New Zealand Refining : CEO's Address to Shareholders - 3rd May 2017

3 May 2017 Annual Meeting of Shareholders Chief Executive Officer's Address

Good afternoon everyone. It is a busy week for us with the AGM and the visit of Colonel Mike Mullane from the NASA space shuttle program who is in New Zealand at the invitation of Refining NZ, Certus, the New Zealand Health and Safety Leaders Forum and the Callaghan Institute to share his learnings from the Challenger disaster.

He is in the process of presenting to all refining staff and a selection of Whangarei students. At a quick exit poll yesterday, it was clear staff were inspired by the strong read across in safety learning between the shuttle program and running a high hazard unit such as our refinery.

It is a great pleasure for me to stand here in front of you at what is already my fifth AGM. It is more pleasing because, while 2015 was a trophy year with record income and the going live of Te Mahi Hou, as Simon has already indicated, 2016 was a very strong year too - with great operational performance and cash flow.

But before I continue I would like to remind you of the earlier Disclaimer slide and remind you not to place undue reliance on any forward looking statements I may give.

GREAT OPERATIONAL PERFORMANCE

The great operational performance is highlighted by the TRCF performance with four people hurt over the year. That is four too many but a marked improvement over prior years. The four injuries need to be seen in the context of 500+ staff coming through the gates each day with a high percentage of them performing physical activity.

Equally, pleasing was our process safety performance. We had no Tier 2 incidents and one, Tier 1 incident.

A tier 1 incident creates damage larger than $25k, a tier 2 incident creates damage larger than $2.5k i.e. Tier 2 events are relatively small in impact and hence it is pleasing to report we had none and hopefully indicative as a leading indicator of improving process safety performance.

The one Tier 1 incident was a threaded plug that blew out - we have 400+ of these types of plugs on site and we have replaced 90%+ of them with the remainder not posing danger and needing a shutdown to replace them safely. As an aside, we suffered no personal harm, damage or income loss.

We had five releases outside consent, all of them minor, and all caused by the major refurbishment work we had underway to our waste water processing capability, effectively putting it out of service as the refurbishment took place.

Finally, we had record throughput and a strong net income performance as Simon remarked on earlier.

As the leadership team and our direct reports looked back in December last year there was a lot of justifiable pride in all that was achieved. And I think it behoves me also in this forum to express my sincere thanks for the tremendous commitment and professionalism shown by our staff and contractors each day.

STRONG NET INCOME DELIVERY

A quick deep dive then on the financials. You see the big impact of the lower Singapore complex margin and lower margin uplift. With the 2015 GRM at USD 9.20 per barrel and the 2016 GRM at USD 6.74 per barrel, the difference was USD 2.73 per barrel. This impacted processing fee revenue by roughly 120 million dollars.

Key drivers behind this difference were the high margin loss hydrocracker shut in the first quarter of 2016, freight differentials coming off with cheaper bunker fuel costs, and product quality premia being under pressure as a result of plentiful product supply in the Singapore markets.

You see the strong contribution of TMH, strong growth also on the RAP, about which more later, and then higher depreciation and financing cost as a result of TMH leading to a net profit after tax delivery of 47.5 million.

All of this lead to a 6 cps final dividend and 9 cps total dividend or some $27+ million dividend in total.

KEY DRIVERS AND STRATEGY UNCHANGED

Our strategy remains unchanged. We compete with Korean and Singapore based refineries and to be our customers' supply partner of choice we need to be competitive. This means being tight on cost and pursuing high payback margin growth projects.

Another key element in our value proposition to our customers is reliability. We are two weeks sailing from Singapore and if we were to have an unforeseen upset, it would take our customers roughly 4-5 weeks to arrange alternative supply, close to the days stock cover in the country. So called "unplanned downtime" is therefore a key metric and again last year we had a world-class performance with 0.85% unplanned downtime.

In today's society, we are of course in pursuit of the so called triple bottom line and want to be known for a world-class environmental and health and safety performance and be known to be good neighbours in general.

There are some six key drivers which impact our long term profitability and success. I won't go through each but would highlight the two that came strongly into play in 2016.

Firstly, that was the decision by the IMO to limit shipping sulphur emissions from 3.5 to 0.5%. This is good for gasoil prices and we are a gasoil producing refinery, so, so far so good; but potentially bad for fuel oil prices -and we do produce some fuel oil.

Potentially, because if ship owners expect high sulphur fuel oil to get cheap they can install sulphur scrubbers on their ships stacks to take advantage and effectively put a floor under the fuel oil price. We will watch for key signals, particularly the order books of scrubber manufacturers and prepare for a world in which we may need to destroy fuel oil in higher value products such as bitumen or burn it for the Refinery's own energy use.

The other standout was Auckland growth and I will talk more about that on the next slide and the strengthening of the conversation on electric vehicles.

We think electric vehicles make sense for New Zealand given its clean electricity and given the fact that most home owners have access to a carport or garage for overnight refuelling. With 30% of fuels imported we believe the imported barrels are the marginal barrels that will be displaced first.

We would not dare place a bet on the uptake of electric vehicles but offer three facts for consideration; the average age of the NZ car population is 15 years; the price point of an electric vehicle is currently some $25k higher than an ICE equivalent, and new car sales are at an unprecedented high in NZ at the moment with 300k new sales last year. Gas guzzling SUVs featured heavily in those new car sales showing buyer behaviour not consistent with concern for climate change.

CONTINUED SUPPORT FOR REFINING MARGINS

Again reminding you of the disclaimer slide in the sense that you should not place undue reliance on any forward looking statements we give. However, we are cautiously optimistic about refinery margins in Asia Pacific and NZ demand.

NZ and Auckland are booming; I talked about record new car sales, RAP volumes were up 8.5% and jet volumes at Auckland International Airport were up 19% in 2016.

Direct flights to Dubai or Doha take some 200,000 litres of jet fuel or 3.7 minutes of pipeline capacity between Marsden Point and Auckland. We anticipated at least part of this growth and are pro-actively upgrading the capacity of the pipeline to continue meeting expected demand growth. We hope to have increased pipeline capacity by around 10% by the end of this year.

We have shown the picture on the right before. It is made by the oil markets consultancy "Facts Global Energy" and depicts their understanding of demand growth (dark blue bars) versus new refining capacity coming on stream (light blue bars).

You can see why 2013 and 2014 were difficult years with capacity coming on stream swamping demand growth but now some 5-6 years after the GFC we don't see much new incremental capacity coming on stream.

In fact, the expectation is that Asiapac will go short on products this year. That is not such a bullish signal as it may sound because products are easily brought into the Asiapac region from export refining centres such as India and the Middle East. However, it is positive nevertheless. A caveat are the so called teapot refineries in China. Privately owned small refineries that fly a bit below the radar and may have spare capacity up their sleeve.

2017 FOCUS AREAS

So, what are we working on this year? First of all, of course, safe operations.

But also the portfolio of post TMH optimisation and small growth projects. We expect to spend some $10 million in growth capital delivering revenue growth equivalent to a payback of one year.

Let me give some examples of smaller growth projects completed in 2016. We delivered an autopilot for the CCR, cost NZ$ 1 million and some NZ$ 600,000 pa revenue. We installed some line-work to improve our flexibility in bitumen manufacture at a cost of NZ$ 1.4 million and NZ$ 2.5 million revenue growth.

First Gas is continuing their project to help us secure more natural gas. In a crude price world of US$ 50/70 per bbl and current exchange rate this will deliver NZ$ 6-10 million revenue.

Equally, we are making good progress on the dredging project which will deliver anywhere between NZ$ 8-12 million at 50/70 $ crude. We recently completed all the pre consent studies and engaged in an intensive second round of local consultation with a pop-up container and visits to various marae - which is critical for Tangata Whenua to prepare the cultural impact assessment. We are getting close to preparing our resource consent application for the Northland Regional Council.

With Auckland growth, as stated earlier, we are increasing pipeline capacity in three stages. The first two stages will complete this year and at NZ$ 5.6 million capex will give a 10% capacity increase or ballpark NZ$ 2-4 million extra revenue.

The third stage will give another 5% at a similar capital cost. We are doing some future work on increasing the pipeline capacity even more than the 15% already under development.