Shell stations to close as margins tighten

By BRIAN FALLOW economics editor

Shell service stations will become fewer and further between in the next few years as falling profit margins in an overcrowded market take their toll.

"Of the 350 sites branded Shell, over the next five years I would speculate we would reduce that by anything up to 50 sites," Steve Foster, director of Shell's retail operations, said yesterday.

Petrol retailers' margins had been declining by about 2.5c a litre a year since 1996, reflecting the highly competitive state of the industry, he said.

He did not think Caltex's acquisition of the Challenge! chain would make any difference to that.

The gap between Australian and New Zealand prices at the pump, net of taxes and levies, has been shrinking.

Five years ago Aucklanders paid 17.9NZc a litre more than their counterparts in Sydney and 19.4c more than in Melbourne. By September last year (the most recent figures available) the gap had shrunk to 5c and 5.7c respectively.

Shell NZ chairman Ed Johnson said that before the industry was deregulated in 1988 the company had more than 3000 sites. "We are still over-pumped with half that number."

Mr Foster said many of the sites to close were owned or head-leased by Shell, and would not necessarily be smaller service stations. Property values, reflecting alternative uses, also came into it.

"Some larger ones struggle to perform because they are sitting on sites that are worth a lot of money."

Releasing its "inaugural triple-bottom-line report", Shell said its oil products marketing operation, which has a market share 27.5 per cent, contributed $62.4 million of Shell New Zealand's $178.3 million after-tax profit last year, compared with $64.1 million of a $146.1 million group profit in 1999.

The 22 per cent increase in the group result reflected a jump in earnings from the exploration and production business to $113.8 million from $78.1 million in 1999.

Exploration and production sales were 31 per cent higher at $256 million, largely because of higher world oil prices.

Mr Johnson said the value added by Shell's New Zealand businesses (sales revenue minus cost of sales) was $775 million last year, of which 53 per cent ($409 million) went to the Government in taxes and duties, 36 per cent ($280 million) to the parent company in dividends, 3 per cent ($22 million) to employees and 1 per cent ($11 million) in interest costs, while 7 per cent ($53 million) was retained in the business.

The figures do not include the former Fletcher Energy business, acquired by Shell in March this year in a joint venture with Houston-based Apache Corp.

After divestments required by the Commerce Commission as a condition of approving the acquisition, Shell will have 84 per cent of the Maui field and 48 per cent of Pohokura, discovered early last year and New Zealand's largest gasfield after Maui.

The managing director of the exploration and production business, Thijs Koeling, said more appraisal drilling was needed to get a clearer picture of Pohokura's recoverable reserves before the company committed itself to how it would develop the field.

One option would be to drill an angled well starting onshore near a major potential customer, methanol producer Methanex.

Mr Koeling, who is moving to Copenhagen, will be replaced next month by former Fletcher Energy chief executive Lloyd Taylor.

Mr Johnson emphasised the company's "commitment to living its sustainable development aspirations", saying it was interested not just in profit but also in valuing people and the planet.