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Z switch to ethanol would cut tax take

JAMES WEIR
Last updated 05:00 07/11/2012

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Z Energy is "seriously considering" a move to potentially cheaper ethanol-blended petrol, but it warned that the Government could lose $60 million a year in excise if it made the switch.

If the whole petrol retailing sector changed to a 10 per cent ethanol blend, the Crown coffers could be cut by $150m a year or more, Z said yesterday.

Competition at the petrol pump had become more intense in the past six months, Z said, and consumers were looking hard to get the cheapest price in the market.

Consumers might see cheaper ethanol-blended petrol without realising its energy content was not as good as that of ordinary petrol, and did not take cars as far on the same amount of standard fuel, Z said.

"If consumers are saying, ‘I don't care how good or bad [the petrol] is, just give me the best price', then OK," chief executive Mike Bennetts said.

Petrol prices have been cut three times recently to about $2.09 a litre, but rival Gull was offering ethanol-blended petrol for about 10 cents a litre less in some regions.

Gull enjoyed a tax exemption on 60 cents a litre because of the 10 per cent ethanol content in its fuel.

Z has had initial talks with the Government about the ethanol excise and wanted to make sure of the tax rules before it made a $15m investment to offer a blended fuel.

But that would "take money out of government coffers by way of excise taxes", Bennetts said, potentially costing $60m for Z alone.

"We are making clear to the Government the consequences [of switching to an ethanol blend] and we are seriously considering it."

Meanwhile, Z said it had come through the past half-year "reasonably well" after making a conscious decision to sacrifice volumes for better profits.

Z Energy revealed yesterday that it had lost its two biggest commercial accounts for diesel in the past half year, with KiwiRail and OceanaGold.

The two firms put their diesel supply contract out to tender and Z put up its prices and lost the contracts.

The profit on those large accounts was less than $1m, despite Z having $30m tied up on the balance sheet in stock and debtors serving those two accounts.

That low return was "clearly destroying shareholder value", Bennetts said.

Z said yesterday that its retail petrol volumes were down 7 per cent in the half year to the end of September. Including diesel, volumes were down 4 per cent to 1.2 billion litres in the half year.

But profit margins on sales were up 12 per cent, to $207m, so the company was better off, Bennetts said.

Z Energy is part of Aotea Energy, which is jointly owned by Infratil and the New Zealand Superannuation Fund.

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Aotea's underlying operating profit was $96.8m, up 17 per cent from $82.8m in the previous six months, despite the 7 per cent fall in petrol sales.

About a third of that fall was a "self-inflicted wound", Bennetts said, as Z closed stores to rebrand and refit them from the former Shell brand.

- BusinessDay.co.nz

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