Refiner margin 10 20 30 40 50 60 70 80 $U S p er b ar re l 1998 –99 1999 –00 2000 –01 2001 –02 2002 –03 2003 –04 2004 –05 2005 –06 200 6–07
Source: ACCC and Platts
Chart 7.1 shows that both Mogas 95 and Tapis crude oil prices have increased rapidly since 2001–02. Since 1998–99, the price of Tapis crude oil has increased by 474 per cent, or at an average annual growth rate of 19.6 per cent. During the same period, the price of Mogas 95 has increased by just over 400 per cent at an average annual growth rate of 18.4 per cent.
7.1.2 Quality premium
Australian fuel specifications do not exactly match the Platts specifications.8 In relation to the Platts
specification, Australian gasoline has tighter quality specifications for summer RVP, distillation, benzene, MTBE, sulphur, induction, Ag strip and PULP and SPULP driveability index (see chapter 6). The tighter specifications generally mean it is more expensive to refine and/or buy Australian grade petrol relative to the Singapore benchmark price.9 Consequently, an adjustment is made to the Singapore benchmark
price by Australian refiners ostensibly to better reflect the cost and value of petrol refined to the Australian specifications standard. The value of this adjustment is known as the ‘quality premium’. The key Australian specifications that contribute to the quality premium are the lower MTBE and the lower benzene levels. These specifications add around $US1.50 to $US2.50 per barrel to the Singapore benchmark price.10 On a cents per litre basis, the total premium adds around 3 cpl to the Singapore
8 BP submission, p. 13.
9 According to the Australian Institute of Petroleum, the introduction of fuel standards has required domestic refineries to make investments, and therefore impose additional costs, to comply with the new standards. The Australia Institute of Petroleum estimates that the total investment required by the industry to implement the Australian Government’s cleaner fuels program will exceed $2.0 billion. AIP, Downstream Petroleum, 2005, p. 3.
benchmark price.11 The actual amount of the quality premium is determined by negotiation between
the buyer and seller.12
The quality premium can also vary from state to state if a particular state has tighter specifications than the Australian standard. For instance, an additional quality premium applies in SA, WA and Queensland. A higher quality premium also applies in NSW in the summer months (November to March) to meet state-specific RVP requirements. In these cases, local prices would reflect the variations in quality premiums.
Some refiners prefer to use Mogas 92 as the applicable Singapore benchmark. In this circumstance, the quality premium added to the benchmark is around $US4 to $US4.50 per barrel or 4 to 4.5 cents per litre on current exchange rates. 13 The use of Mogas 92 rather than Mogas 95 as the benchmark simply
results in a larger premium rather than a change in absolute price to reflect the further gap differential between Mogas 92 quality and the Australian standard. 14
7.1.3 Freight costs
As the Platts quote is fob, freight costs are added to the Singapore benchmark price by Australian refiners to give a landed price. In the refiners’ IPP-based formula, freight costs are set with reference to a benchmark shipping rate (the Worldscale rate) for the journey from Singapore to the relevant discharge port. Worldscale quotes are usually based on a standard ship size and contractual conditions for a specified voyage. To adjust for different ship sizes a system of ‘points of Worldscale’ is used. This enables a freight calculation to be adjusted for the particular journey. Until recently the refiners used the points of Worldscale for the Singapore to Japan voyage for a 30 000 tonne vessel. This year, several of the refiners started using points of Worldscale for the Singapore to Australia journey on the basis that there were now enough trades in that quote for it to provide a reliable price.15
Freight costs are variable and change from day to day. Caltex provided evidence of monthly average shipping rates for the period January 2006 to June 2007. During that period the average shipping rate varied from a low of 2.56 acpl in April 2006 to a high of 5.21 acpl in January 2006.16
In addition, the refiners’ IPP-based pricing formula includes wharfage rates that are set by the relevant port authority and are also subject to change. Caltex provided evidence indicating that the dollar value of the wharfage charge on a per kilolitre basis currently varies considerably, ranging from $0.30/kL at Clyde to $4.44 at Port Lincoln.17
Given the variability of freight and wharfage costs, total freight costs can and do vary from location to location. These variations would generally be reflected in local prices.
7.1.4
insurance and loss
An allowance for insurance and loss is also included in the refiners’ IPP-based pricing formula. This is usually expressed as a small percentage, generally less than half a percentage point, of the benchmark price plus freight.
11 ACCC, public hearing transcript, Melbourne, 5 September 2007, p. 34.
12 Mobil Oil Australia, non-confidential response to notice under s. 95ZK of the Act, p. 6. 13 ACCC, public hearing transcript, Melbourne, 5 September 2007, p. 34.
14 ACCC, public hearing transcript, Melbourne, 13 September 2007, p. 55. 15 ACCC, public hearing transcript, Melbourne 13 September 2007, p. 56. 16 Caltex submission p. 32.
7.1.5 contribution to refinery prices
Chart 7.2 shows an estimate of the average contribution of each of the above components of the IPP-based pricing formula to the domestic refinery price. The chart was derived by the ACCC using data provided by the oil majors. It shows that the Singapore benchmark price makes the greatest contribution to the domestic refinery price at any point in time, representing around 92 per cent of that price. The quality premium contributes around 3 per cent or around 3 cpl on current exchange rates. Although shipping costs vary according to the distance from Singapore to the destination port, an indicative contribution for freight costs is around 4 per cent or 3 cpl. Finally wharfage, insurance and loss each contribute around 0.25 per cent to the refinery price or around 0.2 cpl.