Increasing competition in the petrol market is possible, but not without risks

Tuesday, 1 May 2018

Prime Minister Jacinda Ardern addresses the Deep Tank fuel revelations with BP at the centre.

OPINION: If the Government is serious about bringing more competition to the industry it has options, but nothing is simple.

Energy ministers from both National and Labour have talked up the prospects of intervention in the retail fuel market for years.

Even National leader Simon Bridges asked his officials for options to regulate the industry when he held the portfolio.

Z Energy terminal Brent Cooper, left, with former Energy Minister Gerry Brownlie and former Z Energy chairman Marko Bogoievski during the opening of the Z Energy storage facility at Lyttelton in 2011. Regulating the price at which fuel terminal owners can sell fuel to rivals is the most obvious way to boost competition in the petrol market, but such a move is not without complications.

But so far there has been no action, other than increasing political pressure.

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The best way would appear to be to regulate fuel terminal access, but the option is unlikely to be simple.

It will also inevitably prompt further criticism that the Labour-led Government is undermining investor confidence.

Fuel terminals are the huge tanks which sit near ports around New Zealand, but mainly at Seaview near Wellington, Lyttelton near Christchurch and at Mt Maunganui.

Already the major petrol companies strike deals with each other to ensure constant supplies in all areas, as well as to small independent players.

But the prices being charged confidential and set on commercial terms.

Any number of small independent players - including GAS, Allied and NPD - have built businesses this way.

But the degree to which these companies can undercut the majors on price is constrained by the commercial deals they can strike with those majors.

The alternative would be to set down the terms under which terminal owners are forced to sell to independent retailers.

Dave Bodger, the general manager of Gull, points to the example of Australia, where the country's fuel code requires terminal prices to be published, including a breakdown between product prices and fees, allowing comparisons to international benchmarks.

Wholesale deals in Australia are struck between retailers and fuel traders, with fees added, Bodger said.

Whereas in New Zealand, Gull tends to be asked to deal with the commercial manager of one of its larger rivals, with little transparency over price.

Exactly how much Australia's fuel code boosts competition is unclear. There are far more fuel terminal operators across the Tasman, meaning that if a retailer does not like the prices offered by one player, there are other options.

Apart from Gull, which has its own terminals in Mt Maunganui, New Zealand has only three companies with fuel terminals. Z Energy (which owns Caltex), BP and Mobil. Unless a clearly defined formula is set down, Gull has little bargaining power.

Unless it can reach a deal on terms it is happy with, its only option to enter the Wellington or South Island market would be to build its own terminals.

If Energy Minister Megan Woods was to examine the option of regulating the wholesale market, it is likely that the industry would argue that it would amount to the stripping of property right. Which it would.

Compelling a company to sell a product at less than it otherwise would effectively make owning those terminals less profitable.

Z Energy, BP and Mobil may end up supplying the likes of Gull at a price which they would not believe was enough to make investment worthwhile.

Such a move would almost certainly knock the share price of Z Energy, the only significant New Zealand headquartered petrol company.

It would also cause potential new entrants to pause for thought.

Resource consent has been granted for a major new facility in Timaru, but until construction begins, that consent is no more than words on a page.

Any investment in the fuel market has to be seen in the context of the market, which will change fundamentally in the coming decades.

If fossil fuels are a sunset industry, with the prospect that volumes will begin to drop sharply by 2030, why would anyone consider investing in new terminals, which can cost tens of millions of dollars?

After the announcement that the Labour-led Government would stop issuing new offshore oil and gas exploration permits, Prime Minister Jacinda Ardern may be sensitive to warnings that she is undermining investor confidence.

More than anything else, investors want as clear a picture as possible that after spending large amounts of money, the rules won't change in such a way to undermine their investment.

But the Government has repeatedly talked up the possibility that action will be taken. That it will ensure that Kiwi motorists are getting a fair deal.

Will it follow up the rhetoric with action?