Pacific Islands. Fuel Pricing. Manual

Transcription

1 Pacific Islands Fuel Pricing Manual

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3 Pacific Islands Fuel Pricing Manual Prepared by the Energy Programme, Economic Development Division Secretariat of the Pacific Community Suva, Fiji 2015

4 Copyright Secretariat of the Pacific Community (SPC) 2015 All rights for commercial/for profit reproduction or translation, in any form, reserved. SPC authorises the partial reproduction or translation of this material for scientific, educational or research purposes, provided that SPC and the source document are properly acknowledged. Permission to reproduce the document and/or translate in whole, in any form, whether for commercial/for profit or non-profit purposes, must be requested in writing. Original SPC artwork may not be altered or separately published without permission. Original text: English Secretariat of the Pacific Community cataloguing-in-publication data Pacific Islands fuel pricing manual / prepared by the Energy Programme, Economic Development Division, Secretariat of the Pacific Community 1. Fuel Oceania. 2. Fuel trade Law and legislation Oceania. 3. Automobiles Motors Exhaust gas Oceania. 4. Gasoline Oceania. 5. Motor fuels Taxation Oceania. 6. Gasoline Taxation Oceania. I. Title II. Secretariat of the Pacific Community ACCR2 ISBN: Disclaimer: While reasonable efforts have been made to ensure the accuracy and reliability of the material in this document, SPC cannot guarantee that the information contained in the report is free from errors or omissions. SPC does not accept any liability, contractual or otherwise, for the contents of this report for any consequences arising from its use.

5 Contents Overview Crude Oil Benchmark Crudes Brent Blend Dubai Crude Tapis Crude West Texas Intermediate General global crude oil markets outlook Crude oil refining Fuel pricing options Non regulated fuel markets Tender national fuel supply Regulate fuel price The major components of the FPT: Fuel pricing templates (FPT) elements Free-on-board (FOB) cost of the fuel based on a regional price Regional reference fuel prices Fuel price Premium Shipment related pricing period Freight and freight related costs Medium Range (MR) Freight LCT Shipping Freight related charges ISO containers and drums Government taxes and charges Operating costs allowance Market volume Operating cost scrutiny ROCE allowance ROCE allowance rate Assets Stock Debtors Creditors LPG pricing template Petroleum glossary Appendices Appendix A : Sample Fuel Pricing Template Appendix B : Sample LPG Pricing Template

6 Foreword Pacific Island Forum leaders (Leaders) have periodically called for increased and continuous effort to address the heavy reliance of the region of fossil fuel and its economic and environment implications. In 2008, Leaders raised their concerns over the rapid increases in fuel prices as imports and inflation rose to close to 20%. As a result some Pacific Island countries and territories (PICT) economies contracted, dependence on remittances were exposed and the value of Trust Funds declined. Leaders reaffirmed in 2009 that energy remains one of the region s key priorities, and urged members to remain vigilant in the face of rising world oil prices, not least because of their potential to place pressure on scarce national resources and fragile budgets. This led to the Leaders endorsement in 2010 of the Framework for Action on Energy Security in the Pacific (FAESP). In 2011, Leaders agreed on the value of energy audits and of developing credible whole-of-sector plans such as energy road maps and structures to improve energy security, reduce dependency on fossil fuel for electricity generation and improve access to electricity. The Regional Energy Programme hosted by SPC at its Economic Development Division is coordinating the implementation of the FAESP and its whole-of-sector and many-partners-one-team approach. While there is increasing focus and effort being placed on renewable energy and energy efficiency, there is no denying that the dependence on fossil fuel cannot be removed overnight. The Pacific Islands region fuel industry, with an estimated value of up to USD 6 billion per annum will continue to thrive for some decades to come. PICTs therefore need to ensure their fuel industries are safe and hazard-free as they continuously look for means to individually and/or collectively negotiate more cost-effective supply and logistics, while also implementing better monitoring and regulation of their fuel prices. The SPC effort on petroleum safety and pricing is seen as complementing the effort on renewable energy and energy efficiency. With economies that are highly sensitive to volatile fuel prices, any gains achieved in RE and EE can easily be eroded if fuel prices are not fair and reasonable. It is therefore the purpose of this manual to assist in the understanding of the various elements of the Pacific Islands fuel industry and to unlock some of the myths and misunderstandings surrounding petroleum pricing as it applies to the Pacific Island region. Solomone Fifita Deputy Director (Energy) Economic Development Division 6

7 Overview This manual has been prepared to inform and support the work of officials of Pacific Island countries and territories (PICTs) that regulate or monitor the price of fuel in their respective jurisdictions. One of its key objectives of this manual is to demonstrate how the cost of Pacific Island fuels can be better understood by referring to its various components, which are both internationally and locally influenced. It is meant to assist PICTs to maintain the balance between the national need for energy supply at a fair cost to government industry and consumers and supply companies that need to make a fair and reasonable profit to encourage them to continue their commercial activities. Imported petroleum fuels account for 95% of the commercial energy needs of PICTs, about 75% of which is used for transportation and the majority of the balance for electricity generation. The cost of fuel has a high multiplier effect on PICT economies, directly and indirectly impacting all parts of the economy. There is a very large variance in the price of fuel between PICTs (Chart 1), some of which can be explained by market size, remoteness and differing government taxes, but there are some crucial anomalies related to how the fuel is purchased, the degree to which PICT governments are involved in the process and what systems are being used. Chart 1 Average retail fuel prices including tax and duty It is therefore important that PICT governments fully understand the background and basis for the pricing of petroleum products, that they are confident that they are getting the best deal available and that the cost of energy that is passed to consumers is fair and reasonable in the context of their markets. Petroleum fuel for PICTs is generally supplied from 7

8 major Asian refining centres such as Singapore, Korea, Japan and India, with very limited petroleum refining taking place in the region, apart from limited refining in Australia, New Zealand, Hawaii and PNG which is focussed on supplying domestic markets. Fuel supply to the PICT region is achieved by medium range tanker (MRT) ships from Asian refining centres that supply major demand ports such as American Samoa, Fiji, French Polynesia, Guam, New Caledonia, Samoa, Solomon Islands and Vanuatu. Smaller demand ports are supplied by local coastal tankers (LCT) which in turn load fuel at PICT MR ports. By world standards, the Pacific region is a relatively small fuel market and the supply lines are long, with each of those factors directly contributing to the cost of fuel that is paid in the islands. Petroleum fuel is an internationally traded commodity and as such its price varies on a daily basis. It is influenced by a large number of factors including the underlying cost of the crude oil used to produce it, the supply/demand balance of the Asia Pacific region and also of other world markets, significant world-wide weather events and geo-political conditions in oil producing countries. Crude oil is produced by many different countries and refined at numerous refineries around the world. Many different qualities of crude are produced, each with specific properties that make it more or less suitable to be processed or refined into a wide variety of different possible products which include industrial and energy gases, chemicals, liquid fuels, plastics, lubricants, process oils, tar, bitumen and other residual products. Focussing on the refining process for fuels, there are numerous products produced from a barrel of oil, including liquefied petroleum gas (LPG), motor gasoline, kerosene, diesel fuel and residual fuels, to a wide variety of quality specifications including distillation range, vapour pressure, flash point, sulphur content, low temperature sensitivity. Fuel qualities vary between the different regions of the world and indeed between the industries and market sectors that use the fuel. For example, the quality of diesel fuel can be very different depending on whether it is used for land transport, marine shipping, fishing fleets or electricity generation. There are technical factors and often regulatory limitations in many countries which determine what fuels can be used in which markets and/or end use. 8

9 The cost of all fuel that is supplied to PICTs is made up of five basic components being; 1) Regional price of fuel (which changes on a daily basis), 2) Freight and related charges to transport the fuel, 3) Government charges and taxes, 4) Supply company operating costs, and 5) Margin for the supplying company. Within those five components, are in turn, a number of elements that need to be considered when calculating the cost of fuel within a specific market. These elements will be examined in some detail in the following chapters. Many cost components such as the regional price of fuel, freight and government charges and taxes can generally be independently verified using third party published information. Other cost components such as product premiums, operating costs and supply company margins need to be negotiated based on documented evidence to determine that they are reasonable. The price of fuel within individual markets is affected by; how these fuel cost components are taken into account, the degree to which governments become involved with fuel terminal asset ownership, the degree of involvement and investment by the private sector, whether governments take control of supply tendering and the degree to which they regulate fuel pricing. The different systems that are being used by individual PICTs contribute greatly to the wide variance in fuel prices that can be observed within the Pacific region, beyond the obvious factors of market size and distance from suppliers. This can be seen in Graph 1. 9

10 Crude Oil The pricing basis of all petroleum based fuels, lubricating oils and a variety of other petroleum based products is crude oil, which is a naturally occurring substance produced over geological time, it is thought from decaying plant and animal matter. There are many different types of crude oil produced in many different parts of the world. Crude oil quality is measured in terms of density (light to heavy) and sulphur content (sweet to sour). Density is typically classified by a system adopted by the American Petroleum Institute ( API ). API gravity is defined based on density at a temperature of 15.6 ºC. The higher the API gravity, the lighter the crude is. Light crude generally has an API gravity of 38 degrees or higher, while heavy crude has an API gravity of 22 degrees or less. Crude with an API gravity between 22 and 38 degrees is generally referred as medium crude. Sweet crude is commonly defined as oil with a sulphur content of less than 0.5%, while sour crude has a sulphur content of greater than 0.5%. 1 Benchmark Crudes There are many varieties of crude oil with a wide variation of physical properties, all of which add or detract from their value for processing into useful commercial products. Energy reporting agencies have identified nearly 200 distinct crude streams or blends in recent years. As a way to enable trading of these crudes in international markets, a system has been devised whereby the crude oil market is divided into a limited number of benchmark or marker crudes. These have defined characteristics or are derived from a broad geographic area. Individual crudes are then physically traded at values that take into account their similarities or differences compared with the marker crudes. Prices for individual crudes are often quoted as a premium or discount to a marker crude. Some marker crudes used in the Pacific region are Brent Blend, Tapis and Dubai. Other well-known blends include the OPEC Reference Basket, West Texas Intermediate, Bonny Light used in Nigeria, Russian Export Blend and Mexico s Isthmus. 1.1 Brent Blend Brent Blend is a light, sweet North Sea crude with an API gravity of approximately 38 and a sulphur content of approximately 0.4%. Most Brent Blend is refined in Northwestern Europe, but significant volumes are also shipped to the US and Mediterranean countries. Brent Blend is used for pricing around two-thirds of the crude traded internationally. Rolling price assessments are based on physical Brent-Forties- Oseberg crude oil cargoes loading not less than 10 days ahead and loaded free on board at the named port of shipment (Brent Dated). 1.2 Dubai Crude Dubai Crude is a medium sour crude oil extracted from Dubai. Dubai Crude is used as a price benchmark or oil marker because it is one of only a few Persian Gulf crude oils available immediately. Dubai Crude is generally used for pricing Persian Gulf crude oil exports to Asia. 1.3 Tapis Crude Tapis is a very light Malaysian crude oil with an API of and very sweet with only about 0.04% sulphur. Historically, Tapis was used as a pricing benchmark in Singapore, Asia Pacific and Australia, however this has changed in recent years since Tapis is no longer traded on the open market in significant volume. 1.4 West Texas Intermediate West Texas Intermediate (WTI), the US benchmark crude oil, is a light, sweet crude oil with an API gravity of approximately 40 and a sulphur content of 10

11 approximately 0.3%, making it ideal for producing products like low-sulphur gasoline and low-sulphur diesel. WTI is used primarily in the U.S.A, and the spot price of West Texas Intermediate is reported at Cushing, Oklahoma. 2 General global crude oil markets outlook A brief history of the Dubai oil prices from (Chart 2) shows how oil prices are affected by significant world events such as the Iran Iraq War, the invasion of Kuwait and the global financial crisis. Increases in oil prices from 2004 as a result of factors such as growth in supply, supply squeeze and price rebound. Chart 2 World events impact on Dubai Crude Oil Price (Source: Sharmilpal Kaur, Platts, 2012) 3 Crude oil refining Crude oil is processed through a purpose built oil refinery and undergoes processes such as distillation, cracking reforming and hydrotreating to convert it into a wide range of products including LPG, naphtha, gasoline, kerosene (incl. for jet fuel), gasoil (incl. for diesel fuel), lubricating oils, chemicals, plastics, wax, residual fuels and bitumen in various proportions as per figure 1. Figure 1 Range of products refined from crude oil 11

12 The quality of crude oil and other feedstock dictates the level of processing and conversion necessary to achieve an optimal mix of products. Light, sweet crude has traditionally more expensive than heavier, more sour crude because it requires less processing and produces a slate of products with a greater percentage of value-added products, such as gasoline, diesel, and aviation fuel. Heavy sour crude typically sells at a discount because it produces a greater percentage of low value-added products after simple distillation and requires additional processing to produce higher value, lighter products. Different crude oil characteristics produce portions of fuels and other refined petroleum products, as per figure 2 below. Figure 2 Typical portions of fuel available by crude type More detailed information on the refinery process can be found on-line at the websites of American Fuel and Petrochemical Manufacturers: afpm.org/the-refinery-process/ or Australian Institute of Petroleum: aip.com.au/industry/fact_refine.htm Refiner margin The value-add in the refining process (referred to as the refiner margin) can vary significantly on a daily basis according to the relative supply demand balance of each individual product. Typical examples of refiner margin for products in Asia Pacific when compared to the benchmark Brent Crude can be found in Chart 3. At times, the price of some refined fuels can be valued at just over or even less than the value of the crude oil from which is produced, indicating significant supply imbalances. The refiner margin for motor gasoline has in recent years tended to be less than the middle distillates (kerosene and diesel). 12

13 This imbalance is reflected in the relative prices of the fuels and in severe cases can lead to arbitrage positions that encourage the physical trade of some grades of fuel between regions. Chart 3 Refiners Margin compared with Brent Dated Crude Refiners Margin compared with Dated Brent price 13

14 Fuel pricing options Governments have options when it comes to determining fuel pricing within a market. Three of those options that are used in the Pacific region are: 1. No price regulation, leave the market to find its own level (Australia, Vanuatu and Palau) 2. Tender out national fuel supply (American Samoa, Samoa, Kiribati and Nauru) 3. Regulate fuel prices (Fiji, Tonga, Cook Islands) 1. Non regulated fuel markets Some markets such as Australia have chosen to de-regulate fuel prices on the basis that there are multiple independently owned fuel import terminals and a low barrier to entry for potential new fuel suppliers. In that situation, it can be expected that there will be adequate competitive pressure to ensure that fuel markets will be contested, and thus create reasonably competitive prices. In addition, safeguards and severe penalties are in place which expressly prohibit predator-pricing (aimed to drive out small competitors) or price collusion between suppliers, thus discouraging unethical behaviour between suppliers and distributors. In smaller PICT markets, especially those that have limited or non-existent options for the entry of potential new suppliers, non-regulation of fuel markets can lead to unnecessarily high fuel prices. At the very least, PICTs that find themselves in this position should be regularly monitoring the situation to determine whether it would be in the national interest to introduce fuel price regulation. 2. Tender national fuel supply The ultimate competition for a fuel market in the Pacific Islands can be achieved by periodically tendering out the entire market. Typical examples of this are American Samoa, FSM, Kiribati, Nauru and Samoa and the local oil companies in Solomon Islands. Using this process, American Samoa and Samoa both enjoy some of the lowest fuel prices in the Pacific region. A pre-requisite for achieving competitive national fuel tendering is that the fuel import and storage terminal(s) are to be owned or controlled by national interests, thus allowing a new supplier into the market with minimal investment. Terminal management should be highly professional and handled by the private sector on an ongoing contract basis. This may be regularly tendered out either with, or independently of, fuel supply. National tenders must be carefully prepared and take into account all of the legal and regulatory considerations that need be catered for as well as operating needs such as training, technical support and service supply. Tenders are typically for multiple (3-5) years with a possible extension period if both parties agree. Tendering companies that propose to supply fuel must be pre-qualified in terms of having a proven track record in other comparable markets, multiple supply points or alternative supply options that will cater for unusual supply circumstances such as shipping delays or unfavourable weather conditions. The fuel pricing formula at the centre of any tendering arrangement will typically involve a price build-up starting with a regionally published price based on defined fuel qualities and include all costs to market as well as an agreed supplier margin. The formula should allow for the accumulation of adequate funds, to be held in trust, to cover the government cost of managing the tender and the ongoing relationship with the supplier, operational requirements such as maintenance and training, adequate capital for terminal asset replacement and mandated requirements such as oil spill equipment. 3. Regulate fuel price Regulating fuel prices in a Pacific Islands context is about reaching agreement with suppliers about 14

15 what constitutes a fair pricing formula that will periodically set the fuel prices at a fair level for consumers and still allow suppliers to achieve an acceptable level of profits that will encourage them to continue to supply the market. A formulation methodology is used as opposed to a static price system in recognition that fuel is an internationally traded commodity and as such, prices fluctuate on a daily basis. The pricing formula that has been developed for the Pacific region is commonly referred to as a Fuel Pricing Template (FPT) which can be used for either price regulation or price monitoring. FPTs are meant to be used in cooperation with oil company suppliers. In the case of regulation, this requires negotiation (ideally on an annual basis). FPTs were first developed for use in Pacific Island Countries in the 1980s, in response to the question of what constitutes a fair price for imported fuel supplied by large multi-national oil companies when they supply fuel to economically vulnerable, relatively small and remote Pacific Island markets. The world had been through the oil price shocks of the 1970s and the resulting greatly increased cost of fuel was directly impacting the ability of some PICTs to be able to afford their fuel supplies. There was also some concern that without adequate pricing transparency, there would be potential for multi-national oil company suppliers to improperly exploit PICTs. The theory is that FPTs enumerate the actual costs of the fuel supply chain, recognising that oil company suppliers need to recover those costs and also allow them to make a reasonable return on their investments without making exorbitant profits. FPTs recognise that oil company suppliers often have significant assets and/or other capital invested within a market and need to make an acceptable return on that investment, taking into account the risks of operating in a small remote market and the challenges involved with conducting their business to high international operating standards. It is recognised that the fuel pricing template has limitations, including that it relies on historic operating costs (typically the previous year s actual values). FPTs allow full recovery of reasonable operating costs and overheads but do not include any direct incentive for companies to reduce their costs. FPTs must also be reviewed regularly to ensure that only those costs and allowances that are directly associated with the business or the specific market are recovered. The FPT is however, a useful tool for PICTs to manage their fuel prices if used properly. It is absolutely essential for example that the template parameters 15

16 are reviewed annually and that that FPTs parameters are based on the most recently available company and market information. Each FPT is PICT specific and reflects the individual company costs of doing business in that market. 4. The major components of the FTP The cost of all fuel supplied to the PICTs is made up of five basic components being: 1. Free-on-board (FOB) cost of the fuel based on a regional price. 2. Freight and freight related costs. 3. Government taxes and charges. 4. Operating cost recovery. 5. Allowed profit contribution, often calculated as a percentage return on capital employed (ROCE Allowance). Within those five components are in turn a number of elements that need to be considered when calculating the cost of fuel within a specific market. These are discussed in detail in the next section. 16

17 Fuel pricing templates (FPT) elements 1. Free-on-board (FOB) cost of the fuel based on a regional price 1.1 Regional reference fuel prices Petroleum based fuel is an internationally traded commodity, with prices published daily. Singapore is used as the most relevant market for the PICT region, since Singapore is a large petroleum refining centre, it is a market where fuel is freely traded and where traded fuel prices are regularly reported. The actual fuel shipments may be sourced in Singapore, which is a major oil refining centre, however this is not always the case, with a growing number of Asian export refineries being built in recent years, including in Korea, Japan, India and Russia. Historically, many of the Pacific Islands were supplied from Australian refineries, however over the past ten years Australia has closed a number of its older, less efficient refineries, because they could not compete with much larger new Asian refineries and is now a major importer of refined fuel. Some limited fuel supplies are still sourced from New Zealand, but mainly in ISO-containers to take advantage of container shipping opportunities to small PICTs. The international fuel market can be quite variable, with SPOT market traded prices changing every day, as can be seen from Chart 4. The Singapore traded fuel price, as reported by Platts is based on observed prices in the last hour of each trading day, with the values reported in a high-low range. Hence, the price that is used as the reported daily SPOT price is an average of the daily high-low reported range or the Mean of Platts Singapore (MOPS) price. Chart 4 Singapore traded fuel prices Daily mean of Platts Singapore from January 2008 April 2015 Singapore traded SPOT fuel prices are obtained by subscribing to an industry specific reporting service such as Platts or Argus, with an example of daily report prices in Figure 3. 17

18 Figure 3 Daily reported Singapore fuel prices Documents required to verify regional fuel prices Platts quotations for required grades of fuel products for the specific period required (available from SPC Economic Development Division). 1.2 Fuel price Premium Historically, some PICTs fuel pricing was based on either the Singapore SPOT (ie traded) fuel price or the Singapore quoted POSTED price or some blended percentage of the two. Posted pricing has since been discredited as a valid market price since it was essentially an artificially constructed price that was used by individual oil companies as a communication tool to publicly indicate, amongst other things, their perceived future supply imbalances. The practice of including Singapore POSTED price resulted in PICTs paying an effective set premium over the traded (SPOT) price of their fuel. With the removal of POSTED price as a premium over Singapore SPOT prices, some suppliers choose to charge a set premium over the Singapore SPOT price for PICT fuel supplies. The rationale for this surcharge is that it is an added incentive for the supplier to maintain regular supply to relatively small and remote Pacific Island markets. This surcharge is negotiable with individual suppliers. Grades of fuel are priced individually and it is necessary to specify the grade of fuel that is being supplied to each PICT market and then use the appropriate price. Generally, cleaner lower sulphur content fuels grades attract relatively higher prices. 1.3 Shipment related pricing period The basic mechanism for determining the free on board (FOB) value of a PICT fuel shipment is generally the average of the regional price for that grade of fuel over an agreed time frame. The starting point is typically the published Singapore SPOT price on the day of loading the PICT bulk fuel ship at the Asian supply port. Given, however that the price of fuel can vary significantly on a daily basis, it has become normal that the agreed price be determined as an average over a broader time scale rather than simply accepting the daily published price. Examples of this are; (+/- 2 days), being the FOB loading date calculated as the average of the market price of five days, being two days prior to 18

19 loading, the day of loading and two days after the loading. (+/- 5 days), being similar to the above but using marker prices five days on either side of the loading date. (+/- 10 days), using ten days on either side of the loading date Month average where regulated prices are calculated once per month, and shipments are of a similar frequency, then the loading date in Singapore can be ignored, and instead, the average price of the month is used, being defined by agreed dates (i.e. 16th of each month to the 15 th of the following month). Multiple month average. This is similar to the month average equation. It results in high risk for both parties (both suppliers and PICTs) especially at those times when international fuel prices are volatile. Price averaging systems will result in some anomalies, favouring one party or the other for a period of time, however by using a constant and predictable methodology, these are expected to even out over the long run. The price average used in specific PICT should in some way relate to the actual frequency of shipping to that port. Normally, the period over which the FOB price is calculated is agreed in advance with the oil company supplier and kept constant for an extended period, with adequate notice given for any changes. 2. Freight and freight related costs Refined petroleum fuels are bulk shipped in what are termed Clean Tankers, (to make a distinction with dirty bulk crude oil carriers). Two types of bulk freight are used for PICT fuel shipments, being medium range (MR) tankers and local coastal tankers (LCT), with typical PICT shipping routes illustrated in figure 4 below. The tankers typically have multiple cargo holds and as such can carry different grades on fuel on the same vessel, however, there is a need to guard against cross contamination of products, since the loading and unloading manifolds are usually common to all or many of the cargo holds. Figure 4 Typical MR and LCT fuel shipping routes 19

20 Cross contamination is minimised by using physical barriers (or PIGS) and water to flush fuels down discharge pipelines product discharges. The use of water in this process necessitates that on receiving the fuel into shore tanks, that it is allowed to settle for a determined number of hours (depending on the shipment size and other factors) to allow the water to adequately separate and settle out before the newly delivered fuel is suitable for use. PICT fuel can also be delivered in ISO-containers of 16-20,000 litres or in 200 litre drums, often shipped in containers. 2.1 Medium Range (MR) Freight Medium range tankers, 25-45,000 Metric Tonnes (MT), are those that deliver fuel directly from major supply centres such as Singapore. They typically service deep water ports such as those in American Samoa, Fiji, French Polynesia, Guam, Marshall Islands, New Caledonia, Papua New Guinea, Samoa, Solomon Islands and Vanuatu. MR tankers are the most cost effective way to transport bulk in this region and significant economies of scale are available for those markets that have adequate port facilities to receive MR shipments and sufficient on-shore tankage to make MR shipments viable. MR tanker charges have two specific components being the WorldScale Rate (WSR) and the WorldScale Assessment (WSA). The WSR is a nominal figure that is published annually, is route specific and is an indication of the relative freight rate that would apply, compared to other shipping routes. The WSA is published daily and provides an indication of the short term availability of shipping on specific routings. It is generally a number that is greater than 100 and less than 1,000 and when divided by 100 and multiplied by the WSR, yields the actual freight rate (in US$ per MT) that should apply for a given shipment. WorldScale Assessments are published on a daily basis by reporting agencies such as the Platts Clean TankerWire (Figure 5). Essentially, for any given route, WSR x WSA/100 = Freight rate (US$ per MT) For PICTs, there is no specific WSR, with the rate Singapore Japan often being used as a reasonable proxy. Care should be taken that the WSA average used in FPTs is for the same period as the FOB fuel price loading. Figure 5 Platts Clean TankerWire 20

21 2.3 LCT Shipping LCTs (4-7,000 MT) are smaller vessels with a comparatively shallow draught, which are used to service smaller PICTs where port or anchorage water depth is limited. These ships typically load fuel at a PICT MR port and tranship it to other smaller ports such as Funafuti, (Tuvalu), Tarawa (Kiribati), Rarotonga (Cook Islands) and Tonga. LCT freight rates usually have two components, being a fixed contract component and a bunker fuel surcharge. 2.4 Freight related charges Freight charges related to both MR and LCT freight are Ocean Loss and Insurance, which are both legitimate costs of shipping. Both are recovered directly through the FPT on a cents per litre (cpl) basis. Insurance is typically calculated as a very small (0.05%) percentage of the costs and freight (C&F) value of the fuel. Ocean loss is related to the loss in transit of fuels that are transported in the bulk holds of ships and which are loaded and unloaded by ships manifolds and pipelines. Typical values used in the Pacific have been in the order of % of the cost insurance freight (CIF) value of the fuel. Claimed values should be justified by the supplier. Ocean losses do not necessarily apply for ISO-tainers (info below). Charges that might also be incurred at the destination port, whether or not they are government or private charges include demurrage, wharfage, storage and handling, as follows: Demurrage is voyage related and charged at a daily rate for actual delays in off-loading the shipment. This charge is shipment and event dependent and therefore less predictable. It should therefore be recovered in arrears through the annual operating cost accounts in the next financial year. Wharfage is the port charge for the use of the wharf at landing. It is usually a defined and predictable charge and can easily be recovered directly through the FPT Storage and handling refer to actual charges incurred or charged related to offloading and temporarily storing the stock. It is usually defined and predictable and as such can be recovered through the FPT. NOTE: Company operating costs can be legitimate from a legal perspective, but may still need to be scrutinised and adjusted for the purposes of their inclusion in the FPT to exclude those costs that have been claimed through the FPT and those costs that are not DIRECTLY related to the price regulated market. Care must be taken to verify that duplicate or inappropriate cost recovery does not occur to ensure that PICT fuel prices are fair and reasonable. 2.5 ISO containers and drums Freight charged for delivering ISO containers and drummed fuel is generally based on the actual charges, as evidenced by invoiced documentation. Documentation required to verify freight rates: World Scale Rate World Scale Assessment for the period LCT freight documentation Actual charges relating to shipments of ISO containers and drummed fuel. It should be noted that in the case of ISO-tainers, it is NOT normally necessary to allow ocean losses since the tankers are self-contained and do not require pipeline discharge and it is possible to efficiently drain the tank, thus ensuring that the full shipped quantity is accessed. Furthermore, for ISO-tank loaded in relatively cold climates such as New Zealand, there is a natural fuel expansion factor which means that in practice, typically more litres per the set weight of fuel (calculated at 15 degrees centigrade) are received in PICTs than were 21

22 originally loaded. This will normally more than offset any losses through pressure venting of the ISO-tainer in transit. 3. Government taxes and charges Government charges are usually related to the use of public facilities such as ports and harbour, as well as import duty, excise and value added tax (VAT). These taxes and charges are a matter of public record, vary greatly between PICTs and need to be included in PICT specific FPTs as a legitimate charge against the cost of imported fuel. Care should be taken that government charges and taxes, if claimed through the FPT, are not also included in company operating costs that are claimed through the FPT. Documents required to verify government charges and taxes Audited company operating accounts for the previous financial year relating to operations in the specific PICT. 4. Operating costs allowance Fuel suppliers incur legitimate operating costs and company overheads in providing their services. Supplier operating costs are usually recovered directly from the market on a cents per litre (or other volume unit) basis. 4.1 Market volume For the purpose of determining allowances for both operating costs and for profit margin (ROCE allowance) it is necessary to agree on the volume denominator in the equation. Larger volumes will result in lower allowance values for any Opcost or gross ROCE allowance value. The simplest way to determine this volume denominator is to use the total volume sold by the company in question. The opcost allowance is determined as: OA = (Adjusted Opcost / Volume) / 100 Where OA is the Opcost allowance in cents per litre. A similar equation applies to the ROCE allowance. Non-regulated fuel volumes: If however, it is determined that non-regulated fuel volumes should be removed from the equation (e.g. if aviation fuel was not a price-regulated fuel), it will be necessary to adjust both the operating costs values and the ROCE related values for all costs and assets pertaining to the non-regulated market. 4.2 Operating Cost Scrutiny There is a need to verify the legitimate value of company operating costs and allocate a fair proportion of overheads toward the price regulated market. The volume of fuel supplied to the price regulated market within each PICT needs to be confirmed, taking into account that the entire market may not be price regulated. In that case, it may be necessary to segregate operating costs between the various market segments. Legitimate operating costs and overheads that can be allowed for recovery through the FPT include all those direct and indirect costs that are demonstrably related to providing fuel to a specific market. Depreciation of assets should be allowed as an operating cost for the purpose of the FPT, on the basis that the value of the assets allowed in the ROCE allowance will refer to the depreciated value of assets. Claimed operating costs should not include those costs that have already been claimed through the fuel pricing template, such as international freight, port loading and discharge costs and government taxes. Nor should allowed operating costs include major abnormal costs for events that could reasonably been insured against or any costs that have occurred through the previous negligence of company management. 22

23 Operating cost allowance is not meant to include any level of extra revenue or profit, which will be calculated as an agreed percentage of Return on Capital Employed (ROCE). Documents required to verify Operating Costs Audited company operating accounts for the previous financial year relating to operations in the specific PICT. 5. ROCE allowance ROCE allowance is a level of extra revenue that is allowed to fuel suppliers through the FPT as their contribution to profit. The ROCE allowance is calculated as an agreed percentage of the capital that is employed to provide the services that the fuel suppliers employ in supplying fuel to a specific market. Elements of that capital employed include assets employed, stock and debtors, which is offset by creditors. Care must be taken to ensure that the most appropriate level of the various ROCE elements is agreed, which reasonably reflect the market in which the fuel is supplied. 5.1 ROCE Allowance rate The agreed ROCE allowance will vary by market and should reflect the prevailing market conditions of the time. Factors that should be taken into account should be the underlying no-risk bond rate of major markets, country risk and prevailing business conditions. Historically, fuel pricing templates in PICTs have been subject to ROCE allowance levels of between 12-15% after tax. This will translate into a significantly higher pre-tax value for those supply companies that actually pays tax within the PICT offering the allowance. 5.2 Assets Assets allowed should be directly relevant to the business of the specific market in which the fuel is sold. The depreciated value of assets from the previous financial year, as per the audited company accounts from the previous financial year. Scrutiny of the company asset register on an annual basis is highly recommended and care should be taken to note and remove from the allowance the value of assets that have been retired or that are no longer relevant to the direct operation of the fuel supply business. NOTE: Similar to company operating costs, company asset registers can be legally legitimate, but the details should still be scrutinised and any adjustments made for those assets that are not directly relevant to the PICT price regulated fuel market. 5.3 Stock The value of stock to be allowed in the FPT can be either an average actual value of stock or a theoretical value based on calculated minimum desired stock holding balances, after taking into account stock levels needed to satisfy energy security considerations. Stock values are usually calculated in days of stock cover, the value of which is the landed cost of the stock in the current template. Theoretical stock day calculations should include required minimum stock levels (say days emergency stock at all times) and should factor in the normal replenishment cycles to establish an average stock level that can be claimed through the FPT. For example, for a 30 day replenishment cycle with a 10 day minimum stock level, the allowance would be; 10 days + (30/2) = 25 days The actual days cover should periodically be verified against the theoretical value, which will assist in determining whether adequate stock is being held in-country and to determine whether adequate incountry tankage is in place to satisfy energy needs in an emergency situation. Some suppliers have in past insisted that some PICTs allow the value of stock supposedly held on their 23

24 behalf in other countries, but it is hard to justify this argument since it does nothing to ensure incountry stock security. Stock value calculations (calculated by product) are as follows; (A/365) x B, where A= days stock and B = landed cost of stock 5.4 Debtors This element refers to the capital employed by fuel supply companies that offer credit to consumers in the market place. Claimed values need to be thoroughly scrutinised, given the practice of many suppliers to limit or not allow credit for fuel purchases. 5.5 Creditors Creditors refers to the credit that oil companies receive for the purchase of their fuel from related companies and should be taken into account to reduce the value of capital employed whenever that is a clear factor in the supply chain. Documents required to verify ROCE Allowances: Audited company capital asset register, including original and depreciated value of assets for the previous financial year. Audited company balance sheet from previous financial year. 24

25 LPG pricing template LPG pricing templates operate on the same principles as the fuel pricing template when deliveries are made by bulk tankers to an existing infrastructure operated by third part private company, such as is the case in Fiji, New Caledonia, Solomon Islands, Tonga, Vanuatu and others. One major difference is that International LPG pricing tend to be set on a monthly basis and are based on the Saudi Contract Price, which is published by various media outlets. Chart 5 Saudi contract Price for LPG (Butane and Propane) Saudi LPG Contract Price 25

26 Petroleum glossary A ADO After tax price Automotive diesel oil or diesel fuel. Prices including tax and duty. API The American Petroleum Institute (API) is a United States trade association that represents 400 corporations in the petroleum industry. Asset ASTM Aviation gasoline An economic resource, tangible or intangible, which is expected to provide benefits to a business. American Society for Testing Materials. This is the group that develops products for testing grade of petroleum products. A complex mixture of relatively volatile hydrocarbons with or without small quantities of additives, blended to form a fuel suitable for use in aviation reciprocating engines. Fuel specifications are provided in ASTM Specification D 910 and Military Specification MIL-G B Backwardation Barge Barrel bbl bcf bcm Bill of lading (B/L) A market situation in which prompt physical crude or refined product sells at a premium to forward months prices for the same commodity. An inverted market. The opposite of contango. Motored or motorless vessel used to carry oil products, often along a river. Barges vary in capacity, mainly from 1,000 to 5,000 tons. A unit of measurement most commonly used for crude oil. A barrel of crude oil is equal to approximately 42 US gallons or 159 litres. Abbreviation for barrel. One barrel of oil; 1 barrel = 35 Imperial gallons (approx.), or 159 litres (approx.); 7.5 barrels = 1 tonne (approx.); 6.29 barrels = 1 cubic metre Billion cubic feet; 1 bcf = 0.83 million tonnes of oil equivalent. Billion cubic metres (1 cubic metre = cubic feet). Documentation legally demonstrating a cargo has been loaded. The bill of lading is signed by the captain of the ship and the contract supplier. Abbreviated as B/L. Benchmark Crude Benchmark crude oils are used as references for pricing oils. There are approximately 161 different benchmark oils, of which the main three are West Texas Intermediate, Brent Crude, and Dubai Crude. Brent crude British Petroleum British thermal unit (BTU) Buying hedge Bulk sales A light sweet crude oil produced in the UK North Sea; a major benchmark for pricing of many foreign crude oils. The former name of petroleum company currently called BP. It is the third largest publicly traded oil company in the world with oil reserves up 18 billion barrels and the annual revenues of $308,000,000,000. It is headquartered in London, England. A measure of the heating value of a fuel. Also called a long hedge. Describes the buying of futures contracts to protect against possible increased costs of commodities that will be needed in the future. Wholesale sales. Bulk station A facility used primarily for the storage and/or marketing of petroleum products, which has a total bulk storage capacity of less than 50,000 barrels and receives its petroleum products by tank car or truck. 26

27 Bulk terminal A facility used primarily for the storage and/or marketing of petroleum products, which has a total bulk storage capacity of 50,000 barrels or more and/or receives petroleum products by tanker, barge, or pipeline. C Capex C&F Cost & Freight CIF (cost, insurance, freight) Compressed natural gas Contango Contract price Cpl Crude oil Capital expenditure. Basis for sale of a cargo, in which the price reflects both the cost of the cargo and the cost of freight to its agreed destination. Title and risk of loss or damage to the oil passes from the seller to the buyer when the oil passes the ship s rail at the load port. This term refers to a type of sale in which the buyer of the product agrees to pay a unit price that includes the f.o.b. value of the product at the point of origin plus all costs of insurance and transportation. This type of a transaction differs from a delivered purchase, in that the buyer accepts the quantity as determined at the loading port (as certified by the Bill of Lading and Quality Report) rather than pay based on the quantity and quality ascertained at the unloading port. It is similar to the terms of an f.o.b. sale, except that the seller, as a service for which he is compensated, arranges for transportation and insurance. Compressed natural gas used in vehicles and in other applications not attached to a pipeline. Description for an energy market where the anticipated value of the spot price in the future is higher than the current spot price. When a market is in contango, market participants expect that the spot price will go up. The reverse situation is described as backwardation. Price of fuels marketed on a contract basis covering a period of one or more years. Cents per litre. Liquid petroleum as it comes out of the ground as distinguished from refined oils manufactured out of it. Cubic Foot A standard unit used to measure quantity of gas (at atmospheric pressure); 1 cubic foot = cubic meters. D Demurrage Downstream DPK Dubai crude DWT The sum agreed by charter to be paid as damages for delay beyond the contracted time for loading or discharging from a transportation vessel. Usually refining and the marketing and distribution operations that occur after refining as opposed to Upstream which covers exploration, production and transport prior to refining Dual purpose kerosene (i.e. jet fuel and domestic use). A high-sulphur sour crude oil which serves, either by itself or averaged in with Omani crude oils, as the marker grade for many of the Persian Gulf crudes exported eastward into Asian markets. Deadweight tonnage. E Economies of scale ESPO Blend ExxonMobil Economic functions and results relative to size and the ways in which economic values change as the size of the economy changes. A light, medium sour Russian crude popular with Asia-Pacific refiners. API approx 33, sulphur content %. Named after the East Siberian-Pacific Ocean ESPO pipeline. The largest of the Supermajors publicly traded oil companies. It has reserves of 72 billion barrels of oil and revenue of over $383,000,000,000. It is headquartered in Houston, Texas. F Flash Point The lowest temperature at which a liquid will generate sufficient vapor to ignite. 27