BP: Petrol pricing and profits – the facts

Petrol pricing and profits – the facts

With increasing interest and comment around rising fuel prices in New Zealand, BP Oil NZ has compiled the following question and answer paper to explain exactly what is happening in New Zealand with fuel prices and why.

BP New Zealand appreciates the impact of higher fuel prices on motorists and the New Zealand economy and is committed to explaining fully the factors that set BP New Zealand’s domestic fuel prices whenever required.

This update comes just before BP New Zealand releases its annual Sustainability Report for 2004, which further discusses these points.

Why are fuel prices increasing?

BP New Zealand buys crude oil and refined or finished fuels on the international market and imports those stocks into New Zealand. The crude oil is processed into refined fuel by the Marsden Point Refinery and the finished fuel is imported into ports around the country, ready for use.

The prices that BP New Zealand pays for that oil and refined fuel on the international market are the key factors that set the price at the pump. Oil and refined fuels are traded in US dollars so the strength of the New Zealand dollar relative to the US is also very important.

Over the last two years the international prices for oil and refined fuel have soared. Over the course of 2004, the price of a barrel of Brent Crude oil ranged between a low of US$29 and a high of US$52, representing a variance of 80 per cent in just one year.

On average, the price of a barrel of oil traded 33 per cent higher in 2004 than in 2003. These trends have continued strongly into 2005, with a barrel of Brent Crude Oil now just under US$60 per barrel, as at this afternoon.

In recent months the New Zealand dollar has slipped around four cents against the US (from 72USc to 68 USc. Put simply, BP New Zealand is paying much more for the fuel and oil it imports into New Zealand and is getting less oil and fuel for every purchasing dollar.

How are oil prices arrived at for the New Zealand market?

All of the fuel and oil we sell in New Zealand is purchased on international markets at the current rate (both imported and fuel produced by NZRC) in US dollars.

What is happening on international oil and fuel markets?

Since 2004 there has been surging demand for both oil and refined fuels from large, rapidly developing countries like China and India.

This strong and growing demand for oil and fuel increases the global competition for available oil and fuel. This competition pushes up the price of both products.

Currently there is also a global shortage of refining capacity to process crude oil into fuel. This inability for refineries to meet global demand again pushes up the price for refined fuels.

How can the price rise and fall so quickly?

There is no slack in the global oil and fuel markets. When a part of the supply chain fails, such as the closure of a major refinery or where there is civil unrest in an oil producing area, the reduced supply immediately pushes up prices.

Recent events such as hurricanes in the Gulf of Mexico forcing the closure of oil production platforms, and outages at major refineries in the US, have pushed up international prices, which have flowed through to New Zealand pump prices.

International events such as terrorism attacks, industrial action, extreme weather and even the recent death of the King of Saudi Arabia can all lead to increased prices as a result of speculation on the international markets.

In terms of the prices for internationally traded refined fuels, demand for diesel as a heating oil in the US and Europe winters can push up global diesel prices. The summer ‘driving season’ in the United States pushes up the demand, and therefore price, for petrol.

Is this happening just in New Zealand?

No. The increasing fuel prices that New Zealand is seeing are a reality for countries around the world.

It is worth noting that New Zealand’s fuel prices are still among the lowest in the world.

What makes up the cost at the pump?

Currently the factors behind the pump price for a litre of unleaded 91 octane petrol at a BP New Zealand company owned site are:

• Tax 47.4 per cent

• Shipping product to New Zealand 3.6 per cent

• Crude oil, refined fuels, refining costs 45.7 per cent

• Operating costs, wholesale and operating margin 3.3 per cent

For more information visit the BP New Zealand website at www.bp.co.nz and visit ‘Facts about Fuel Pricing’.

What about BP New Zealand’s 2004 profit?

It is important to note that BP New Zealand’s operations are as a fuel and lubricants wholesaler and retailer. We have no ‘upstream’ exploration or oil production interests in New Zealand. All of the fuel and oil we sell in New Zealand is purchased on international markets at the current rate (both imported and fuel produced by NZRC).

It is important to BP New Zealand that there is no confusion or misunderstanding about our financial performance in New Zealand. In 2004 BP New Zealand made an historical cost, after tax profit of $55 million. We have more than $550 million invested in New Zealand, leaving BP New Zealand with a return on investment in 2004 of just 10 per cent. Our return in 2003 was only five per cent.

As one of New Zealand’s largest businesses, this is a fair return. This result is in no way and by no standards excessive.

What about fuel margins?

The return, or gross margin, on every litre of fuel BP New Zealand sold decreased in 2004 from 2003 levels. The decreasing fuel margins are a direct result of intense price competition and this trend is continuing in 2005.

Recent comments from the AA and the Road Transport Forum (RTF) support this, with both parties noting that fuel margins are not increasing.

More information on margins

The Ministry for Economic Development publish regularly updated data on their website showing the margins being recorded by fuel importers. It is important to note that these are not retail or wholesale fuel margins, but this data does show a steady compression of margin.

So where did BP’s 2004 profit come from?

BP New Zealand’s 2004 profit has increased from that of 2003. This is due to a number of reasons:

• While fuel margins were down, BP New Zealand sold approximately 3.5 per cent more fuel in 2004 which contributed to the improved result.

• BP New Zealand’s convenience, shop and café offers are thriving and the growth in those areas of the business boosted BP New Zealand’s 2004 result. This is a significant and growing part of BP New Zealand’s business.

• The rising value of international oil prices in 2004 led to a significant gain on stocks held at year end. In contrast, a stockholding loss was incurred in 2003 when the value of these stocks slipped on the international market. These results arise from the historical cost accounting rules used in the preparation of our statutory accounts. (To smooth out the impact of fluctuations arising from the volatility of international prices BP New Zealand, in line with the international practice in the oil industry, manages its business on a replacement cost basis. BP New Zealand’s underlying results on a replacement cost basis in 2004 were lower than in 2003 principally because of the decline in marketing margins).

• BP New Zealand accounts for its investment in the New Zealand Refining Company on an equity accounted basis. The strong performance of NZRC in 2004 generated $8 million in additional profit to BP New Zealand compared to 2003. The NZRC is an independent business with shares that can be purchased by any person on the NZX.

Does BP New Zealand increase its pricing faster than lowering them?

Increasing prices is something that BP New Zealand does reluctantly. We are acutely aware of the impact of higher fuel prices on motorists – we lift our prices when we have to and we lower them again as soon as we can.

BP New Zealand seeks to avoid unnecessary domestic market fluctuations and never bases pricing decisions on a single day’s data.

BP New Zealand is committed to delivering the best quality products to our customers at a fair price. We will continue to compete vigorously in the market on price and differentiate our offer to customers on quality.

We are committed to a transparent and up-front approach to pricing issues. We will continue to take a proactive approach to explaining these issues both to our customers and to the media.

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