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Ouro Preto International Final Report Cook Islands Review of Fuel Distribution and Pricing System Prepared for Cook Islands Government October 2005 Alan Bartmanovich Principal Energy Consultant Ouro Preto International Phone/Fax: +61 (0) 2 6161 3606 23 Lumeah Street Mobile: +61 (0) 410 542 534 Narrabundah 2604 ACT e-mail: [email protected] Australia CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System TABLE OF CONTENTS page 1. Introduction 3 2. Terms of Reference 4 3. Executive Summary 6 4. Recommendations 10 4.1 Recommendation Summary 4.2 Recommendation Detail 5. Specifications and Demand 15 6. Fuel Price Regulation 18 6.1 Cook Islands Fuel Pricing Template 6.2 Wholesale and Retail Fuel Price 7. Fuel Terminals 22 8. Importation, Storage and Distribution 25 9. Standards and Regulations 26 10. Lessons from other Pacific Island Countries 28 10.1 Fuel Excise and Taxation 10.2 ROCE rates used in other Pacific Islands Countries 10.3 Comparative Fuel Prices - Pacific Region 10.4 Independently Owned Fuel Terminals 10.5 Equitable Outer Islands Fuel Pricing – Kiribati and Tuvalu Attachments A. Cook Islands Fuel Pricing Template B. Cook Islands Fuel Pricing Template – Elements in need of Review C1. Mogas Comparative Costing by Island /Group C2. Mogas Comparative Costing – Proposed Changes D1. ADO Comparative Costing by Island /Group D2. ADO Comparative Costing – Proposed Changes E. Progamme of Consultant In-Country Visits F. Agenda – Chamber of Commerce Meeting Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 2 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System 1. Introduction 1.1 National Background Information 1 The Cook Islands are located in the South Figure1 – Cook Islands West Pacific between 8oS and 23oS, and 156oW and 167oW.Of the countries fifteen islands seven are in the Northern Group and are low coral atolls while the Southern Group comprises eight mainly elevated fertile volcanic islands. Total land area is 237 km2 with an economic exclusive zone of 2.2 million km2. Arable land area is approximately 17% with 13% under cultivation. Estimated population is 21,200 showing an increase over the 2001 Census figure of 18,027. The capital, Avarua, is located on Rarotonga, the largest and most populated island in the group. 1.2 Project Background Fuel Price Regulation is used in Cook Islands to ensure that fuel is reasonably available at a fair price while providing some level of comfort to suppliers that they will be Source – CIA Factbook 2004 allowed to recover their costs and consistently generate an acceptable corporate return. The Cook Islands Fuel Pricing Template is generally robust and flexible however, there is an urgent need to renegotiate the basis of many of its parameters, a situation that was identified in an external review2 undertaken in mid 2002. Attempts by the government appointed Fuel Price Review Committee to negotiate more acceptable parameters have been unsuccessful. To their credit, since 2002, Cook Island government officials have defended Cook Island consumer interests and resisted passing on fuel price increases, instead insisting on increased oil company disclosure and only finally relenting in recent months after the well reported surge in world oil prices. Serious concerns remain, however, hence the request for this formal review. The in-field study took place between 30 Jan-11 Feb 2005, with most time spent in Rarotonga. Visits were made to all the bulk fuel terminals, meetings were held with all oil companies in Rarotonga and information was gathered from them, much of which has been used as the raw data for the analysis in this report. An agenda of the consultant’s meetings, including a public meeting with the Cook Islands Chamber of Commerce, can be found in Attachment E. A visit to Aitutaki was cut short and a second visit to Atiu was cancelled as a result of Cyclone Meena. Despite this, work continued through the cooperative effort of all parties. 1 Source UNESCO report Sept 2004 2 Review undertaken in May 2002 at the request of the Cook Islands Government by the Regional Petroleum Adviser, then based at the Pacific Islands Forum Secretariat Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 3 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System 2. Terms of Reference COOK ISLANDS: REVIEW OF FUEL DISTRIBUTION AND PRICING SYSTEM STAFF CONSULTANT: ENERGY SPECIALIST TERMS OF REFERENCE A. BACKGROUND 1. There are two major fuel suppliers in Rarotonga each with its own tank farm. The Triad storage facility is the smaller of the two and some questions have been raised regarding its continued suitability and possible environmental impacts that could raise liability issues in the near future. The other supplier Mobil Oil has a newer tank farm and on the surface better maintained. 2. A template is in place for determining the price of fuel and the Price Tribunal formally approves each application. 3. There is, as would be expected when fuel prices rise, concern that the template establishing the price of fuel to the consumer is more favourable to the oil company than to the consumer. In practice only Mobil Oil make applications for price reviews and Triad, who appear to have a lower cost operation, adjust their prices accordingly. Thus, competition does not result in reductions of price. 4. The reality is that the competition that exists results in price increases for if Triad take volume from Mobil then Mobil distribution and ROI will be spread over a lesser volume causing a higher price as a result. 5. In recent years, private organisations have also commenced importing fuel and while they may purchase it at a lower rate the volume for Mobil Oil reduces causing the fixed costs to be spread over a smaller volume increasing the price to the consumer. B. SPECIFIC TASKS 6. The consultant will review the fuel distribution and pricing system in the country. In particular, the review needs to examine the current situation in Cook Islands and best practices in the regional as well as in other regions to provide options and recommendations for implementation and further consideration by the Government of the Cook Islands. 7. In addition, the consultant will review the present system of distribution and the application of the price control system. Distortions caused by the price control mechanism and by competition must be addressed. 8. The consultant will review and recommend options for distribution with implied costs and benefits in each option. The tasks will include but not be limited to: i. Continuation of the present system ii. Restructure the present system to minimise distortions iii. Removal of the license to import by small private importers iv. Reduce to 1 importer/tank farm similar to the Samoa model. 9. Any recommendation should include how the proposal can be implemented in such a way that it is fair to all concerned, including the consumer given the circumstances. Compensation, if any, should be considered. 10. For any recommendation following a system similar to the Samoan Model, the issue of Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 4 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System compensation for tank farms, including the environmental impact and future risks, must also be considered, clearly documented with necessary mitigating measures. C. PERIOD OF ENGAGEMENT 11. 15 days (exclusive of travel time) including 10 days in the field and 5 days home office intermittently in December 2004. D. REPORTING REQUIREMENT 12. A brief summary (not more than 5 pages) on findings and recommendations of the field visit to be discussed and agreed with the Government before departure from the field. A comprehensive report covering the specific tasks will be submitted to the Government and ADB after the completion of service. Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 5 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System 3. Executive Summary Petroleum based fuel is currently supplied into Cook Islands by three multi-national oil companies (MNOCs) into three bulk fuel terminals on Rarotonga. The Outer Islands, with the notable exception of Aitutaki, are supplied in 200 litre drums or 1600 litre containers from Rarotonga. Fuel for Aitutaki is supplied directly from NZ using 20 tonne bulk liquid ISO containers. Total annual fuel demand for Cook Islands exceeds 20 million litres, about half of which is diesel fuel. The remainder is approximately equally split between motor gasoline and kerosene for aviation fuel. Fuel Price Regulation Domestic fuel prices for motor gasoline (mogas) and diesel fuel (diesel) have traditionally been regulated in Cook Islands in an attempt to ensure that reasonably priced transport fuel is available to all islanders. Kerosene is sold almost exclusively as aviation turbine fuel. The price of household kerosene price has not been regulated since, it is understood, there is virtually no demand. When household kerosene is sold, it tends to be very expensive, with its price being based on the importation of packaged product, even though kerosene is imported in bulk (as aviation fuel). In other Pacific island countries household kerosene is price regulated as a low cost fuel of necessity, especially for remote communities and low-income households. This leads us to question whether price regulation of kerosene should be introduced into Cook Islands. To date, fuel price regulation has had mixed success in Cook Islands, having been determined, almost exclusively, on submissions by the dominant supplier. The introduction of a second supplier, Triad (currently supplied by BP from Fiji) was an admirable attempt to introduce competition into the local fuel market.