Auckland jet fuel arrangements a potential barrier to new entrants

Thursday 19th September 2019

The three major oil companies’ control of fuelling at Auckland International Airport is a potential barrier to competition and should be reviewed as part of the airport’s redevelopment, a government inquiry says.

Ownership of the jet fuel hydrant system at the airport by Z Energy, BP and Mobil is a potential obstacle for new entrants and the airport company should monitor changing ownership models internationally when establishing its next facility, the review says.

Those decisions should include whether the next joint user hydrant installation – or JUHI – should operate on an open-access basis, whether minimum storage and input capacity should be stipulated in the ground lease; and how the operator of the new system will disclose and consult on future investment plans.

“The final decision about the location of the new JUHI should take into account resilience considerations, including that its location does not limit the options for fuel supply via pipeline, truck, train, or another method,” the review said among 21 recommendations on improving fuel security for Auckland.

“We accept that open access does not guarantee additional resilience along the jet fuel supply chain. However, we were persuaded that it would have the effect of removing barriers to entry that make it difficult for new entrants to set up alternative jet fuel supply chains.”

Resilience of jet fuel supplies was a key element of the inquiry into the September 2017 failure of the main fuel pipeline into Auckland from the Marsden Point oil refinery. While household and business fuel supplies were largely unaffected, hundreds of flights were disrupted, airlines were forced to bring in fuel from other airports and emergency alterations were made so fuel tanks around the country could store additional jet fuel.

Gull, backed by parent company Caltex Australia, wants to start providing jet fuel in Auckland and has proposed trucking it from either Tauranga or Marsden Point within the next three years.

Reviewers Elena Trout and Roger Blakeley acknowledged that Caltex – now owned by Z Energy – was granted gained access to the JUHI and the pipeline from Wiri in the late 1980s.

But they described those access arrangements as “murky and cumbersome.” Gull had only recently got access to the agreement, after the three partners received a draft version of inquiry report, they noted.

Their report, issued Tuesday, accused Z, BP and Mobil of dragging the chain on additional fuel storage needed at Auckland airport, on the jet fuel pipeline from the Wiri fuel terminal and at Wiri itself. They recommended the government prepare legislation so it can step in if investment isn’t made in a timely way.

The pair’s 156-page report highlights their concern that the airport’s plans to relocate the jet fuel hydrant system may inadvertently lock-in both the existing anti-competitive arrangements and block potential secondary supply sources like that proposed by Gull.

They also noted the resistance of BP and Mobil to offer information during interviews, a specially convened industry workshop, and a three-day public forum, in relationship to a Z-led working party formed to consider a potential $150 million project to rail jet fuel in from Tauranga as a secondary supply route.

“In July, we learned that this working group had expanded its focus in May 2019 and begun to discuss possible investments to improve the resilience of the existing infrastructure,” the review says. “This was frustrating, given these were the exact issues the inquiry had canvassed with the parties in previous months in the interview, workshop, and forum. The fuel companies knew these issues were central to our analysis and the report we were drafting.”

Only after the panel made specific requests using its statutory powers was the information provided.

Auckland and Perth are the only major airports in Australia and New Zealand that rely on a single fuel supply line. The country’s biggest airport accounts for 75 percent of the country’s international passenger movements and is a key market for BP, Mobil and Z Energy who collectively supplied about 1.5 billion litres of jet fuel there last year.

That is projected to increase to between 2.1 billion and 2.8 billion litres by 2035, when the lease for the current JUHI ends. That growth is another reason that Gull wants a slice of the action.

The review believes a second supply chain for the airport would significantly enhance its resilience but accepts that only the industry can determine whether that is viable.

But it doesn’t accept that it can’t be considered, and nor does it believe the control of the existing facilities by the three major firms helps.

“There is a structural incentive for the incumbent joint venture participants to deny or inhibit access to new entrants that will compete with them for jet fuel customers,” they say.

“Open access to the infrastructure in the supply chain would have the effect of removing barriers to entry that make it difficult for new entrants to set up alternative jet fuel supply chains. As a result, it has the potential to help enhance the resilience of the jet fuel supply chain.”

During the inquiry hearings, Gull indicated it might be able to supply 8-10 percent of the fuel needs at the airport.

The airport is currently rebuilding its road network, with the specific intention of reducing truck movements through its core aviation precinct. If jet fuel is to be trucked, it believes it should be to the Wiri terminal, which can’t currently receive road tankers.

The alternative railed fuel supply modelled by Z Energy would terminate near Wiri. Mobil told the inquiry that trucking fuel to Wiri would put more pressure on the existing infrastructure. If a second supply chain was to enter the system, it needed to be as close to the airport as possible, it said.

BP disputed the inquiry team’s suggestion that the company had not been open with the inquiry about the option of railing fuel from Tauranga.

External affairs manager Leigh Taylor said the inquiry’s information requests were generally made using the powers of the Inquiries Act, so it was not true to say material was only provided in response to a statutory request.

“With regard to future resilience plans, we have not been reluctant to share information with the inquiry about our thinking on investment possibilities, and have provided that information,” she told BusinessDesk. “BP took the outage and the inquiry very seriously and cooperated openly and fully."

Mobil said the firm’s discussions with the other suppliers were subject to confidentiality obligations.

“Mobil strongly believed that it was important to honour such commitments, even knowing that it may be subject to criticism,” a spokesman said.

(BusinessDesk)

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