10. Market and Cost Implications
10.1 Competition and Security of Supply
One of the underlying principles of the Review is to promote a competitive environment and to ensure that there are no unjustified barriers to entry to the petroleum supply market in New Zealand. There are two aspects of this competition: competition in the retail and commercial fuel sectors and competition in the refining sector. The two are inextricably linked.
There is already competition in New Zealand's retail and commercial fuel sectors. Retailers are competing for market share, creating pressure on retail margins, that in turn leads to pressure to minimise wholesale fuel costs.
Competition in the refining sector extends from New Zealand throughout the Pacific Rim, where there is excess refining capacity. New Zealand has one refinery at Marsden Point, and most of our fuel is sourced from there (refer Section 3.1.1). The Marsden Point Refinery is relatively small by comparison to new refineries in the Asia-Pacific region. It is located alongside a deep water port and is a significant employer in the Northland area.
The heavy reliance on fuel from the Refinery means New Zealand is vulnerable to interruptions from this supply source, as evidenced by recent diesel problems. On the other hand, having a New Zealand refinery gives a degree of security of supply. For example, the Refinery could be used to refine New Zealand crude if international supply disruption occurred.
The extent and timing of the changes proposed in the Review have considered the Refinery's configuration and processing capability, the cost of upgrading, lead times for new equipment, and the economics of refining in a very competitive market. If the costs of complying with new specifications become too great, the Refinery users may choose to have their crude oils processed elsewhere or to buy all their finished products directly. However the four Refinery users are also significant shareholders so they have an interest in seeing the Refinery operating to capacity.
Not all retailers operating in the New Zealand market have access to petrol and diesel produced at the Marsden Point Refinery. Most fuel imported to New Zealand is sourced from refineries throughout Australia and Asia. Specifications designed to complement the configuration of the Marsden Point Refinery may be a barrier to competition and may constrain imported fuel sources. Some refineries in the region can already supply New Zealand with fuel that meets some, if not all, of the proposed changes to the specifications.
These issues, many of which bring competing tensions, have been considered in the development of the proposals. The Review recognises that there is a role for independent suppliers and that both they, and the major suppliers, must be able to acquire fuel from a range of sources. This consideration has been balanced against the need to recognise the contribution to supply from the Marsden Point Refinery and the need to provide it with a reasonable opportunity to meet proposed changes to the Regulations.
Australia, in its review of petrol and diesel specifications, has similarly had to take into account competition issues and the ability of its refineries to meet proposed changes.
One further aspect that must be considered is the interdependence of specification parameters and the integration between products produced in a single refinery. Refineries produce a wide range of products from each crude oil, so that the quality constraints on one product will directly affect another. This limits the ability to pick and choose specifications for individual fuels when they are produced from one source. This constraint applies to imports as well as Marsden Point Refinery product and has been another consideration in the development of the proposals.
It is acknowledged that because of these interdependencies, there may be significant scope for optimising both the changes to specified limits on fuel properties as well as the timetables for their adoption. This will vary with fuel source/processor. This review has focussed primarily on signalling the desired changes with due regard to their implications, so providing a basis for the market to choose the best solution for implementing them.
10.2 Financial Implications of Proposed Changes
Relatively little information was available from New Zealand's fuel suppliers on the potential cost impacts "at the pump" of the proposed changes in the fuel specifications. To understand the potential implications, it is necessary to understand the make-up of fuel costs in New Zealand. This is discussed in Section 10.2.1 below.
In view of the lack of New Zealand specific information, the costs of similar changes in Australia and Europe were considered, to provide an indication of the likely cost implications for New Zealand's market. This is covered in Sections 10.2.3 and 10.2.4.
10.2.1 The Price of New Zealand Petrol and Diesel
The cost of petrol and diesel at the pump in New Zealand is the sum of many individual components including crude oil prices, foreign exchange rates, shipping and distribution costs, refining costs, taxes and operating costs for both wholesaler and retailer.
MED's Energy Data File (MED, 2001a) provides information on retail and imported petrol prices and compares regional and international prices. MED's analysis relates pump prices to the Singapore spot market price. Singapore is a major refinery centre, considered to be operating at industry best practice levels, and is widely used as a benchmark for pricing in the Asia-Pacific region. New Zealand taxes and levies, international freight and insurance costs may be added to the spot price to derive a New Zealand import price for petrol. This is shown in Figure 10.1, based on a retail price for regular grade in the September 2000 quarter.
Figure 10.1: Breakdown of Retail Petrol Costs
It should be noted that the total tax rate is a combination of a fixed percentage (GST) and a fixed rate per litre. Other data from MED indicate that retail margins on petrol (the difference between the wholesale and retail price) were of the order of 3c per litre for the September 2000 quarter (MED, 2001). On some occasions, the largest contributor to changes in fuel prices in New Zealand is movement in the $US/$NZ exchange rate.
MED also tracks Singapore spot prices and New Zealand retail prices for diesel and a similar breakdown can be derived, however a much smaller proportion of diesel sales are through retail outlets.
MED's website is regularly updated to show weekly average prices of crude oil, petrol and diesel.
10.2.2 Implications for Marsden Point Refinery
The tolling arrangements that the Marsden Point Refinery operates under have been described briefly in Section 3.1. The refining margin (the cost to the Refinery user of having crude oil processed) is determined by a complex formula, and is principally controlled by refining margins elsewhere in the Asia Pacific region. In simple terms, for the Refinery to be competitive, the cost of purchasing crude, shipping it to Marsden Point, refining it and distributing products to New Zealand ports has to be less than the cost of purchasing and shipping imported products directly.
For the Refinery, meeting new specifications is likely to necessitate a mixture of capital investment (modifications to existing and/or new processing plant), increased operating costs, and potentially lower revenue, as a result of:
- Lower refining margins resulting from use of more expensive feedstock (crude oil);
- Reduced throughput as a result of greater processing being required and lower yields;
- Higher maintenance, downtime and catalyst costs associated with this greater processing (e.g. more removal of sulphur, conversion of benzene to other products); and
- Potential downgrading of product to lower value products.
Capital investment in new processing plant can be significant and there can be long lead times - not only for design and fabrication of the equipment itself , but in selecting suitable windows for refinery shutdowns to allow its installation. In view of this, the Refinery's continued viability is dependent on its being able to process fuel within a defined band (the difference between the cost of the feedstock and the price of landed product).
Whether the increased costs are passed onto the consumer is the choice of the marketing companies (the Refinery users).
10.2.3 Costs from Australian Review
The Environment Australia review of fuel quality (EA, 2000a) considered a number of scenarios for fuel quality changes, including that of meeting Euro 4 requirements for diesel and petrol by 2006. Data supplied by Australia's oil refineries were used to develop a financial model to predict likely cost impacts for each scenario. Key points from this analysis were:
- Costs were based on required changes to all eight Australian refineries;
- The specification changes now adopted by Australia are generally similar to those proposed in this Review (alignment over time with Euro 4). The main challenges for Australian refineries are meeting sulphur limits for both petrol and diesel, and RVP and benzene limits for petrol. These are similar to the challenges for the Marsden Point Refinery, with the exception of sulphur limits in petrol, the limits for which are currently easily met by Marsden Point.
- Estimated costs to meet Euro 4 specifications, relative to a base case specification, were averaged over the eight refineries. The base case reflected current fuel quality plus allowances for changes already in train (particularly in relation to sulphur and benzene). All costs are in Australian dollars.
| Average operating cost increase | $A17M per refinery |
| Average capital cost | $A185M per refinery (range $A80M - $A280M) |
| This translates to: | 1.5 centsA per litre for Euro 4 diesel |
| | 1.1 centsA per litre for Euro 4 petrol |
10.2.4 European Costings
The Australian review indicated that Australian costs would be similar to that for European refineries. It quoted a 1999 CONCAWE study on European Union refining industries costs to achieve Euro 4 specifications. Average costs (again in Australian dollars) were:
1.6 centsA per litre for Euro 4 diesel
0.9 centsA per litre for Euro 4 petrol
10.2.5 Implications for New Zealand Petrol and Diesel Prices
In general terms, the changes proposed for New Zealand are broadly in line with the Australian and Euro 4 proposals. The cost increases would be seen as an increase in the cost of product to the wholesaler, and the level of increase, if any, to be passed on to the motorist would be decided by the retailer. It is reasonable, however, to expect that cost increases at the pump might be of the order of magnitude of 1-2 cents per litre.
However, as a staged approach to specification changes is proposed, it is likely that these costs may be seen as a number of incremental steps over a period of years. This may not be easily visible, against a background of exchange rate movements and crude oil price movements. For example, the Singapore spot market price for petrol ranged from 31cNZ to 55cNZ per litre over the year 2000 (source: MED).
It is, therefore, very difficult to determine what the true cost of any changes to fuel quality might be, or to translate this into a price impact at the pump. For example, the 1996 conversion to premium unleaded petrol did not result in a significant cost increase to the consumer, although an increase had been predicted prior to its implementation.
Back to Top