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ComCom eyes terminal, refinery access in fuel market study

Thursday 31st January 2019

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The Commerce Commission wants to understand whether access to locally made fuel and its delivery and storage around the country may be limiting competition.

The regulator is undertaking a broad review of the retail petrol and diesel market and has highlighted access to the country’s fuel logistics chain, and the rules for its use, as an area for deeper examination.

Among issues it is canvassing is whether the exclusive use of the Marsden Point Refinery by the three major companies – Z Energy, BP and Mobil – is an obstacle to competition. That includes their use of the refinery’s pipeline to the Wiri terminal in Auckland, the country’s biggest fuel market and the delivery point for about 37 percent of the refinery’s production.

The commission is seeking submissions on whether the operations of Coastal Oil Logistics, which manages the major firms’ fuel shipments around the country, and the operation of the refinery-to-Auckland pipeline and Wiri terminals is limiting competition.

“What are the advantages and disadvantages of the current arrangements that govern COLL and the RAP for competition in the retail market?” the commission asks in a 38-page statement of preliminary issues.

“Are there efficiency gains from the shared infrastructure? If so, how are these being shared with consumers?

“Does the operation of the refinery as a tolling service - as opposed to a merchant refinery - adversely impact competition in the retail fuel markets?”

The market study is the first the commission is undertaking under new powers granted by the government last year.

The government’s move was a direct response to a 2017 study led by the Ministry of Business, Innovation and Employment which found pricing in some parts of the country may not be reasonable. Among issues highlighted was the major firms’ control of most of the fuel storage around the country and Gull’s complaints that its efforts to gain access to some of that on commercial terms had been rebuffed out of hand.

The commission noted that earlier work, and its own review of the Z Energy purchase of the Caltex business, completed in 2016. During that review it noted the control Z would gain of storage in the upper South Island, but did not act against it.

The commission says the current study has a different focus from its previous work. It is looking at broad competition in the retail petrol and diesel market, rather the impact of a specific acquisition. It will not be looking at commercial fuel contracts, nor supplies of jet fuel, bitumen or marine fuel.

“However, we may consider these markets where they provide insight into understanding how competition operates in the retail petrol or diesel markets.

“We may make recommendations if we consider there may be ways to achieve better outcomes for the long-term interest of New Zealand retail fuel consumers.”

Fuel prices became a political football last year as rising crude oil prices and a weak New Zealand dollar contributed to record pump prices.

But the growing price disparity between areas where independent retailer Gull operates and where it doesn’t – Wellington and the South Island – and an increase in industry margins, has increased the temperature of an issue simmering during the past decade.

MBIE calculated that higher margins since 2008 were now costing the average motorist $150 a year.

But it was the earlier unsustainably low margins that saw Shell sell its retail business to Z Energy in 2010. Mobil had also had its New Zealand business on the market.

Z Energy also publicly pushed for higher margins, saying they were needed to re-start investment in the country’s aged tank and pipeline infrastructure. It also sought to put more of the industry’s co-owned infrastructure – which helps avoid duplication of assets around the country – on a more commercial footing.

Last year Z sold its stake in New Zealand Oil Services, which manages BP and Z Energy terminals. Other firms have also increased their terminal investment in recent years to keep up with big increases in jet fuel and diesel demand.

In recent years, Mobil has increased capacity at Lyttelton and BP has built new tanks in Dunedin. In 2015 Port Taranaki bought and upgraded a former Caltex terminal there and leased it to BP. Timaru Oil Services, owed by French-Pacific interests, is currently building new storage there.

The commission wants to know why prices, profits and margins have risen in the past decade and why New Zealand’s pre-tax fuel prices are now among the highest in the OECD.

It wants to see whether the industry’s system of shared assets, the system the major firms have for lending and borrowing fuel, and for coordinating shipments around the country, has an impact on competition.

It also wants to know whether building new terminals is really a barrier to entry, and whether capacity is keeping up with demand growth.

Historically, access to terminals has been key for new players. Gull – now owned by Caltex Australia - started its business by building its own storage in Tauranga in 1999 using disused tanks from Marsden Point. A year earlier Fletcher Challenge started importing fuel into its Taranaki oil facilities and built its own terminal in Timaru the following year.

But that dependence may be breaking down. Gull, which has tried and failed to get access to South Island storage, last month said it expected to open outlets in Wellington this year.

Waitomo Group – which is supplied by Mobil – has more than 50 outlets on the North Island and last month said it will open a site in central Christchurch in late 2019. It also plans a Wellington outlet this year.

The commission says it is keen to understand the growth of smaller brands, including Waitomo, Allied Petroleum and GAS, which are supplied by industry majors and collectively added more than 80 outlets between 2012 and 2016.

It also wants to understand the drivers of regional prices and the role that the increasing use of loyalty schemes is having on prices and competition.

It also notes that discounts and loyalty schemes seem to vary by location and that consumers who don’t participate will be left paying posted board prices.

“What are the potential benefits and harms to consumers from the increased use of loyalty schemes and fuel discounts? For example, does this increase switching costs for consumers or make it easier for consumers to benefit from a lower price?”

The commission is receiving submissions until Feb. 21. It is aiming to publish a draft report by July or August. 

(BusinessDesk)

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