Z Energy seeks better returns from industry shared service arrangements

BUSINESS DESK: New Zealand’s largest transport fuels retailer, Z Energy, will use upcoming negotiations on industry-wide infrastructure and transport arrangements to improve commercial returns on an industry it says “seems trapped in an economically unsustainable state.”

Among existing arrangements that no longer work for Z – formerly the downstream business of Shell New Zealand, now owned 50/50 by Infratil and the New Zealand Superannuation Fund – are shared coastal shipping services that are integral to national petrol and diesel supply lines.

“The way the costs fall, everyone pays the same unit rate” for coastal shipping, Z chief executive Mike Bennetts told BusinessDesk. “My point is that for some grades of fuel, we are twice the size of one of our competitors. The unit efficiency benefits smaller players. It’s good for New Zealand to have overall costs lowered, but scale isn’t being rewarded.”

Z and BP New Zealand now by far the two largest participants in the downstream transport fuels market.

Bennetts also mounted a case for improved profit margins on transport fuels – if not higher prices – because they were stuck below commercially attractive levels. Importer margins of around 17 cents a litre compared with 50 cents a litre in the 1980’s, when the industry was subject to price control.

Post-tax returns for Z were currently around three cents a litre, meaning even a small cents per litre increase could “double our returns”, said Bennetts, who has also raised questions about variable fuel quality, which is not widely appreciated by motorists.

Lowest-priced retailer Gull Petroleum uses an ethanol blend, which cancelled out the benefit of lower per litre costs since the blend had “less grunt” than fuels completely refined from crude oil.

Gull also did not include engine-cleaning additives to its fuel, and Z’s testing had found inconsistent addition cleaning additives by another unnamed competitor, whose customers may be assuming all its fuel has such additives.

“It’s a myth that all fuels are the same,” said Bennetts. “Z research shows some contain no cleaning additive and some only sometimes.”

In the meantime, the capital equipment vital to a secure national distribution network was deteriorating, with capital expenditure trending well below depreciation for much of the last decade.

Meanwhile, some industry players were holding onto disused infrastructure rather than allowing others to develop it. In Timaru, this was leading to constant rationing and to a big jump in the amount of transport fuel being trucked around the South Island rather than taken by ship.

The Z delivery fleet covered six million kilometres in 2008, rising to eight million kilometres in 2011.

Bennetts said the company was putting on hold some $50 million of upgrades while it renegotiated shared arrangements with competitors, which were struck when all players in the market were more equal in size. However, the spending required to complete its national rebranding from Shell to Z would continue as planned.

Bennetts said he had told the Z board he would not move beyond resource consents and detailed engineering plans for planned infrastructure upgrades until more advantageous commercial arrangements were concluded.