Customs eyes up fuel firms' 'slops'

HAMISH RUTHERFORD
Last updated 05:00 25/01/2013

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Customs is investigating whether fuel companies are avoiding paying millions in tax by recycling so-called "slops" into petrol, without paying excise.

In December the Court of Appeal ruled in favour of Customs in its case against Australian-owned Gull, after claiming it is owed up to $22 million in unpaid excise and penalties.

The action dated back to 2010, when Customs discovered Gull was quietly blending butane into petrol, and claimed it was gaining a tax advantage by paying the lower rate of excise on that additional volume.

During the course of the investigation Customs' attention was drawn to what the industry refers to as "slops", undefined hydrocarbon mixtures created by fuel companies through the unavoidable mixing of petrol, diesel and jet fuel.

The mixture is created in small volumes from the draining of residual liquid in fuel trucks when they return to fuel terminals. Larger volumes are believed to be created in the form of "interface", the mixed grade created when a fuel pipeline switches from carrying one type of fuel to another.

Collected in tanks, the slops are later recycled into other forms of fuel, although industry sources say it is virtually all mixed into petrol. This is because jet fuel must remain effectively pure, while adding petrol to diesel makes it too explosive. Jet fuel contains too much sulphur for a diesel mixture to meet fuel specifications.

However, there are claims this could avoid tax, because both diesel and jet fuel are excise exempt.

Customs has already had contact with Wiri Oil Services, which operates the 167km fuel pipeline between the fuel refinery at Marsden Point and Auckland.

Wiri is owned by the four major fuel companies, Z Energy, BP, Chevron (which markets fuel as Caltex) and Mobil.

Wiri Oil Services Limited general manager Ian Cummings said Customs had been in contact last year about the slops issue and whether to switch responsibility for excise to the Auckland end of the pipeline.

However, since the latest court decision, which effectively reversed a decision of the High Court in Gull's favour, Wiri has had no contact from Customs, Cummings said.

While the interface could be "several thousand litres at a time", occurring approximately daily or every other day, Cummings said, the volumes involved were "minimal" in comparison to overall volumes, with Wiri receiving 3 billion litres of fuel a year.

A spokeswoman for Customs confirmed the issue was live, but no decision had been made over whether to make a claim against Wiri, or other terminal operators, for unpaid excise.

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"We're looking into the issue for one oil terminal at the moment, and it may arise for other pipelines, but we haven't finalised our approach and we haven't decided whether we'll be making assessments".

At the time of the Court of Appeal ruling Gull general manager Dave Bodger said the decision would have implications for the wider industry, in reference to the slops issue.

Gull, which has 3-4 per cent of the retail fuel market, created about 50,000 litres of slops a year, "99.9 per cent of which" came from residual amounts drained from fuel tankers, Bodger said.

Its own terminal pipeline in Tauranga uses a rubber "pig" to wipe the line clean, in a way he believed other fuel terminals did not do, meaning more slops would be created elsewhere.

Bodger said the process of mixing slops into fuel was "sensible" as it effectively recycled fuel, which he believed would meet fuel specifications.

- BusinessDay.co.nz

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