New Zealand Oil and Gas (NZOG) CEO David Salisbury was quoted as saying that the Tui Field has produced the year end June 2008 ( first year in production) over 15 million barrels (mmbbls) of oil -see link, making a one year revenue of $234.6 Million from its 15% stake in this "Joint Venture" field. Obviously, this is good news at first glance, however, The the Ministry of Economic Development (MED) has published in its Energy Data Book- June 2008 that the remaining recoverable reserve of Tui Field is 35.4 mmbbls. A quick calculation will show that Tui will be depleted in about 2 years time on present production rate (or slightly more if operators decide to reduce present production rate).
It is quite understandable that "Joint Venture" should make the best out of present crude oil prices, however, this will bring to question the NZ Government Policy (Crown Minerals) regarding rate of depletion of oil fields as a factor concerning National Energy Security Policy and the well being and good management of the fields. If there is no such policy then we think it is time that (Crown Minerals) should put some restraints on the rate of depletion of fields proportional to their recoverable reserve and the nature of each field. It is important to safeguard the interest of all parties, but we believe that the nation has the right and a stake in the way its natural resources being utilised.
Thursday, July 31, 2008
Wednesday, July 30, 2008
Lessons Learnt from Gull and Challenge Entry into Petrol Retail Market
After lodging his investigation to assess barriers to entry in the oil market, Max Bradford the Minster of Energy at the time (1997) accepted the conclusions of the Australian consultants (ACIL) that there were no real barriers to entry in the New Zealand oil products market. There was also a lot of enthusiasm that the subsequent entry by Fletcher and Gull Oil will create a competitive environment and lead to “what may some refer to” as balance pricing structure “fair price” in this industry.
Now and after (10) years, it is useful to look back and examine the impact those two entrants have made on the market?
Challenge commissioned “Service Stations” in the North Island and used its storage facilities in New Plymouth to import and transport fuel to their service stations and customers in the North Island.
Challenge entered the market with noticeable price reduction of 3 cent/liter; however that effect was almost immediately drowned by a government tax increase of the same amount and the decision by the Oil Companies not to pass it to customers. Pump price for Challenge and the Oil Companies was leveled and that quickly nullified the psychological effect of Challenge entry to the market as a competitor to major oil. However, and not long after, Fletcher decided to sell its Challenge assets to Caltex and the whole business felt in line with the Oil Company pricing policies.
Gull Oil had its service stations located mainly in Hamilton and Auckland. They have built a new storage facility in Tauranga and transport their fuel by road.
Gull entered the market with more ambitious approach that is to make a real and effective price challenge to the incumbent majors in order to gain quick ground and market share. To that end Gull reduced the pump price by a sizable discount of 5 cents/lt. for both petrol and diesel.
Incumbents logical approach to Gull’s price discount was to match Gull’s prices (or slightly lower) but only around the limited number of Gull’s Stations where their presence constituted a threat to majors’ market share in that locality, a “policy of containment” one may say.
This meant that while safeguarding their interests and market share in the face of price competition, the majors were not forced to enter in an all out price war that may cause substantial reduction in their overall margins. With Challenge falling in line, it was left to Gull to stand up to the majors; it had two options to choose from
1-To adjust its price to be in line with the majors.
2-To keep its discount of 5 cent/liter for a while to get the support of some motorist who realized that Gull is giving them the benefit by challenging the major oil companies.
Gull decided on the second option and continued for a while until it managed to get a stable market share and then gradually got her price closer to the major oil postings.
Contractor Diesel Oil:
The situation for contract diesel oil is different and rather more complicated for as long as contract prices are confidential, there is a room to maneuver and the majors are competing with each other to gain market share in that very profitable and less exposed market. The entry of independent new suppliers has not a real impact on this market as consumers are mostly tied up by a long term storage and supply contracts with the majors and for some of them, a change of supplier may imply the installation of new storage tanks and possibly the issuance of a new resource consent, hence many are reluctant to abandon their existing suppliers especially as the competitors are still week and have little incentives to offer.
Effects of rising crude oil prices on the new entrants:
At the beginning, Challenge and Gull’s entry into the oil products retail market had created some kind of deterrent and has in fact kept the prices fixed at a time when crude oil prices went up by as much as 40%. That was good for the country and the consumers, bad for the oil majors but very unfortunate for the new comers, unfortunate because they based their entry and pricing on low stable crude oil prices yielding high profit margins even after reducing the selling price for both petrol and diesel. When crude oil prices went considerably high, they had no option but to abandon their discounted price policy and fall in line with the price the major has been imposing on motorist. They have ever since operated as ineffective player with a small market share.
What conclusions can be drawn from Gull and Challenge Entry to the Market?
The problem with that experiment was that the new entrants lost the initiative so vital for new comer to succeed. Their margins became considerably tight especially as they were relying for the purchases of their products on crude oil sensitive “spot market” and they have limited storage capacity to cater for sharp fluctuations in the prices. The majors have of course suffered losses, however their ability to survive while waiting for the good times to come was much better, they have well developed and fully integrated system especially designed to absorb shocks of this kind.
To sum it up I would like to point out the following:
1-It is clear that no company is willing to tolerate a price competition in a market congested with service stations like the one we have in Auckland where the prices of petrol and diesel are published over-head, simply because no company will want to see her market share eroding through price discounting by her neighbour.
2-If we hypothetically consider a scenario where two or more companies try to out-bid each other through price reductions, then a bottom price may be reached where the stronger party (not necessarily the best) will soon throw the weaker out of the market (by causing him huge financial losses). and once dominating the market, he can set price as he wishes.
3-The policy of containment used against Gull was very effective, yet not costly and have succeeded in limiting the portion of market share Gull was able to grab.
4-In the long run (and having taken price competition out) new entrants market share will only be proportional to the number of service stations they operate,
It is now clear that it needs more than few service stations here and there to create the kind of competition the Minister of Commerce was trying to establish in the oil industry. Frankly, Markets will not automatically adjust themselves to create what may “politically be considered as fair price!” through “Free Market Competition “ especially in the absence of clear government policies and guidelines.
Mundher Al-Saleem
30/7/2008
Now and after (10) years, it is useful to look back and examine the impact those two entrants have made on the market?
Challenge commissioned “Service Stations” in the North Island and used its storage facilities in New Plymouth to import and transport fuel to their service stations and customers in the North Island.
Challenge entered the market with noticeable price reduction of 3 cent/liter; however that effect was almost immediately drowned by a government tax increase of the same amount and the decision by the Oil Companies not to pass it to customers. Pump price for Challenge and the Oil Companies was leveled and that quickly nullified the psychological effect of Challenge entry to the market as a competitor to major oil. However, and not long after, Fletcher decided to sell its Challenge assets to Caltex and the whole business felt in line with the Oil Company pricing policies.
Gull Oil had its service stations located mainly in Hamilton and Auckland. They have built a new storage facility in Tauranga and transport their fuel by road.
Gull entered the market with more ambitious approach that is to make a real and effective price challenge to the incumbent majors in order to gain quick ground and market share. To that end Gull reduced the pump price by a sizable discount of 5 cents/lt. for both petrol and diesel.
Incumbents logical approach to Gull’s price discount was to match Gull’s prices (or slightly lower) but only around the limited number of Gull’s Stations where their presence constituted a threat to majors’ market share in that locality, a “policy of containment” one may say.
This meant that while safeguarding their interests and market share in the face of price competition, the majors were not forced to enter in an all out price war that may cause substantial reduction in their overall margins. With Challenge falling in line, it was left to Gull to stand up to the majors; it had two options to choose from
1-To adjust its price to be in line with the majors.
2-To keep its discount of 5 cent/liter for a while to get the support of some motorist who realized that Gull is giving them the benefit by challenging the major oil companies.
Gull decided on the second option and continued for a while until it managed to get a stable market share and then gradually got her price closer to the major oil postings.
Contractor Diesel Oil:
The situation for contract diesel oil is different and rather more complicated for as long as contract prices are confidential, there is a room to maneuver and the majors are competing with each other to gain market share in that very profitable and less exposed market. The entry of independent new suppliers has not a real impact on this market as consumers are mostly tied up by a long term storage and supply contracts with the majors and for some of them, a change of supplier may imply the installation of new storage tanks and possibly the issuance of a new resource consent, hence many are reluctant to abandon their existing suppliers especially as the competitors are still week and have little incentives to offer.
Effects of rising crude oil prices on the new entrants:
At the beginning, Challenge and Gull’s entry into the oil products retail market had created some kind of deterrent and has in fact kept the prices fixed at a time when crude oil prices went up by as much as 40%. That was good for the country and the consumers, bad for the oil majors but very unfortunate for the new comers, unfortunate because they based their entry and pricing on low stable crude oil prices yielding high profit margins even after reducing the selling price for both petrol and diesel. When crude oil prices went considerably high, they had no option but to abandon their discounted price policy and fall in line with the price the major has been imposing on motorist. They have ever since operated as ineffective player with a small market share.
What conclusions can be drawn from Gull and Challenge Entry to the Market?
The problem with that experiment was that the new entrants lost the initiative so vital for new comer to succeed. Their margins became considerably tight especially as they were relying for the purchases of their products on crude oil sensitive “spot market” and they have limited storage capacity to cater for sharp fluctuations in the prices. The majors have of course suffered losses, however their ability to survive while waiting for the good times to come was much better, they have well developed and fully integrated system especially designed to absorb shocks of this kind.
To sum it up I would like to point out the following:
1-It is clear that no company is willing to tolerate a price competition in a market congested with service stations like the one we have in Auckland where the prices of petrol and diesel are published over-head, simply because no company will want to see her market share eroding through price discounting by her neighbour.
2-If we hypothetically consider a scenario where two or more companies try to out-bid each other through price reductions, then a bottom price may be reached where the stronger party (not necessarily the best) will soon throw the weaker out of the market (by causing him huge financial losses). and once dominating the market, he can set price as he wishes.
3-The policy of containment used against Gull was very effective, yet not costly and have succeeded in limiting the portion of market share Gull was able to grab.
4-In the long run (and having taken price competition out) new entrants market share will only be proportional to the number of service stations they operate,
It is now clear that it needs more than few service stations here and there to create the kind of competition the Minister of Commerce was trying to establish in the oil industry. Frankly, Markets will not automatically adjust themselves to create what may “politically be considered as fair price!” through “Free Market Competition “ especially in the absence of clear government policies and guidelines.
Mundher Al-Saleem
30/7/2008
Saturday, July 26, 2008
"Cost-Based" Verification Of Petrol Pricing In New Zealand
Abstract
The national media have recently exposed to "public attention", the very important subject of petrol pricing in New Zealand, and as I have special interest in this field, I am of the opinion that a new approach is needed if understanding between the parties concerned (The Government and the oil companies), is to be attained. The problem as I see it from current argument may be summarized as follows:
If it is accepted that the oil companies " In what could be considered as tacit collusion " are setting petrol prices free from outside competition or interference then does the government have the right to intervene in the pricing mechanism?
For example to suggest some "adjustable price formula" to ensure that petrol and other main oil products are sold on fair basis). And will companies accept such formulation? Both parties will argue a case of collusion versus regulations and interference but once all parties agree on a principle then a fair and correct way out could be found.
The other very important issue that needs addressing is the status of the Refinery as an independent enterprise. Here we have two contradicting views, while some argue that the refinery should run economically in a manner similar to say the "Singapore" refineries* and hence to set the Singapore export prices as a benchmark in comparing products cost at "Marsden Refinery" the oil companies could argue that the refinery is more expensive to run and has to continue operating (for security of supply and other strategic reasons).The truth is that the refinery is highly flexible and efficient, producing (high value products) and hence should be highly competitive. Again there is a good deal of truth in both arguments and a mid- way solution is possible.
Note: Full text of this article may be available on request.
The national media have recently exposed to "public attention", the very important subject of petrol pricing in New Zealand, and as I have special interest in this field, I am of the opinion that a new approach is needed if understanding between the parties concerned (The Government and the oil companies), is to be attained. The problem as I see it from current argument may be summarized as follows:
If it is accepted that the oil companies " In what could be considered as tacit collusion " are setting petrol prices free from outside competition or interference then does the government have the right to intervene in the pricing mechanism?
For example to suggest some "adjustable price formula" to ensure that petrol and other main oil products are sold on fair basis). And will companies accept such formulation? Both parties will argue a case of collusion versus regulations and interference but once all parties agree on a principle then a fair and correct way out could be found.
The other very important issue that needs addressing is the status of the Refinery as an independent enterprise. Here we have two contradicting views, while some argue that the refinery should run economically in a manner similar to say the "Singapore" refineries* and hence to set the Singapore export prices as a benchmark in comparing products cost at "Marsden Refinery" the oil companies could argue that the refinery is more expensive to run and has to continue operating (for security of supply and other strategic reasons).The truth is that the refinery is highly flexible and efficient, producing (high value products) and hence should be highly competitive. Again there is a good deal of truth in both arguments and a mid- way solution is possible.
Note: Full text of this article may be available on request.
Friday, July 25, 2008
The Role of the Independent Petrol Retailers in NZ
Preview
A study I submitted and published by the Ministry of Economic Development (MED) in (2002). To put it in perspective, the average price of crude oil at the time of this study was around US$23.
The Report
NZIER report published in March 2002, titled "The Decline of Independent Petrol Retailing: Rationalisation or Predation?" tackled the problem from the viewpoint that the Major Oil Companies in NZ are operating as competitors! The fact that the Majors hold majority share in the refinery, wiri terminal, the pipeline and coastal shipping makes them more of sisters competing for market share in a friendly environment.
The Oil Companies take the bulk of their profit from the wholesale price, which they freely set. They also decide the retail margin for their owned operated service stations which “in effect” has to be followed by the “independents” since the retail margins allowed were meant to be low enough to leave little room for meaningful (pump price) competition by the retailers. The terms of reference of the review did not touch base on the issue of wholesale, retail margins and pricing hence avoided a pivotal point, upon which MTA based its proposals, I have constructed a model to calculate wholesale cost of oil products in NZ and after six months run, I came to the conclusion that major oil companies are charging at least (5) NZ CENT/LITRE more than what a fair price should be compared to what say the Australian Oil Companies are charging for their wholesale petrol sales. Wholesale price may have been reduced in recent years (as evident from the importer margin curve shown in the report) nevertheless this further show how much more NZ motorists are paying for the liter of petrol they purchase.
The retail margin allowed in NZ at around (5) CENT/LITRE is similar to that in Australia(regardless of the sales volume and service provided). This means that the minimum retail price policy executed by the majors is not for the benefit of the motorist but as a mean of squeezing the independent operators out of the market and prevent them from “price based” competition for market share. I do not want to go into details about service station “rationalization process” which is taking place at the present but will directly come to agree with the conclusion that “in the end” it will mean the demise of most “independent service stations’ and hence bring a closure to a trend that has started since deregulation in 1988.
I believe that Independent Service Stations still have a role to play and the government has a duty to protect them from an “eventual demise” major oil company’s policies are leading them towards. The very existence of these stations gives a window of opportunity to many “new comers” to inter the market and break the near 100% monopoly existing at the present. Without the independents, Gasoline Alley Services (G.A.S) wouldn’t have existed, even Gull and Challenge have gained strength by incorporating some existing independent service stations, and has it not been for the ownership of the tanks by the majors, many more service stations would have joined Gull and Challenge.
Proposals
Given the present state of the oil industry in NZ, it is difficult to legislate to protect the interest of the independent operators in the manner proposed by MTA, however, I believe a simple first step could be a legislation to make it compulsory for owners of a “service station” to own the associated tanks and equipment and hence “free the tanks from the hands of the majors”. Such a regulation will be very helpful for future developments and will remove a burden (and in my opinion a barrier) to free trade in the oil product market. Tank ownership will also strengthen the negotiating position of the independents and remove a barrier to entry for wholesale imports. The regulation could also be extended to apply for diesel in the industrial and transport sectors. Ownership transfer may go either way by mutual agreement between the two parties (oil company and independent) within a time frame to be stipulated in the regulation.
A study I submitted and published by the Ministry of Economic Development (MED) in (2002). To put it in perspective, the average price of crude oil at the time of this study was around US$23.
The Report
NZIER report published in March 2002, titled "The Decline of Independent Petrol Retailing: Rationalisation or Predation?" tackled the problem from the viewpoint that the Major Oil Companies in NZ are operating as competitors! The fact that the Majors hold majority share in the refinery, wiri terminal, the pipeline and coastal shipping makes them more of sisters competing for market share in a friendly environment.
The Oil Companies take the bulk of their profit from the wholesale price, which they freely set. They also decide the retail margin for their owned operated service stations which “in effect” has to be followed by the “independents” since the retail margins allowed were meant to be low enough to leave little room for meaningful (pump price) competition by the retailers. The terms of reference of the review did not touch base on the issue of wholesale, retail margins and pricing hence avoided a pivotal point, upon which MTA based its proposals, I have constructed a model to calculate wholesale cost of oil products in NZ and after six months run, I came to the conclusion that major oil companies are charging at least (5) NZ CENT/LITRE more than what a fair price should be compared to what say the Australian Oil Companies are charging for their wholesale petrol sales. Wholesale price may have been reduced in recent years (as evident from the importer margin curve shown in the report) nevertheless this further show how much more NZ motorists are paying for the liter of petrol they purchase.
The retail margin allowed in NZ at around (5) CENT/LITRE is similar to that in Australia(regardless of the sales volume and service provided). This means that the minimum retail price policy executed by the majors is not for the benefit of the motorist but as a mean of squeezing the independent operators out of the market and prevent them from “price based” competition for market share. I do not want to go into details about service station “rationalization process” which is taking place at the present but will directly come to agree with the conclusion that “in the end” it will mean the demise of most “independent service stations’ and hence bring a closure to a trend that has started since deregulation in 1988.
I believe that Independent Service Stations still have a role to play and the government has a duty to protect them from an “eventual demise” major oil company’s policies are leading them towards. The very existence of these stations gives a window of opportunity to many “new comers” to inter the market and break the near 100% monopoly existing at the present. Without the independents, Gasoline Alley Services (G.A.S) wouldn’t have existed, even Gull and Challenge have gained strength by incorporating some existing independent service stations, and has it not been for the ownership of the tanks by the majors, many more service stations would have joined Gull and Challenge.
Proposals
Given the present state of the oil industry in NZ, it is difficult to legislate to protect the interest of the independent operators in the manner proposed by MTA, however, I believe a simple first step could be a legislation to make it compulsory for owners of a “service station” to own the associated tanks and equipment and hence “free the tanks from the hands of the majors”. Such a regulation will be very helpful for future developments and will remove a burden (and in my opinion a barrier) to free trade in the oil product market. Tank ownership will also strengthen the negotiating position of the independents and remove a barrier to entry for wholesale imports. The regulation could also be extended to apply for diesel in the industrial and transport sectors. Ownership transfer may go either way by mutual agreement between the two parties (oil company and independent) within a time frame to be stipulated in the regulation.
Welcome
Welcome to my New Zealand Blog. My name is Mundher Al-Saleem. I am a B.Sc Chemical Engineer, specialised in International Oil Products' Contrating. I would like to discuss problems facing NZ oil consumers in the face of rising world oil price and demad. I am keen to share my thoughts and views with like minded people and be pleased to give constructive opinion and solutions.
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