Behind the pricing: Internal email lifts veil on BP's petrol prices

Sunday, 29 April 2018

After years of confusion and spin, a single internal email exposes the petrol industry's pricing behaviour.

A directive from a mid-level manager in BP's Auckland headquarters to lower North Island petrol stations spelled out a plan to stem sales losses in Ōtaki, where petrol prices are up to 20 cents a litre more expensive than in Levin, just 19km north.

But instead of cutting prices in Ōtaki, BP pricing manager Suzanne Lucas outlined a novel tactical plan: raise prices in the whole area, and hope that BP's major rivals responded by doing the same thing.

**READ MORE:

*  You're being squeezed on petrol

* [Please explain BP told as asked to attend Beehive

​](https://www.stuff.co.nz/business/103471324/bp-summoned-to-the-beehive-after-internal-email-outlines-alarming-pricing-plan)* Read the BP pricing email in full**

'Rather than just reducing the price in Ōtaki we will be looking to increase the price at Paraparaumu & Kāpiti and also Levin,' Lucas wrote.

'We have already increased all three sites mentioned by 5cpl [cents per litre] and have found that the Z [Energy station] in Paraparaumu has already matched our pricing.

'Over the next couple of weeks we will continue to try a number of tactics in the hope of reducing the pricing gap between Ōtaki and its surrounding regions.'

On its own, the email appears to be limited to one small, generally provincial area.

But Levin, with a population of about 21,000, is a flashpoint in a national petrol market which faces the growing risk of Government intervention.

Prices there are typically around 30c a litre cheaper than in Wellington, even though the capital has its own fuel terminals, making delivery costs lower.

Where once the petrol industry had uniform pricing across the country, Wellington, like Christchurch and many other parts of the South Island, tends to be charged what the petrol industry defines as the 'national price'.

But lower prices generally across the upper North Island have led to increased margins in areas covered by the national price.

This has led to claims that motorists in some parts of the country are being ripped off by petrol companies to recover money being lost in areas where competition is hotter.

On Sunday, Energy Minister Megan Woods said the email was concerning, prompting a pointed invitation for BP to meet her in her office in the Beehive.

'There's strong public interest in making sure Kiwis are getting the best possible deal at the pump,' Woods said in a statement.

'It's alarming to see evidence that suggests that's not always happening.'

Since early 2017, the Government has been delivering increasingly blunt warnings that it did not accept the industry explanation of competitiveness in the retail fuel market.

Although there have been accusations that the former National government and the new Labour-led coalition were simply caving to populist pressures, official reports have cast doubt on arguments used by the major fuel companies.

Former energy minister Judith Collins ordered a report be conducted by the Ministry of Business, Innovation and Employment (MBIE) as she vowed to 'get to the bottom' of activity in the industry that was difficult to explain.

The report found activity 'that may not be consistent with a workably competitive market'.

'YOU DON'T HAVE OUR PERMISSION TO PUBLISH'

Although Stuff has not established the exact date of the internal BP email, it appears to be from mid-2017, when there were periods when the price gap between the lower North Island and central Wellington narrowed.

While Levin and Masterton – the southernmost stations of fuel discounter Gull – have become the focus of allegations of a nationwide cross-subsidy, the source of the email claimed BP used similar tactics elsewhere.

In simple terms, the petrol market in most of the North Island is more competitive than elsewhere.

While this means motorists in some regions benefit, paying what may effectively be below-cost price for fuel, profit is recovered elsewhere.

The MBIE petrol report found that petrol prices in Wellington and many parts of the South Island were not only higher than elsewhere, but the gap in prices could not be explained by added costs of delivery.

There is nothing in the email to suggest that BP was communicating its pricing strategy with any of its rivals directly, meaning the communique is not likely to be illegal.

But the company, headquartered in one of London's most exclusive neighbourhoods and with a market capitalisation of around $200 billion, did not want the story to see the light of day.

Despite repeated requests, BP refused to be interviewed on the contents of the email, releasing only a terse statement which suggested Stuff was not in a position to tell the story.

'The information you have passed on was released without BP's permission. This was an internal document and is commercially sensitive,' spokeswoman Leigh Taylor said in an email.

'We do not give permission for it to be used by you in any form. BP takes breaches of confidentiality very seriously, and I would appreciate it if you could provide me with additional information regarding how you came across this information.'

The real concern around the email is likely to be the risk of embarrassment.

The 'tactics' which the internal email outlines appear to undermine an industry which has long claimed that prices were set by global product prices and the strength of the New Zealand dollar, combined with a trend towards local discounting.

Lucas' email on BP's pricing tactics even spells out the company's 'standard response' for complaining motorists.

'BP sets a national price, however, due to localised competition there are a number of areas in NZ that are discounted to varying degrees and where we can compete we will.'

An examination of BP's financial reports suggests it is in command of where it does, and does not, compete on price.

In 2016, BP reported a $215 million profit before income tax on its New Zealand business.

In all but one year since 2010, BP's pre-tax profits have ranged from $131m to $166m a year.

While profits can, in some cases, be a misleading measure, BP is clearly generating an enormous amount of cash, arguably the best sign of financial health in a mature company.

During 2015, BP New Zealand's directors elected to pay its parent company a dividend of $300m.

BP's statement added further evidence that while the industry as a whole is profitable for the major players, certain areas are not.

'We can't always match or sustain heavy localised discounting across the entire market or across our entire portfolio of products,' Taylor said.

'An unsustainable level of discounting was in effect … in the area you have referenced. As a result, BP took an independent decision to improve its competitive position in the wider area.'

The Automobile Association (AA) has been claiming for several years that the major petrol companies are pushing up margins in Wellington and the South Island to cover losses elsewhere.

'That margin is being used to subsidise discounted prices in parts of the country where [the major petrol companies] are competing with low-cost brands,' AA petrolwatch spokesman Mark Stockdale said.

In simple terms, motorists in Wellington and the South Island are being ripped off to cover a lack of profit elsewhere.

A STRANGE, NATIONWIDE CROSS-SUBSIDY

Several years ago, Mike Bennetts, the long-time chief executive of Z Energy, was heard discussing the idea of a weird publicity stunt.

Prices had sunk so low in areas such as the Bay of Plenty that he would like to pull up a petrol tanker to one of the cut-price petrol stations and fill the tank up.

Some stations, Bennetts lamented, were selling petrol at such a low price that he couldn't even buy it that cheap.

While Gull, which for much of its history was owned by a wealthy Australian family, has been undercutting its larger rivals since the 1990s from its fuel terminals in Mt Maunganui, the gap was becoming a gulf.

By the start of 2016, the AA was pointing to the growing gap as a sign of a major cross-subsidy.

Dave Bodger, who has headed Gull for more than a decade, said he used to get contacted by journalists when his prices were 6c a litre cheaper than the 'national price' used by Gull's rivals.

While he could not say conclusively that there was a cross-subsidy, from what he observed it appeared to be the case. People had jokingly accused his company of pushing up prices in Christchurch, his hometown.

'I don't know if that's the case, but it's that gap of up to 40 cents [a litre, compared with the national price] that makes people ask the question,' Bodger said in early 2017.

Other discount brands have also begun emerging, including NPD (Nelson Petroleum Distributors) which supplies fuel to more than 40 sites throughout the South Island. However, NPD buys its fuel from Mobil, limiting the degree to which it could ever undercut its larger rivals.

The AA's Stockdale said New Zealand had something approaching two separate fuel markets.

'We could go as far as to say that, in some areas, the market has never been more competitive. We've never had this level of price discounting and regional price variability that we've seen in the last few years.

This was 'absolutely not' the case everywhere, Stockdale said. 'There are parts of New Zealand where there is a lot less price competition.'

Stockdale said fuel companies were often difficult to pin down. 'Kiwis are sceptical about fuel prices and they are sceptical about the behaviour of fuel companies, and it's difficult to get a straight answer.

'More needs to be done to get the facts and give confidence to the consumers that the market is operating fairly and confidence to the Government that the market is operating fairly and if it isn't, then the Government might consider intervention.'

Stockdale said the fuel companies should be more open about pricing. 'We think they should be a lot more transparent with motorists and up front about why prices are the way they are where they are.'

When the new Labour-led Government was given the final MBIE report, Woods pledged to look into short-term options which could help promote competition.

So far, no measures have been announced, but Woods said the behaviour outlined in the BP email backed up the Government's decision to give greater powers to the Commerce Commission, allowing the competition watchdog to 'compel the release of evidence and get to the bottom of why some Kiwis appear to be paying over the odds for petrol'.