Fuel industry practices and structures have proved resistant to change for much of the past 30 years. Photo / Bloomberg
Fuel industry practices and structures have proved resistant to change for much of the past 30 years. Photo / Bloomberg
COMMENT:
The Commerce Commission's just completed market study is about to start unwinding fuel industry practices – and structures – that have proved resistant to change for much of the past 30 years.
Views are mixed as to how effective terminal gate pricing – effectively mandatory regional wholesale offers – will be in enabling stronger price competition among the country's 20 – yes 20 – retail fuel brands.
But breaking down long-term, exclusive – and sometimes geographically limited – supply contracts is expected to have a big impact and make contestable much more of the 7.8 billion litre-a-year petrol and diesel market.
The potential for the smaller and growing retailers to access up to 20 per cent of their supplies from more than importer should encourage a sharpening of wholesale pricing – and pump prices in turn. It could also help reduce supply risk as the new firms expand in volume and potentially into new geographies, Waitomo Group managing director Jimmy Ormsby told BusinessDesk.
"That competitive tension at the wholesale fuel level is pretty positive."
The commission believes the majors – BP, Mobil and Z Energy – are being generously rewarded for their role as custodians of the national fuel distribution network. But they are also obliged to sell their share of production from the Marsden Point refinery and already compete hard to supply supermarkets, KiwiRail, trucking companies and other commercial customers.
The commission won't be waiting another 20 years to assess the impact of its fuel review.
Now they'll have to fight harder to keep the volume they each supply to their clutch of reseller customers – the likes of Waitomo, Allied, GAS, Farmlands etc. The commission has suggested maximum terms on those contracts of three to five years.
Z Energy chief executive Mike Bennetts believes his firm has "less to lose and more to gain" from that change, given how embedded some of its partnerships are relative to those of its rivals.
Ormsby expects his firm will be able to have a "mature conversation" with long-time supplier Mobil and other potential providers to come up with arrangements that deliver value for all parties.
I hope he's right.
The majors have a poor record for agreeing anything and Bennetts is hoping for a clear deadline from government to help focus industry minds and get workable arrangements in place relatively quickly.
And that is important as the combination of terminal gate prices and split wholesale contracts may speed the demise of the arrangements the majors have for borrowing and lending fuel to each other at terminals around the country.
While the commission believes those arrangements provide a big advantage to the majors, and limit competition between them, they also help coordinate fuel deliveries and ensure adequate supplies around the country.
They have also enabled up-and-coming retailers to access fuel in parts of the country where their own wholesaler doesn't have storage of its own.
NPD – formerly Nelson Petroleum Distributors – has added 19 sites in the South Island since January 2016 and, according to the commission, has had the most impact on the pump prices of the major firms given it also tends to build service stations as opposed to unmanned pumps.
Yet it is supplied by Mobil, whose only South Island storage is at Bluff and Christchurch.
Z Energy has long been unhappy with the borrow-and-loan arrangements, which allow all the majors to benefit from any new capacity one of them builds at a terminal.
It manages most of the fuel storage in Nelson and plans to withdraw some of it from the scheme – as it can with six weeks' notice – before deciding whether to take similar steps in other parts of the country.
Z Energy chief executive Mike Bennetts. Photo / File
It's the sort of risk to nascent competition the commission noted should Mobil change its strategy or be sold by its US parent.
"The new retail fuel sites that have opened are predominantly supplied with fuel by Mobil," the commission said in its 589-page final report. "Competition which depends on the individual strategy of one player may not endure over time."
Timaru Oil Services, due to commission 32 million litres of fuel storage there next year, could be well-placed to start meeting some of the demand potentially up for grabs – particularly now that Gull and Waitomo have also started operations in the South Island.
Gull, which has established a broad North Island retail network since building its own terminal in Tauranga 20 years ago, may also be keen. As general manager David Bodger told the commission in September, it has never been asked to bid to supply any of the minor resellers.
Legislation to drive the planned changes should be enacted mid-2020, about the same time Timaru becomes home to the country's fifth terminal operator. Given flat demand, it will likely be the last new entrant.
The commission won't be waiting another 20 years to assess its impact and has already signalled a role for back-up regulation to ensure the new industry arrangements are effective.
