High petrol prices are 'awful for everyone', says Z Energy CEO who doesn't believe peak oil has been reached yet

By Gareth Vaughan

Z Energy would prefer to see petrol prices below the historically high levels of more than NZ$2 a litre which they've been at this year, and the company's chief executive officer doesn't believe peak oil has been reached yet.

Speaking to interest.co.nz in a Double Shot interview, Z Energy CEO Mike Bennetts said high fuel prices, with petrol currently above NZ$2 a litre, were "awful for everyone."

"Consumer demand drops off. I guess the price point we see as being important is about $2 a litre and prices have gone through that twice, once in 2008 and again earlier this year and petrol demand drops off by about 5%," said Bennetts.

"That's 5% less sales that we make so it obviously affects us economically. We don't have a vested interest in prices being high because we don't produce oil, we don't have any interest further up the value chain."

"So because we don't have that interest further up the value chain and we're aware of the consequence on our customers, our preference actually is for lower prices," said Bennetts.

'Not at peak oil yet'

Asked for his views on peak oil, the concept that at a certain date the maximum level of global petroleum extraction is reached, from which the rate of production starts a terminal decline, Bennetts said peak oil was an "interesting one."

 I personally don't think we're at peak oil," said Bennetts. "I think even if I was wrong, however, there are different dynamics that drive things. So for example, 20 years ago the United States predicted they would run out of (natural) gas. Right now they've got 100 years worth of gas."

"So there are things that just happen by way of technology break throughs or further exploration. I think there's also the other side of that which is shrinking demand, or moving demand, as people get more into public transport and all that stuff."

Whatever happened in the future Z was "here to stay,"striving to satisfy customers' energy needs for "decades."

And Bennetts said Z Energy was just that, an energy company. If other fuels or technologies super seeded petrol and diesel, Z was open to selling and promoting them.

"We're not called Z Hydrocarbon Fuel Distributor," Bennetts said. "We're actually in the energy business. We actually see ourselves meeting the transport needs of people on the move. At the moment that happens to be hydro carbon that comes from oil, it could equally be gas, it could equally be electrons, it could be biofuels," Bennetts added.

"So we're very much open to exploring that space and we think by being local and more nimble than our overseas competitors, we can actually jump onto things and satisfy latent and then growing consumer demands around that stuff before anybody else."

As New Zealand is Z's only market, Bennett said it should be able to innovate and do research and development in a way that's different to its main competitors.

Bought from Shell, Z competes with the global big boys

Bought as global giant Shell's New Zealand downstream, operations (or fuel retail and distribution business), for NZ$696.5 million in April last year by Infratil and the New Zealand Superannuation Fund, the business is being rebranded as Z following market research on 17,000 people. As Bennetts puts it, this was the equivalent of stopping everyone in Ashburton and asking them questions about the company.

Z has also just opened its second retail bond offer, seeking to raise up to NZ$150 million to reduce bank debt. See more on the bond offer here.

Z consists of a 17.1% stake in Marsden Point oil refinery operator the New Zealand Refining Company, a 25 % stake in Loyalty New Zealand which runs Fly Buys, some 220 petrol stations, about 100 truck stops, plus pipelines, terminals and bulk storage terminal infrastructure around the country. Z is licenced to use the Shell brand until June 30, 2012 by which point all its petrol stations and truck stops will be rebranded as Z Energy.

Through its petrol stations Z is looking to shake up the retail fuel market where it has about 30% market share and its major competitors are BP, Caltex owner Chevron and Mobil.

A forecourt promise

Through what Bennetts calls its "forecourt promise", Z is pledging that a member of its staff will fill your tank up for you - in Z branded stations -  between 10am and 5pm in a move that will see Z take on additional staff.

"And if we let you down on that promise we'll give you a free cup of coffee or some flybuys points to acknowledge that we let you down," Bennetts said.

Asked whether people simply bought petrol based on price and convenience of the petrol station, Bennetts agreed they were the two key factors.

"However, after that there is a chance to differentiate yourself. We're large inside New Zealand but we don't want to be caught up inside that whole big oil type approach," said Bennetts.

"We think we can do a much better job for our customers by being nimble and responsive to this market, and we felt it was important we showed that through our brand, and people actually have - believe it or not - higher expectations of a local company."

"They've actually said through the research, if anything actually goes wrong in the sector, we expect you as the local firm to sort it out. So we're happy to live up to those expectations and we felt we should brand ourselves accordingly."

Meanwhile, on the infrastructure side of the business Z has also started to levy a "capital recovery charge" on competitors who use its terminal facilities. This is a break from previous industry practice where competitors have used each others facilities through borrow and loan agreements with the access costs calculated on a per litre rate of the annual operating costs.

Z says these deals don't, however, provide any return on the original investment made in tanks and nor do they encourage investment beyond annual maintenance costs, with this having led to a decline in tank upgrades and a limited number of new tanks being built over the past decade. Z plans to invest up to NZ$50 million in new terminal facilities over the next three years.

'Focus on shareholder returns, not market share'

Bennetts said Z's net profit after tax is about 3 cents a litre with about 1 cent of that stemming from what it makes from selling the likes of food and drink at its petrol stations.

"And we see that's really where the growth is. New Zealanders are reasonably satisfied in terms of demand around their fuel needs," Bennetts said. "We think we can actually help them with their busy days and say, 'look you're coming to us anyway, you're really busy, we can actually make that interruption to your day a little bit easier and satisfy two needs in one'."

With about a 30% share of the retail fuel market, Z is roughly on par with BP as the market leader. But Bennetts said Z wasn't a growth driven company in terms of market share.

"We actually want to grow the returns to our shareholders and by doing that it creates greater certainty for our bondholders. We'd like to get some organic market share," he said. "If there were some optimistic acquisitions that came our way, we'd certainly look at that. We have the capacity for that, but I'm much more focused on returns rather than market share."

"Sometimes when you get too focused on growth, you grow your amount of sales but  your actual performance or productivity with shareholder funds goes down. So I'm not into growth for the sake of growth."

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