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Copeland: Inquiry into petrol prices

Inquiry into petrol prices

A copy of the letter forwarded by Gordon Copeland Independent MP, to Hale & Twomey Limited, who are undertaking the Inquiry into petrol prices, at the request of the Government.

27 June 2008

Ian Twomey Director Hale & Twomey Limited PO Box 10 444 Wellington Dear Ian,


At the conclusion of the Commerce Committee meeting last Thursday, I undertook to send to you some additional information concerning the practices of the oil majors which I believe need to be questioned. In that connection I attach hereto a press release I issued on 12 May, together with the accounts for Royal Dutch Shell PLC covering the first quarter of this year. The content of the press release will be self explanatory.

In addition, I would like to add a comment on two further points. Recently the BP NZ spokesperson, in justifying the movement of petrol and diesel at the pump, made it clear that this is based upon the “current cost of supplies” (CCS) method of accounting for inventories. You will see that Shell also used that basis of accounting in their quarterly results, thereby reducing their profit for the quarter from $US 9.1billion to $US 7.8 billion.

However, if you go down to note 2 of their accounts (see page 15 of the attachment) you will see that the CCS methodology is not recognised under International Financial Reporting Standards. Rather, that standard obliges Shell to report its profits using the first-in, first-out method of accounting which is the IFRS standard.

The oil majors chose to use the CCS basis for the reason mentioned in my press release; namely that when the price of oil moves up, the company must immediately generate extra cash at the pump (or so they claim) to pay the extra cost of replacement oil at the new price. I do not accept that that is the correct approach. I would argue that at least a proportion of that extra cash, say 40%, should be funded by raising new capital. In other words, when the company’s investment in inventories increased by $US8.2 billion in the first quarter, that should have been funded as to $4.92billion from increased prices with the other $3.28billion – 40% - coming from new capital; probably in the form of debt. I was CFO of BP NZ until May 1980 when, as now, the price of oil was increasing rapidly. Senior executives in BP had this debate then, but, as now, the “let’s take it all at the pump” faction carried the day.

In any event, if the oil companies want to use the CCS basis then they must be consistent so that when the price of oil decreases, a reduction at the pump follows immediately. They must not be allowed to have it both ways. Finally I would like to respond to BP New Zealand’s claim that their return on capital in New Zealand is 3% and that they could boost their earnings simply by selling up their assets and putting the money in the bank. That is disingenuous to say the least.

BP New Zealand is a wholly owned subsidiary of BP International and although I don’t have the time to check the groups return investment for the first quarter, you will see from the enclosure that Shell’s return for that quarter was a whopping 24.5%. The comparable rate of return from money in the bank in Britain or the Netherlands (where Shell’s head offices are located) would probably be around 5% maximum! I appreciate that most of the issues I am raising here relate to the international practice of the oil giants and that New Zealand, alone, can do little about the situation.

However I do think we should stop BP New Zealand from pulling the wool over people’s eyes and that New Zealand should join with other oil importing nations in an international effort to hold these multinational giant companies accountable. Their current profits are unconscionable. With all good wishes,

Yours sincerely,
Gordon F. Copeland M.P.

CC. Roger Fairclough Manager Fuels and Crown Resources, Ministry of Economic Development


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