'Get used to prices', motorists

New Zealand Refining chief executive Thomas Zengerly reckons motorists will have to suck the syphon on higher petrol prices.

"We used to live in a world when we were used to prices of $US15-$20 a barrel, and we are in an adjustment process to a world that is pricing crude at $US45-$55 a barrel. This is a painful process."

Asked if motorists were being ripped off, Zengerly said: "I can understand that Joe Public has indeed this feeling."

But he said world refining margins had lifted dramatically in response to a shortage of capacity. World demand for refined oil had risen to 2.5 million barrels a day, leaving supply around 80 million barrels a day short.

"There is simply not enough refining capacity around globally to satisfy the growing demand for oil. That will balance out over time, but it takes some time for this new capacity to be built."

NZR's refining margin had tripled from 2003/4 to around $US3 a barrel. When the market was regulated in 1988, NZR was limited to US44c.

Deregulation also allowed total vertical integration so wholesalers such as BP and Shell, who also own crude oil in the ground, could own retail outlets.

They already controlled NZ Refining, with BP holding 23.6 per cent, Mobil 19.2 per cent, Shell 17.1 per cent and Caltex 12.7 per cent.

Those key owners have come under fire for reporting profits of more $US70 billion ($NZ95.75 billion) last year topped by Mobil's owner, Exxon Mobil Corp, which turned in a staggering $US25 billion return.

Coincidental or not, NZR lifted its profit 200 per cent to $97.5 million last year and hiked its dividend from $1.20 a share in 2003 to $3. The company's shares have doubled in price, hitting an 11-year high of $37 in March. They closed Friday at $33.60.

When deregulation was proposed the oil companies threatened to close the refinery, which they said would not be competitive.

So the Government wiped off nearly $2 billion of NZR debt - a debt that derived from the ill-considered decision to expand the refinery as part of Sir Robert Muldoon's Think Big programme of the early 1980s. The Government also paid $80 million to NZR to help it cope with a deregulated market.

The debt was initially to be repaid by a specific "temporary" levy on petrol, but that was incorporated into general excise taxes in 1986 that today consume just over half of every dollar spent on petrol.

Zengerly said NZR profited last year because of its sophisticated maintenance, which meant few interruptions and low costs, particularly as electricity prices dropped from abnormal highs in 2003. The strong dollar also played its part.

He said NZR was not benefiting any more than any other refinery.

"This is not a New Zealand phenomenon. Yes, we had a very good year in 2004, but one should not forget that we had a large number of very lousy years in the 1990s when we didn't earn the return on capital."

He said the shortage of refinery capacity was likely to persist for some time,as it takes four to five years to build a new refinery, and NZR should benefit. It is mulling expanding its annual 5 million tonne annual capacity by 20 per cent.

 

He said it was cheaper to expand an existing plant than start afresh.

NZR is already well advanced with a $180 million project to improve the environmental quality of the fuel its produces. It has paid for more than $140 million of the upgrade that will result in cleaner- burning fuels this year.

As a result of the upgrade, NZR became the first organisation to sign a Negotiated Greenhouse Agreement (NGA) with the Government whereby it will be exempt from the $25 carbon tax for every tonne of carbon emitted. Zengerly estimates the NGA will save NZR around $30 million in tax a year.

NZR supplies around 70-80 per cent of New Zealand's petrol and diesel requirements. The rest is imported from Singapore, mainly by its major shareholders.

The Ministry of Economic Development does not monitor NZR's margins, although its website tracks New Zealand import prices excluding taxes against the Singapore price. The graph shows these had not significantly blown out in the past year, although a Consumers Institute graph shows margins have been swelling since April 2002. The ministry believes the imported product is what sets the price of petrol in New Zealand, and that price determines the level of NZR's profitability.

If there is a spread between the cost of crude and the cost of imported refined product, then the refinery will be profitable.

When the market was deregulated when free-market economics were in the ascendancy, the concept was that independent operators would keep the major oil companies honest.

Ten years after deregulation Fletcher Challenge set up the Challenge network and forced prices down 6-7c/litre. When Fletcher Challenge was broken up in 2001, Challenge was bought by Caltex with the Commerce Commission deeming there to be sufficient competition.

The only independent operator today is Perth-based Gull Petroleum with 2-3 per cent of the market. It imports fuel from overseas.

Consumers' Institute director David Russell said that with vertical integration of the industry, what may be lost in margins at the pump is recouped through subsidiary holdings such as NZR.

The institute's graphing "shows clearly that on average the big companies have been doing well".

"My impression is they are competing, but from a high level and a comfortable base. Despite the high profits, consumers may be better off."

Refining Company

* The New Zealand Refining Company runs New Zealand's only oil refinery, at Marsden Pt, near Whangarei.
* It supplies around 70 per cent to 80 per cent of New Zealand's petrol and diesel requirements. The rest is imported mainly from Singapore.
* Shareholders: BP 23.6 per cent, Mobil 19.2 per cent, Shell 17.1 per cent and Caltex 12.7 per cent.

- NZPA