kg of carbon dioxide, a packet of smokes and a flat white. Very often. For years. (More on those calculations later.)

Z is playing the classic game oil companies are indulging in worldwide: Talk lots about the transition to clean fuels; only do a bit badly; focus on maximising fossil fuel sales for as long as possible; and reassure us they really, really care about solving the escalating climate crisis.


Z adds a Kiwi twist. It tells us how much it is one of us (just call us Z!), how different it is from those mendacious oil multinationals, how innovative it is, and how hard it’s working on a clean, climate-compatible energy future.

It’s delivered connection and creativity to us. But now it needs to build massively on those to lift its ambitions and ours on clean energy.

It’s doing very well for its shareholders, however. At least until reality catches up with their company and them. In classic global oil company “milk-the-old-model-for-all it’s-worth-for-as-long-as possible”, Z says it is “optimising its core business.”

That means, for example, it has successfully pushed for the closure of the Marsden Point refinery, in which it is a shareholder. This will cut big chunks of cost, complexity and capital out of its business. Which will make fossil fuels cheaper, so it will sell more. With the benefits going to shareholders, as this chart from its Investor Day presentation in July shows. Note the growth in earnings, the capital released, and the share buybacks and dividends it’s promising shareholders.

Z argues it’s important to reward shareholders. Yes, but not if perpetually plump dividends is all they want. That strategy minimises investment in Z’s clean energy future. It will destroy shareholder value in the long term because energy disruption is rapidly gathering momentum worldwide. (More on that later.)

So, shareholders, customers and citizens at large would be far better off if Z invested its significant cashflow from its legacy fossil fuel business in its sustainable future. But Z, in mindset and capability, is woefully ill-equipped to play that utterly crucial role.

If you want Z’s full pitch about its future, you can watch the four-hour video of its Investor Day last month here and download the slides here

As Z told its audience, its strategy has three pillars out to fiscal year 2024. This chart summarises them:

The first and third pillars speak for themselves. The future is the second pillar, Transition to a Low Carbon Future. And the number 1 item is…grow convenience store revenues by 20 percent to $500 million a year! If it thinks that’s so important to our climate compatible future, perhaps we should dive down into the details.

Z total revenues were $3.5 billion in fiscal year 2021, which ended in March. They were down 29 percent from the previous year because of Covid. They have recovered well since, though obviously are susceptible to further lockdowns.

In fiscal 2021, Z’s gross profit margin on fuels was $518 m; and on “non-fuels” was $74 m, of which 88 percent came from its convenience stores. So, the stores are material to its business, accounting for a third of its operating profits, while fuels contribute the other two-thirds.

Across its network, the stores generate 48 cents of revenue for every litre of fuel sold. But lots of people shop there without buying fuel. In the quarter to March 2021, for example, Z Retail clocked up 6.6 m fuel-only transactions, 1.4m fuel and store transactions, and 6m store-only transactions.

Of all those store transactions, its largest category is tobacco products, accounting for 47 percent of store revenues. Coffee is its second largest category, accounting for 21 percent of revenue and 32 per cent of gross margin.

And the carbon dioxide hit? Well, a fill up, averaged across our car and SUV fleet using AA, industry, and government data, equates to 110 kg of CO2. Or 200 kg for a 3.2 litre, double cab Ford Ranger, which was the no. 1 new “car” by sales volume in New Zealand last year (though, that also included lower emission 2-litre versions). 

In its four-hours of Investor Day presentations, Z spent 35 minutes talking about its convenience stores and 45 minutes about clean fuels.

Z was a fascinating company for the first three years of its life. It offered great hope that we could break away from the massive economic and environmental damage caused by oil multinationals. Notably, it said as a locally-owned company with no upstream oil reserves it would lead the transition from fossil fuels to clean transport energy.

The trigger for this big ambition was the 2010 purchase of Shell’s downstream operations here, which range from a share in the Marsden Point refinery and storage and distribution infrastructure, down to the largest share of fuel stops in the country. The buyers were the New Zealand Superannuation Fund and Infratil, the infrastructure investor, which paid $700 m.

The corporate capabilities of the operations here were skeletal, because its huge multinational parent provided them from afar. The first hire, as chief executive, was Mike Bennetts, a Kiwi veteran of the global oil industry. He rapidly built a very capable, innovative and agile team which turned Z into the strong company it is today. He is still its CEO.

Z has markedly changed for the better the downstream oil industry here. By competing vigorously and creatively against the local operations of Exxon-Mobil, BP and Chevron, it forced those global titans to help reverse here the sector’s long downward spiral of investment in its assets and its service to customers.

But then in 2013 NZ Super and Infratil floated 60 percent of Z on the NZX. The IPO valued Z at $1.4 billion, double the price the two investors had paid for it three years before. By the time they had completely exited Z over the following three years, they had made an even greater return on their investment.

However, the switch of investors has been a big negative for Z. It has gone from two very strategic and supportive investors to 10,000 market-listed shareholders, most of whom, in Kiwi-fashion, clamour for dividends today with no thought of the future.

Yes, Z has got bigger and better in its fossil fuel business with the acquisition of Caltex NZ in June, 2016. But it has sunk almost all of its innovation, energy and capital into optimising its fossil fuel legacy rather than making its clean energy future.

Where it has tried to be bold it has failed. First, it invested $26m to build a biodiesel plant in Auckland, which opened in 2016. But three problems arose:

– Z decided against using well-established overseas technology to turn non-edible tallow from meat works into biodiesel. Instead, it picked local technology which had not been proved at commercial scale. It turned out to be difficult and expensive to get running properly.

– Z invested without the backstop of a government-mandated blending of clean biodiesel into fossil diesel, which would have guaranteed take up of product from the plant. The Clark Labour government had announced one. But before it came into effect the Key government canned it shortly after taking office in 2008. This meant very few customers were willing to pay a higher price for the blend over the fossil variety.

– Z failed to understand the international market for biodiesel. Even before it invested, the market was growing fast, with non-edible tallow one of the feedstocks used. It is also used to make the like of soaps. Competition for it intensified, so prices rose. With operating losses rising, Z mothballed the plant last year.

Second, Z invested $46m in 2018 to buy a 70 percent stake in Flick, a highly innovative NZ retailer of electricity. It uses sophisticated software systems to sell electricity at wholesale market prices to retail users, thereby undercutting the gentailers who dominate the sector. Z hoped to learn lots from Flick about electricity market innovation, given electricity is a big part of our clean-transport future.

But Z completely failed to see a blindingly obvious trap. The gentailers dominate the wholesale and retail electricity markets to their advantage and high profitability. They smash start-ups like Flick which are trying to disrupt their dominance in the retail sector.

Long before Z bought into Flick, that incumbent power was widely known, evidenced by the start-up carnage. And it’s only become a bloodier story over the past 18 months of high and volatile prices in the wholesale market, hence the booming profits of the gentailers. It would take radical reform of the wholesale market to give Flick and its fellow disruptors hope for a future.

Despite those setbacks, Z continues to contribute knowledge and ambition to New Zealand’s hopes of transforming itself into a clean energy, net zero carbon nation. For example, it made sensible suggestions on biofuels for land transport and sustainable aviation fuel for flying in its submission to the Climate Change Commission’s draft recommendations to the government.

The one on clean jet fuel is particularly noteworthy. Z is a member of the NZ Sustainable Aviation Fuel consortium, with Air New Zealand and Scion, the Crown Research Institute for forestry plus LanzaTech of Chicago and its LanzaJet consortium with international airlines.

The UK is committed to LanzaJet through its government/industry Jet Zero Council. The government recently committed 15 m pounds to eight companies in the UK working in this space. 

LanzaTech was founded in Auckland in 2005, and established the viability of its technology at the Glenbrook steel mill for capturing carbon monoxide from steelmaking and turning it into synthetic plastics and fuels. Stephen Tindall was its first investor and remains actively involved. To accelerate its development, LanzaTech moved to Chicago in 2014, as I described in this Newsroom column

The local consortium’s concept of an SAF initiative for New Zealand would use wood waste from forest harvests in Northland as the feedstock for LanzaTech’s system, which would involve repurposing the hydrocracker at the Marsden Point refinery after it stops making petrol, diesel and jet fuel next year. Air NZ lays out the plan in this document

Hopefully our Government has Sustainable Aviation Fuel on its very long to-do list to help us make this a zero carbon economy over the next three decades. The Government’s next task is very urgent. By the end of this year it has to come up with its Emissions Reduction Plan as its formal response, required by law, to the Climate Commission’s recommendations. This will be only an over-arching framework, with a vast amount of work by government, industry and civil society to follow to bring it to fruition.

We have no idea how Ardern’s Government will respond on many issues. But we can be sure of one thing. They will only pursue proposals with “mandates” – that is, those strongly supported by the industries and consumers involved.

That’s why Z is so deeply disappointing. It is completely failing to rise to the huge challenges – and great opportunities – that the climate crisis presents to it and us. Mind you, that’s true to varying degrees of every major corporate player in the country.

Take emissions from road transport. The story is told by this single chart from Z’s Investor Day.

The blue line is the Climate Commission’s pathway for decarbonising land transport. Bear in mind, the Commission is not being particularly ambitious on this. Like so many of its recommendations, it presents a ‘minimum viable product’, not the ambitious goal we need. Still, in aggregate the sum of its MVPs is a good basis for us to make a start on transforming our economy to a clean one.

But crucially, every player, every sector in the economy must take the Commission’s MVP as the absolute minimum they have to achieve. Every player must be more ambitious so we can achieve more and compensate for some inevitable failures along the way. That’s how big, quick and sure our response to the climate crisis has to be.

But Z undershoots the Commission. The orange line is its less optimistic view of the shift away from fossil fuels. It then translates that into demand for various fuels, adding in jet fuel, in this chart based on its “House View” from its Long Term Demand Study

Note how tiny an NZ market it sees for clean fuels over the next 15 years. Maybe this helps explain its enthusiasm for convenience stores. But even its faith in those is ill-founded. Very few drivers of electric cars will pull in to charge. Most will do so at home, work, or at charging points at malls and other places with varied attractions. But the longer the life of petrol and diesel, the brighter the prospects for an unreformed Z.

Z could prove it is truly committed to leading a rapid transformation to clean transport. To do so, it must have the courage and conviction to:

– Take responsibility: Explain to customers, shareholders and government how much damage its fossil fuel products are doing to our climate, well-being and economy —and how much worse that will get if we don’t replace them rapidly.

– Convince the government: Z must make its case that is a strategic asset crucial to the future of this country; thus it should remain New Zealand-owned to secure the long-term economic and environmental benefits that would be diluted by foreign ownership.

– Act boldly: Supercharge plans for biofuels and sustainable aviation fuel with government and industry partners from home and abroad.

– Become part of the global energy transformation: Disruption is escalating rapidly, driven by a fast-rising tide of investment. As The Economist noted in a recent article

“Money has followed innovation. BloombergNEF, a research firm, reckons that last year investors poured more than US$500b into the “energy transition” (shorthand for decarbonising everything from energy and transport to industry and farming), twice as much as in 2010. A slug of that has come in the form of risk-tolerant venture capital flooding into many fields. PWC, a consultancy, estimates that between 2013 and 2020 VC investments in climate tech grew at five times the rate of global start-up funding overall. In 2021 these investments may be near $60bn in America alone, up from $36bn last year.”

One example of such a VC is Breakthrough Energy, a US$2b fund backed by Bill Gates and other notable investors. Among its investments is Heart Aerospace, the Swedish maker of electric aircraft. As last week’s column noted, Sounds Air has bought three for delivery here in 2026.

– Invest wisely: Stop paying dividends. Sell the convenience stores. Invest the cashflow and sales proceeds in clean fuels. Strongly leverage that commitment by attracting major partners.

– Deliver promptly: Z must show rapid progress on the above actions. But there are plenty of quick wins in this long journey for all of us. Z can help us achieve them, by urging each of us to reduce our fossil fuel consumption, and find ways to reward us for doing so.

The options range all the way from driving more smoothly, cutting unnecessary trips, buying more fuel-efficient vehicles (particularly hybrids), using more public and active transport (walking and cycling), using vehicle-sharing schemes and buying more electric cars as they become more affordable.

Fossil fuel users have a big role to play. In addition to doing all the above, you might consider switching to buying your fossil fuels from BP. Arguably it is one of the best among the oil multinationals (and far superior to Z) in investing some of its cashflow from oil in clean energy, and committing to reducing its Scope 3 emissions, that is, the ones generated by its customers using its products.

Climate Action Tracker’s report on oil majors ranks BP number 3 in the world on such measures. In contrast Exxon-Mobil is at the opposite end of the spectrum so switching to Mobil from Z would be a retrograde step.

So far BP is persuading shareholders of the wisdom of its transition. But there is a big downside to buying their fuel in New Zealand. Its operation here, as Shell’s was before Z made it into a proper business, is a tiny cog in a multinational machine. Z has more skin in the game, and can make bigger and faster commitments to New Zealand than BP ever would.

Still, if you do switch to BP be sure to tell Mike Bennetts, Mike.Bennetts@z.co.nz the CEO of Z, why you have. Or you could buy Z fuel but pass on its convenience stores. Be sure to tell him that too. He always welcomes customer feedback.

Above all, Z could make real progress fast if it had shareholders who were committed to the need for the company’s reinvention and appreciated the benefits of doing so. Such a positive change in ownership could come in various ways:

– Some existing shareholders would be happy to forego their dividends to ensure their company had a prosperous future.

– Thankfully, others who want dividends now without care for the future would sell. Good if that depressed the share price for a while. It would make Z more attractive to the right kind of committed shareholders.

– Given the scale of the tasks ahead, Z would benefit enormously from having the Super Fund and Infratil as its owners again, or at least as cornerstone shareholders. And if they ensured Z maximised its clean energy opportunities, they would get a second big payoff.

– Conversely, government ownership is less than ideal because it is not commercial enough, as we see with the ineffectual mixed public-private ownership model with the gentailers, although it is more successful with Air NZ.

– And the current attempt of Ampol to buy Z is a complete non-starter. The Australian company is well behind even Z on this journey. It has only recently released its first Future Energy and Decarbonisation Strategy and is considering its first modest investments.

Ampol could well make all the same beginner mistakes Z has. Much worse, its strategy is based on a 2C rise in temperature. Yet, the entire global response to the climate crisis is now intently focused on only a 1.5C rise. The gap between the two is vast in terms of climate, technology, economics, and speed of change. Ampol’s new strategy is already history.

Could Z become a truly transformative energy company? Yes. Two trailblazers are Ørsted and Neste Oyj, from Denmark and Finland respectively.

Ørsted was formerly Danish Oil and Natural Gas, a state-owned enterprise created in 1972 to develop North Sea prospects. Over the past 12 years, it has ditched fossil fuels and become the world’s largest developer of offshore wind power with a 29 percent market share.

Neste, with some 48 percent of its equity owned by the Finnish government and public sector, has become in recent years one of the world’s largest producers of biofuels and sustainable aviation fuel. Incidentally, its Singapore refinery is the one that outbids Z for the purchase of tallow from NZ meat works because it has the international depth of markets to do so.

Moreover, the Finns are deeply committed to making their country carbon neutral by 2035. They are tracking well. Meanwhile we are far behind on our 2050 target.

Denmark and Finland are only slightly larger than us in terms of population. But we have significant clean energy potential they don’t. If we backed Z Energy to become the company we need it to be – and it deserves to be – New Zealand could join them in being global exemplars of the clean energy revolution.

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