Z Energy warns it may face millions in backdated fuel excise duties

Z will end up with a 49 per cent share of the fuel market if the $785 million sale, which requires the competition regulator's approval, goes ahead. Photo / NZME.

Z Energy, the service station chain floated by Infratil and the New Zealand Super Fund two years ago, warned it may be facing millions of dollars of additional costs as the nation's customs service seeks to claw back excise duties stretching over the past three decades on leftover fuel in a pipeline from the Whangarei refinery.

New Zealand Customs Service is looking into what it considers to be unpaid duties on fuel transported from the Whangarei refinery via a pipeline to the Wiri Oil Services terminal in South Auckland, which is jointly owned and operated by Z Energy, BP, Mobil and Chevron.

During the process, some of the fuel gets mixed together and is then blended back into the petrol and diesel tanks. Customs is now charging excise duty on the extra fuel that is blended back into petrol, Wellington-based Z Energy said in a statement.

In May, Customs charged the Wiri terminal shareholders $66 million in unpaid duty dating back to 2007, including $24 million in unpaid duty and $42 million in penalties. Z Energy paid its $23 million share of the charge, and an additional $5 million relating to other terminals, and is seeking to recover the costs, it said, adding that payment was required within 20 days or further penalties of 2.5 percent would be levied.

The Wiri shareholders received an additional letter from Customs yesterday outlining its intention to backdate the charges to the opening of the facility in 1986, which the group estimates would cost it $71 million to $109 million, including the $66 million already paid. Z Energy estimates it may face a total $25 million one-time charge as its share of the costs, though it says it's not possible to predict what the final financial impact might be.

"Z is not yet clear as to what its share of the additional money might be, nor has any decision been made on whether or not to accept the offer or reject the offer and pursue the issue through the courts," it said.

Z Energy says the practice of reblending comingled fuel is the only practical method for dealing with the type of fuel and it has occurred at every terminal in New Zealand since they started operating more than 100 years ago and is standard operating practice globally. The small incremental volume gain is offset by natural evaporation of fuel throughout the rest of the supply chain after it leaves the refinery, Z Energy says.

Customs has been in talks with the industry since 2012 when it won a Court of Appeal case, later upheld by the Supreme Court, on the charging of excise duty against fuel retailer Gull, which had been blending butane into its petrol.

Still the cases are different because Gull was blending fuel for discretionary commercial reasons rather than for standard and necessary operational activity, Z Energy said.

Z Energy shares fell 0.7 percent to $5.80.

Read the full Z Energy announcement here: