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. However, this has proved to be counter productive in that Triad has not, until very recently, been included in fuel price regulation. Moreover, when Triad has won volume at Mobil’s expense, Mobil has been allowed to claim their operating expenses and ROCE allowances over a lower volume, leading to higher ‘cents per litre’ allowances and resulting in higher fuel prices in the price-regulated market. This is a systemic flaw in the application of the Cook Islands fuel price regulation that must now be addressed. From a wider perspective, for many years, the dominant supplier has been allowed to claim the bulk of their total operating costs, including regional and head office overheads over only the portion of their annual sales volume that is sold into the price regulated market. This has led to relatively high allowances being recovered by both suppliers from their price-regulated volume. In addition to this, current fuel price regulations allows a very generous Return on Capital Employed (ROCE) as the agreed profit component. Again, however, the ROCE is calculated over only the price regulated volume, thus resulting in a relatively high ‘cents per litre ROCE allowance’ which is also recovered from the price regulated market. In summary, the dominant fuel supplier recovers the bulk of its Cook Islands operating costs and receives a high ROCE return over the price regulated fuel volume, leaving it free to achieve additional returns from its contract volume, which in 2004, accounted for approximately 50% of its Cook Islands sales. Understandably, efforts by the Cook Islands government to attempt to change the parameters of the current fuel pricing system have been met with reluctance. Despite this, a decision has been taken that changes must be made, preferably through further negotiations with current suppliers. It is estimated that the value of fuel price reductions available through direct negotiation with oil companies is in the region of NZ 12-33 cents per litre. For this to be achieved, however, Cook Island negotiators must be supported by strong political will. Additional savings beyond this are potentially available through the optimization of local fuel import logistics, a course of action that we will also strongly recommend.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 6 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System While not contributing to the price regulation process, Triad has benefited from the outcomes of review decisions but on the other hand, may be at a disadvantage in the contract fuel market, as already mentioned. JUHI, the third bulk fuel terminal is jointly owned by Shell and BP and exclusively supplies jet fuel aviation turbine fuel to the international airlines. Given that JUHI does not normally serve the domestic fuel market, they do not participate in regulated fuel pricing. Although JUHI operations do not directly impact on fuel market economics, they are potentially significant, representing possible alternate future supply options. We will also recommend that JUHI volume is better reported, for the sake of completeness and also in the light of recommendations in this report to include household kerosene in future fuel price regulation. Specific Issues with Fuel Pricing Submissions Besides the general issues mentioned above, there are specific issues with price review submissions in that they are not entirely independently verifiable. For example, 50% of the free-on-board (FOB) Cook Islands fuel purchase cost has been based on an oil company generated Posted Price, which, although verifiable, is not directly derived from the freely traded fuel market. MNOC Posted Prices can carry significant premiums to the traded market and are often published retrospectively. There also arises the question of which MR fuel shipments (Medium Range tanker, usually Singapore to Fiji) are used to calculate the value of fuel that is sold to Cook Islands. This issue is significant because it can lead to significant price differentials, since world fuel prices change on a daily basis. Starting with supplier shipping data, it was found that there were inconsistencies as to which MR is used to calculate the values for local coastal tanker (LCT) shipments loaded for delivery from Fiji to Rarotonga. Evidence suggested that when Singapore fuel prices rose sharply, the most recent MR shipments were used (in some cases before they even land in Fiji) while on other occasions, the costings from older MR shipments into Fiji are preferred. Queries with the MNOC supplier led them to confirm that it has been their policy, for at least the past decade (apparently with approval from Cook Islands Government) to base Cook Islands fuel pricing on the most recent shipment independent of whether the product has physically landed in Fiji or not. While that information did clarify one aspect of this issue, detailed examination of records actually confirms our original finding that supplier practices have not been consistent on this issue over time. On that basis, it is seen as a high priority to remove this potential for fuel price manipulation from the Cook Islands fuel pricing template as a matter of priority. Fortunately, any negative effect from the observed process was not directly passed on to the general market due to the effective fuel price moratorium in place in Cook Islands for a period of 22 months from late 2002. The same might not apply for the Cook Islands contract fuel market, which is external to the price regulation process. Fuel Price Regulation should be based on actual, audited MNOC accounts One long standing contentious issue with Mobil Oil in Cook Islands is their continuing refusal to base their periodic price reviews on actual independently audited accounts, preferring instead to use company generated annual budgets for the purpose of calculating recovery and margin allowances. This has resulted in the addition of a complicated system of over and under recovery adjustments that affect Cook Islands fuel pricing in future years. A widely used alternative and one that will be strongly recommended is to base current year fuel pricing on audited previous year actual accounts thus eliminating the need for future year arbitrary adjustments. Each of these issues directly impacts on Cook Islands fuel costs to a significant dollar value. The good news is that each item, if properly addressed, also represents an opportunity for achieving future fuel cost saving and more responsible fuel pricing. The goal that we have in recommending the re- negotiation of the fuel price regulation system is to achieve more transparent and accountable fuel pricing to the ultimate benefit of Cook Islanders.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 7 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Terminal Ownership Options - An independently owned National Fuel Terminal Even though there are three fuel terminals and more than three fuel suppliers to Cook Islands, there is very limited competition. As mentioned above, what competition there is often has the effect of driving fuel prices up instead of down. Unfortunately, having multiple fuel terminals in a market as small as Cook Islands brings with it significant inefficiencies, in shipping, storage, distribution and overheads, resulting in an unnecessary duplication of costs. If we search for examples of how this problem has been addressed in other small countries, we only need look as far as American Samoa, Samoa and Marshall Islands, all of which independently own their fuel terminals. It is not coincidental that they also have enjoy some of the lowest fuel costs in the Pacific Islands. During our in-country visit, we were informed that it is the intention of the current dominant supplier to sell their terminal to local investors in the near future. If this is the case, then we recommend that the government use the opportunity to redefine fuel economics in its favour going into the future. There are at least three possibilities for the government at this stage being 1. Do Nothing – in this case, it is likely that the sale will proceed and a third party company take over the dominant fuel terminal. It is likely that this type of sale would be accompanied by a long term exclusive supply agreement and disadvantage most Cook Islanders in the medium to long term. 2. Government purchase the Terminal – This would be the closest option to the so-called ‘Samoa model’ in which the government owns the terminal and assumes the risk associated with the fuel business. 3. Manage the Terminal sale based on National Necessity – This is an excellent opportunity to establish an independently owned fuel terminal, which could include both broad private and selective ‘public institutional’ ownership. The first case presents a leap of faith that the new owner will provide a acceptable service to the benefit of the Cook Islands. Government would need to negotiate with the new owners. The second case would mean investing significant capital to purchase a high risk business. The CEO of Cook Islands Investment Corporation advises that the CI government does not have a good track record with managing its assets effectively. In any case, there is a desire to promote opportunities in the private sector and move away from excessive public ownership of infrastructure assets. The third case provides an excellent opportunity for the Government of Cook Islands to intervene and ensure that an independently owned National Fuel Terminal (NFT) is established. By managing the ownership transfer, government also has a unique opportunity to set the rules around the future fuel industry to its maximum advantage. We envisage that the new ownership of the NFT would be a combination of public and private investors (island councils, TAU, private shareholders, etc.) with the government putting itself in the position of regulator, ensuring that no one party comes to exclusively dominate future ownership or the eventual operation of the NFT while at the same time ensuring that the interests of the Cook Islands public are safeguarded. The question of how the current Triad fuel terminal would relate to the newly proposed NFT needs to be defined. It would be preferable, in terms of optimizing economies of scale if the two domestic fuel terminals were at least integrated in their operations and perhaps, in future, combined into a single terminal. There has been concern expressed as to whether the Triad terminal complies with internationally recognised standards for the Handling and Storage of Dangerous Goods (DG). On that topic, we strongly recommend that both existing domestic terminals be formally inspected by independent, licensed DG inspectors to determine compliance with appropriate DG standards. These reports will form the basis of the decision as to whether both terminals should remain in operation and indeed, the strategic value of each terminal for the purpose of their integration into an NFT.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 8 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System We further envisage that there would be an independent ‘National Fuel Authority’ (NFA) established to oversee the national interest in the NFT. The NFA would tender and periodically allocate the professional operation of the NFT, ensure that ‘international best practice’ operating standards are adhered to and ensure that any public or product liability concerns are adequately identified and addressed. NFA would also conduct a periodic international tender for competitive fuel supply and related terminal services. Fuel Price Regulation Proposed Changes Independent of the changes to fuel price regulation that will be necessitated by the introduction of an internationally competitive fuel tender, we strongly suggest that there is an urgent need for a major review of current Cook Islands fuel price regulation and practices. There are a number of measures (see Attachment A) that will involve serious negotiations and require strong government support to ensure ultimate acceptance by current fuel suppliers. The expected result will be significantly and consistently lower fuel prices for all Cook Islanders. We suggest that these negotiations with current suppliers could take place as early as June 2005, since they should ideally be conducted annually as soon practicable after the availability of oil company annual audited accounts for the previous year. It has been suggested by the private sector, through the Cook Islands Chamber of Commerce, that doing away with fuel price regulation could lead to lower fuel prices as normal market forces eventually come into play. Current and past regional experience clearly demonstrates that complete deregulation is likely to result in higher, not lower fuel prices. For example, Vanuatu, which is without formal fuel price regulation has some of the highest regional fuel costs. Similarly, an experiment undertaken in Fiji Islands some years ago, in which fuel prices were deregulated led to an immediate and dramatic price spike, forcing the government to reconsider. We do, however, see circumstances to support a deregulation of the retail fuel price, conditional on the establishment of the independently owned NFT, the introduction of the proposed competitive international fuel supply tender and the adoption of Terminal Gate Fuel Pricing (TGFP) on Rarotonga. Under those conditions, TGFP would become, as the name implies, the regulated maximum wholesale price at the NFT terminal gate. Local distributors would then be free to compete in the fuel distribution, contract and retail markets, conditional, of course on their demonstrated ability to meet required DG and environment health and safety (EHS) standards. We envisage that this change could provide significant opportunities for small businesses development. The introduction of TGFP would signal a need to change the operating emphasis of the existing Internal Affairs Division from that of its current role of regulating wholesale and retail fuel pricing towards regulating imports and Terminal Gate Fuel Pricing while developing an effective price monitoring system for retail fuel to ensure a level playing field and intervening as necessary in extreme cases. International Standards It is imperative and a matter of extreme urgency that internationally recognised standards be adopted and enforced in the Cook Islands fuel industry, especially in the areas of Transportation, Handling and Storage of Dangerous Goods (DG) and Environment, Health and Safety (EHS). Of particular concern is the transportation, to the outer islands, of gasoline in small bulk (1600 litre) containers that are not rated as suitable for highly flammable goods. We are especially concerned that fuel terminal owners, who are ultimately responsible for all environment, health and safety issues at their terminal, have effectively turned a blind eye to this unsafe practice and allowed it to continue. In Aitutaki, with the increased used of 20 tonne ISO containers, there is an obvious and serious need for the enforcement of internationally acceptable DG and EHS standards in terms of separation distances and dedicated container storage areas. This is especially true for gasoline ISO containers since, whether they are full or empty of liquids, they are hazardous.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 9 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Another aspect of Environment, Health and Safety that is of concern is the absence of an effective system to deal with the growing problem of used and waste oil that should, at a minimum, be collected for safe disposal either within the Cook Islands or preferably re-exported for proper processing. The problem with simply dumping used and waste oil into conventional rubbish tips or using in using it in unsuitable applications is that eventually it finds its way into the ground water and near shore fisheries, with its heavy metal additives finding their way into the food chain, potentially creating long term health concerns. The formal collection, transport and possible re-exportation of used and waste oil is therefore highly recommended. Fuel Quality issues We would be remiss not to comment on fuel quality issues as we have been made aware of them. Firstly, Aitutaki Power advises that the switch to direct fuel sourcing from New Zealand has resulted not just in lower prices but also in their receiving better quality fuel into their powerhouse. This has probably been the result of the substitution of 20kl stainless steel ISOtainers to replace the previously used 1600 litre cubes that had previously been used to transport fuel from Rarotonga. While meeting with representatives from the fishing industry, we were also told that some (mainly Australian) captains of international fishing vessels have, in past, raised concerns about the poor quality of fuel sourced in Rarotonga although it is unclear as to the origin or supplier of that fuel. New Diesel Fuel Standards We note that changes in diesel fuel specifications are already becoming an issue in Cook Islands. Similar to the change from leaded to unleaded fuel in past years, to reduce air pollution, Australian and New Zealand have dramatically reduced the maximum sulphur content of diesel fuel, from the previous standard of 5000 ppm (0.5%) sulphur down to the current standard of 500 ppm (0.05%), which will be reduced again down to 50 ppm (0.005%) sulphur from early 2006. The current ‘Pacific Standard’ of 5000 parts per million (ppm) sulphur is still being supplied through the bulk terminals in Rarotonga while Reef Fuels, which supplies Aitutaki, is already supplying the ‘Australian Standard’ fuels. The new low sulphur diesel fuels, while essentially being environmentally cleaner, do have performance issues associated with them, related to the lubricity in diesel engines. It will be necessary for fuel suppliers to manage the transition very well to avoid performance adverse issues. Fuel Distribution to Outer Islands The transportation, handling and storage of fuel to and within outer islands is a major cause for concern. Most outer islands do not have appropriate equipment to handle the 1600 litre fuel containers (or any similar size) on their wharves or jetties. This results in the practice of multiple decanting of fuel from the transport ship to the lighter and again onto the wharf, creating serious concerns both in terms of safety and the quality of the resulting fuel on-island. Measures need to be put into place to ensure that every island has appropriate equipment available to be able to safely and efficiently handle the fuel containers that are being imported and subsequently re-exported. We recommend that all aspects of Outer Island fuel supply be addressed collectively, through an appropriate government department. This should include ensuring appropriate containers are used, transportation systems, unloading equipment and practices and storage & handling on the outer islands is adequate. One solution could be the establishment of an ‘Outer Island Fuel Delivery Service’, perhaps under tender, with the successful tenderer charged with providing a ‘Terminal to Island Jetty’ fuel delivery service which would satisfactorily address all concerns for a defined cost. The cost of this service could be built into the Outer Islands Fuel Price Regulation template.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 10 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

4.0 Recommendations 4.1 Recommendation Summary R1. Redefine parameters behind Fuel Cook Islands Price Regulation, broadening their scope and applying them on a monthly basis. R2. Conduct formal Annual Reviews to update, justify and substantiate supplier claims from the Cook Islands price regulated fuel market based on previous years actual audited accounts. R3. Appoint a National Fuel Authority (NFA) to oversee all aspects of the Cook Islands fuel industry on an ongoing basis. R4. Establish an independently owned National Fuel Terminal (NFT) on Rarotonga. R5. Establish an internationally competitive periodic (3-5 year) tender for domestic fuel supply and National Fuel Terminal operation. R6. Adopt and enforce internationally accepted standards for the Handling, Transportation and Storage of Dangerous Goods, Fuel Quality and related Environment, Health and Safety issues. R7. Develop safe and economical Outer Islands fuel supply options, upgrading fuel handling, transportation and storage infrastructure as necessary.

4.2 Recommendation Detail The ideal situation in Cook Islands would be to open the market to direct competition from international suppliers who could ultimately drive prices down to an efficient level. This is not possible as long as the dominant fuel terminal is owned and operated by a single oil company. Competitive international supply is achievable, however, once there is an independently owned National Fuel Terminal (NFT) in Rarotonga using periodic supply tenders. This opportunity would present itself in Cook Islands should Mobil choose to divest its terminal ownership in Rarotonga, as has been advised it will do in the near future. We caution that if international tendering for fuel supply is the ultimate objective, then it is important that the sale of the terminal does not include a long-term exclusive supply agreement which would preclude future open international fuel supply competition. NFT establishment also opens possibility of Cook Islands participating in future multi-national fuel purchasing agreements, which is consistent with the newly defined Pacific Plan. In fact, it can be said that the absence of an independently owned fuel terminal in Cook Islands would seriously prejudice the possibility of participation in future regional fuel purchasing cooperation. For these reasons, it is important to ensure that the ownership of the proposed NFT does not simply pass to another oil company or any one private entity but that, in the national interest, it is widely owned by the people of Cook Islands, either indirectly through government or, alternatively, directly through public/private investment, but with no single or related entity allowed to own more than 10- 12% of the terminal at any time. In the meantime, however, it is necessary to work within a fuel price regulation framework that is fair and equitable for all consumers. To achieve this, we recommend the following:

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 11 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

R1. Redefine parameters behind Fuel Cook Islands Price Regulation, broadening their scope and applying them on a monthly basis. The Cook Islands Fuel Pricing Template (example in Attachment A) is adequately robust to serve the purpose of ensuring that the Cook Islands do is not overcharged for its fuel while still allowing the oil company suppliers a fair and reasonable profit. It has, however been manipulated over the years and its parameters need to be upgraded. This can be rectified in the following way: • Upgrade the parameters behind the Cook Islands Fuel Pricing Template and develop a more transparent, verifiable and equitable pricing system. Details in Attachment B. • Extend regulated fuel pricing to household kerosene based on bulk import economics to ensure that economically priced energy is available for domestic purposes. Ensure that adequate stocks are offered for sale to satisfy reasonable market demand. • Move to monthly fuel price reviews based on formal submissions by both domestic fuel suppliers based on previous month average Singapore Mean of Platts Spot (MOPS) price, with recoveries and allowances based on previous year actual accounts. The monthly allowed fuel price should be determined and applied in a transparent and equitable manner after taking into the submissions from both suppliers. • Conditional on the establishment of the National Fuel Terminal (NFT), move toward a maximum Terminal Gate Fuel Price (TGFP) on Rarotonga and the deregulation of retail fuel prices. Similarly, determine maximum wholesale fuel prices for Aitutaki and the outer islands. R2. Conduct formal Annual Reviews to update, justify and substantiate supplier claims from the Cook Islands price regulated fuel market based on previous years actual audited accounts. Moving to previous year actual audited accounts will require that formal reviews would be conducted to upgrade claims and allowances. It is reasonable for these to be held early in Quarter 2 on the basis that this is when company audited accounts would be available. These reviews should include an experienced and appropriately qualified professional consultant to advise the Cook Islands government in order to ensure that that the appropriate changes are put into place.

R3. Appoint a National Fuel Authority (NFA) to oversee all aspects of the Cook Islands fuel industry on an ongoing basis. The National Fuel Authority would oversee all aspects of the Cook Islands fuel industry with the mandate of ensuring that economically priced fuel is reliably, safely and securely made available to all Cook Islanders. As such, its membership should include all parties which have a substantial interest in the industry. NFA membership should include, o Finance Secretary (Chairman), o Director of Labour and Consumer Affairs, o Director of Energy, o Chairman and/or General Manager of Te Aponga Uira, o one member representing the business community, (perhaps the Chair of the Chamber of Commerce), o one member representing interests of the Outer Islands o One or two representatives of NFT owners.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 12 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System o Advised by an independent, professional consultant with appropriate specialist knowledge of the downstream petroleum industry. NFA duties would include; • Carrying out formal, professional inspections of both domestic fuel terminals for the purpose of establishing conformance to internationally recognised Dangerous Goods (DG) and Environment, Health and Safety (EHS) standards and especially establishing the value of any potential residual liability due to environmental degradation • Establish the Rules of Charter for the proposed NFT, including but not limited to o Recommending the proposed ownership mix (i.e. private vs. public) and the maximum future ownership by any one entity, (i.e. 10-12% equity, to ensure its long- term independent operation) o establishing the financial framework for the NFT multiparty ownership. o Determining parameters for the periodic tendering of NFT management, which should have an international support component, perhaps administered by local management. o Determining parameters for the international competitive tendering for Cook Islands fuel supply, which should include pre-tender investigation and confirmation of supply capability, multiple supply point options and demonstrated reliability. o Establishing and enforcing the Key Performance indicators for the terminal operator and ensuring that these are regularly reported on, o Managing income generated through the terminal operation and/or supply tender, and o Ensuring professional terminal maintenance and expansion as necessary. • Arrange for the valuation, financing, purchase and resale of the existing Mobil fuel terminal and as much as appropriate (as per the DG/EHS report above) of the Triad terminal to establish an independently owned National Fuel Terminal on Rarotonga. • Establish the parameters for the safe and economical delivery of fuel to the outer islands, develop and oversee the tendering and administration of the proposed ‘terminal to outer island jetty’ fuel supply service.

R4. Establish an independently owned National Fuel Terminal (NFT) on Rarotonga. Government is advised to assume control of the ownership transfer of the existing fuel terminals and the establishment of the NFT as a matter of national interest. If necessary government should consider directly purchasing the fuel terminal(s), combining them and ultimately divesting the resulting NFT to widely held private and/or public ownership. NFT ownership should be on the basis of passive ownership, with the independently appointed NFA effectively overseeing NFA operation. We would especially advise government not to accept that the sale of the fuel terminal is conditional on long-term exclusive fuel supply of any type. Terminal operation contract should include the adoption of world best practice operating standards, local operator training, provision of fire fire-fighting training, regular repairs and maintenance evaluation and scheduling. Sub-contracting to locals should be allowed if it includes appropriate training and support packages.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 13 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System R5. Establish an internationally competitive periodic (3-5 year) tender for domestic fuel supply and National Fuel Terminal operation. Establishing a periodic internationally competitive tender for fuel supply every 3-5 years can be an effective way to achieve economic fuel supply, as has been demonstrated by a number of Pacific Island countries and territories, such as American Samoa, Samoa and Marshall Islands (MEC). The process for achieving this end should include • Calling for expressions of interest for pre-qualification of potential supply companies for national domestic fuel supply. • Fuel supply tender and the eventual supply contract should be based on formula pricing broken down by components that are transparent and independently verifiable. The resulting supply contract should address minimum product specifications, adequate safety stock, supply security, multiple potential supply sources, and risk. • Establishing minimum performance standards and regular performance evaluation against key performance indicators should be agreed.

R6. Adopt and enforce internationally accepted standards for the Handling, Transportation and Storage of Dangerous Goods and related Environment, Health and Safety issues. • Australian Standard AS 1940, Handling, Transportation and Storage of Dangerous Good (DG) or its NZ equivalent should be adopted. • Contract short-term international expertise to enforce the DG standard through an appropriate government department, then recruit and train qualified local DG and EHS inspectors. • Cease the practice of shipping mogas in 1600 litres boxes and require the fuel industry to find an acceptable alternative. • Establish and enforce appropriate fuel quality standards, including the management of the transition in the near years to lower sulphur specifications, as has already been adopted in Australia and New Zealand. • Ensure that Aitutaki ISO container and bulk storage practices meet acceptable DG standards, especially in terms of separation storage distances for both full and empty ISO containers.

R7. Develop safe and economical Outer Islands fuel supply options, upgrading fuel handling, transportation and storage infrastructure as necessary. • Require fuel suppliers to provide DG standard compliant packages for the transportation of fuel to the outer islands. • Depending on the DG packaging solutions identified, install adequate lift capability on every outer island jetty to handle fuel shipment containers to avoid multiple decanting of bulk liquid fuel. • Tender out the transport and handling component of all outer island fuel supply for the Southern (excluding Aitutaki) and Northern Groups, encouraging the creative development of safe and economical and safe supply systems that comply with international DG standards, possibly including the use of a military style landing barge.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 14 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

5. Fuel Specifications and Demand Fuel specifications are changing, with Cook Islands fuel currently determined by the grade of fuels imported into Fiji Islands. There is an imminent change in diesel fuel specifications related to the tightening of emissions specs in Australia, which may mean that more than one grade of diesel fuel may be needed in future to satisfy the various markets (i.e. automotive, marine and utilities).

Table 1 Cook Islands Fuel Quality Summary

Cook Islands Product Singapore Designation Comments

Motor Gasoline 92 RON Unleaded Premium grades may be needed in future for high performance cars.

Kerosene Kerosene Mainly sold as Jet AvTur Jet Aviation Turbine Fuel Undefined market for household (Jet Avtur) or dual purpose kerosene. kerosene (DPK)

Diesel Gasoil 0.5% S Future automotive diesel grades will be 0.05%S and eventually 0.005%S, following international trends; Importation of multiple diesel grades may be required in future to satisfy multiple market demands.

Fuel Demand Determining the annual consumption of fuel in Cook Islands proved to be an unexpected challenge. The oil companies were reasonably cooperative in providing a summary of their annual sales, however, this was only a part of the story. To obtain a more complete fuel demand picture, we obtained data from the Department of Energy, fuel importation figures related to the JUHI operated discharge pipeline and we also interviewed individual fuel importers operators in Aitutaki, which imports most of its fuel directly from NZ in 20 tonne ISO containers. For future reference, we suggest that there needs to be a more formal mechanism for the regular collection of fuel demand and importation data, if only for the purpose of government planning and the reconciliation of Value Added Tax payments. From Chart 1 it can be seen that fuel importation into Cook Islands is more than half diesel fuel with the balance made up of roughly similar quantities of motor gasoline and kerosene. From Chart 2, we see that the bulk of the diesel market goes to the power sector while we are informed that virtually all kerosene is sold as Jet Aviation Turbine Fuel. We have some concern with the fuel usage pattern as it is reported, in that it is not typical for island countries. Usually, there is significant demand for household kerosene, especially among the lower income families and especially in the outer islands. Our concerns are supported by anecdotal evidence from the manager of the JUHI terminal who advises that although they do not regularly sell household kerosene, when they have off spec or dirty kerosene, for example after receiving a new bulk shipment, it is drummed and easily sold to the public.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 15 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Enquiries with Mobil indicated that household kerosene was not readily available and that it tended to be imported in drums, resulting in a high cost, despite the fact that kerosene in the form of jet aviation fuel is imported in bulk into Rarotonga. There is a concern that the high, unregulated price of household kerosene may be restraining demand and thereby depriving poorer households of a cheap fuel source. For this reason, we will recommend that household kerosene be brought under future price regulation.

Chart 1 Cook Islands Fuel Imports 2004

2004 Cook Islands Fuel Imports

22%

Mogas Kero 54% Diesel

24%

Chart 2

Cook Islands 2004 Fuel Demand by Product

14,000,000

12,000,000

10,000,000 Pow er Outer Isl 8,000,000 Pow er Rarotonga Aviation

Litres 6,000,000 Gen Market Outer Isl Gen Market Rarotonga 4,000,000

2,000,000

0 Mogas Kero Diesel

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 16 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System As can be seen from Table 2, nearly 90% of demand is in Rarotonga, with a further 7% in Aitutaki, leaving only 4% for the outer islands. The power sector accounts for 37% of demand, the bulk of which is in Rarotonga and Aitutaki. Table 2 Cook Islands 2004 Fuel Demand

Mogas Kerosene Diesel Total % General Market Rarotonga 4,063,725 5,666,947 3,588,868 13,319,540 59% Aitutaki 567,964 0 134,636 702,600 3% Outer Islands 118,167 0 14,400 132,567 1% Power Rarotonga 6,834,694 6,834,694 30% Aitutaki 960,000 960,000 4% Outer Islands 780,000 780,000 3%

Total 4,749,856 5,666,947 12,312,598 22,729,401 100%

Outside of Rarotonga, Aitutaki accounts for 65% of fuel demand with the balance spread widely, as can be seen from Charts 4 and 5. Most of the Aitutaki demand is met by direct fuel imports from NZ in 20 tonne ISO tankers. We have been informed that this development resulted not only in lower fuel prices but also in improved fuel quality.

Chart 4 Cook Islands – Outer Islands Fuel Demand

2004 Cook Islands - Outer Islands Fuel Demand

1,800,000

1,600,000

1,400,000

1,200,000

1,000,000 Diesel Kero

Litres 800,000 Mogas

600,000

400,000

200,000

0

e n i u n ki iu k o ea a ka ga ta At uae t ihik s hy n u gaia rs ut s r k a n apu ha Ait Mau Mitiaro k a Man Man lme Ta Man N Pe u k P a Pa R

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 17 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Chart 5 Cook Islands – Outer Islands Fuel Demand (excluding Aitutaki)

2004 Cook Islands - Outer Islands Fuel Demand (excluding Aitutaki)

250,000

Southern Group Northern Group 200,000

150,000 Diesel Kero Litres 100,000 Mogas

50,000

0

e o i u a a iu ae r on ik yn aia u ia tea sa h uk ng At g st u s r p a n ha Mauk Mit ka a Man Man lmer Tak Manih N Pe k a Pu a P R

6.0 Fuel Pricing Regulation Fuel prices are regulated under the authority of the Ministry of Internal Affairs and administered by the Director Responsible for the Price Tribunal. Wholesale and retail fuel prices are periodically calculated with reference to submissions provided by oil companies. Fuel price regulation is generally a compromise between government desire for low fuel prices balancing multi-national oil company (MNOC) goals of maximizing corporate returns. As such, fuel price regulation provides some measure of market price stability while offering a level of confidence to suppliers that they will both recover their costs and achieve an acceptable rate of return on their capital employed (ROCE). To date, Mobil has been the main contributor of pricing submissions although we understand that recently Triad has been prevailed upon to participate. Fuel Price Review Submissions have been in the form of a ‘Cost Plus’ build-up using a Fuel Pricing Template and specifically related to fuel volume for the price-regulated market comprising retail and government customers. Retail and Wholesale prices are calculated for Rarotonga, Aitutaki and the Outer Islands of the Southern and Northern Groups taking into account local distribution and margins. 6.1 Cook Islands Fuel Pricing Template In general, the Cook Islands Fuel Pricing Template (CIFPT) (see Attachment A) is adequately robust and flexible in that it can be adjusted to accommodate changing parameters, allows for constantly fluctuating world fuel prices and constantly changing shipping and operating costs. It includes a formula that allows an agreed return to suppliers based on an agreed Return on Capital Employed. To be acceptable to all parties, the parameters used within the CIFPT must be fair, transparent and independently verifiable. Unfortunately, this is not currently the case in the Cook Islands in the sense that there are a number of concerns with the current submissions, including but not limited to; Posted vs Singapore Spot price For the purpose of calculating the Cook Islands fuel price in Rarotonga, the Free-on-Board (FOB) fuel price quoted for shipments out of Singapore are based on a combined value of 50% of the daily traded

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 18 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System or ‘Spot’ price and 50% on the company Posted price. While both Spot and Posted fuel prices are both published and verifiable, only Spot price directly relates to the daily traded market price. Company Posted Prices are internally generated by some oil companies and are primarily used for internal purposes. Company Posted Prices are usually set at a significant premium to real market Daily Spot prices, are typically steady in a falling market and, in a rising market are often set retrospectively. Posted price irrelevance to current market reality is evidenced by the fact that at least one multi-national oil company, BP, has stopped publishing Singapore Posted prices from mid 2004. As can seen from the chart below, in terms of value, in 2004 the Mobil Posted premium for mogas over Singapore SPOT prices was as high as US$12-14 per bbl in 2004, with an average annual premium in the order of US$4 per bbl.

2004 Mogas 92RON ULP Posted premium over MOPS

15

10

5 US$/bbl

0

-5 JFMAMJ JASOND

Mobil average

Potential for selective nomination of MR shipment ex-Singapore The current fuel pricing methodology, although previously accepted by the Cook Islands government, which matches specific MR ships with LCT shipments for the purpose of determining an FOB fuel value cost is in need of revision. Fuel is delivered to Fiji Islands using medium range (MR) tankers (ie. 20-30,000 MT) from either Australia or Singapore approximately every month. Cook Islands fuel is then loaded onto local coastal tankers (LCT, typically 2-5,000 MT) for delivery to Rarotonga every 6-8 weeks. The time discrepancy allows the possibility of selectively (perhaps inadvertently) choosing the cost of fuel that it sells to the Cook Islands. Chart 6 below demonstrates the relative timing of the various LCT shipments to Cook Islands compared with the correspondingly nominated MR shipments. These have been presented against a backdrop of the Singapore spot fuel prices. The number of days between the MR (Singapore) and LCT (Fiji) loadings is represented by the vertical position of the symbols on the graph. The chart demonstrates that from mid 2002 to mid 2004, the typical difference between loadings is typically in the range of 15-35 days. When fuel prices were rising sharply in late 2004, there was a tendency to choose more recent MR shipments with differences in loading dates of 9, 5, 2 days and even 1 day. Beyond this, for two shipments in late 2004, when Singapore fuel prices were falling, the period between loadings increased again to 18 and 24 days respectively. At best, this suggests inconsistent application of the fuel price regulation parameters.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 19 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System When queried on this finding, the supplier advised that it was a long standing policy that the most recent MR shipments would be used for the purpose of costing Cook Islands fuel, independent of whether they had actually landed in Fiji prior to loading the LCT for Rarotonga. Unfortunately, the summary shipping data provided to support this position clearly demonstrated that the stated policy had not been applied consistently. The potential for discretionary leeway in matching MR and LCT shipments is ultimately demonstrated by one instance in late 2002 when two submissions were made for the same LCT shipment, with two separate MR ships nominated, the first claiming a gap of 22 days, the second claiming a gap of 6 days. This analysis strongly supports our recommended move away from specific shipment based fuel pricing towards using a 30 day average Singapore Spot price as the basis for future Cook Islands fuel market prices.

Chart 6 Rarotonga Loading Day Comparison - MR (Singapore) and LCT (Fiji)

70 # of days between claimed MR (Singapore) and LCT (Fiji) loadings for Rarotonga Compared with Singapore Market Prices 60

50

40

30 US$/bbl

20

10

* source Platt's OilGram Price Report 0 2002 2003 2004

ADO SPOT MR Load Fiji Load Raro Disch Mogas SPOT

Operating Cost Recovery from Price Regulated Volume CIFPT allows the recovery of reasonable operating on a cents per litre basis. Adequate care must be taken that there is a justifiable proportioning of these costs between the price regulated and contract volumes. Ideally, this will involved a line by line detailed justification as to the relevance of an item to the price regulated volume.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 20 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

Summary Table 3 below summarises the potential value of items that we have already identified. A more comprehensive summary of the CIFPT Parameters that require attention is detailed in Attachment B.

Table 3 Potential ‘renegotiation’ savings value of Cook Islands Fuel Pricing Template

Template Parameter Value (NZ cpl) Comments

FOB Spot / Posted 0 – 10 Posted is company generated; Move to a MOPS average basis for FOB price

Arbitrary MR Shipment selection 5 - 7 Move to defined period based on a transparent and verifiable international fuel price

MR Assessment Variation 1 Needs to be verified and modified as necessary

Operating Cost charged 6 - 15 Move to previous year actual exclusively to price regulated costs equitably charged across volume total sales volume

Total Estimated Saving 12 - 33 NZ cpl Available

6.2 Wholesale and Retail Fuel Prices 6.2.1 Rarotonga and Outer Islands Wholesale fuel prices for Rarotonga and the Outer Islands, except Aitutaki are based on the outcome of Rarotonga import fuel calculations using the CIFPT. In the case of the outer islands, these are then built up with actual shipping and handling costs to both the Southern and Northern Groups. To this is added a percentage overhead allowance and a percentage profit (refer Attachments B and D). There is some concern as to the rationale of having both the Overhead Allowance and Profit expressed as a percentage over cost. Assuming that both these pricing components are valid, then it would be more reasonable to have Overhead Allowance expressed as a fixed value per island or group, with Profit expressed as a percent of total cost. Attachments C and E include some proposed changes to the pricing formulae, fixing the Overhead Allowance at 5, 15 and 20 cents per litre while increasing the Retail profit level from 7.75% to 10%. The net overall effect is to retain current pricing in Rarotonga, but to decrease retail prices for the Southern and Northern Groups by about 13 cpl. Actual values adopted may need to be adjusted to take into account community concerns, but it should be remembered that we are also recommending a general review of the CIFPT parameters, which should further reduce fuel costs to all islands sourcing fuel from Rarotonga. 6.2.2 Aitutaki For the past two years, Aitutaki has been importing its fuel directly from New Zealand in 20 tonne ISO containers through Reef Fuel. Prior to that, fuel was received in 1600 litre cubical tanks from Rarotonga. Although price was the primary motivation for change, the new supply source brought with it the additional (and unforeseen) bonus of dramatically improved fuel quality, probably related

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 21 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System to the improved shipping package. Alone of the outer islands, Aitutaki is able to handle 20 tonne ISO tanks which is now the preferred method for fuel importation, in the absence of any bulk options. It is not entirely clear how often fuel costs change in Aitutaki or what the trigger mechanism is for this change. We are informed that the currently approved fuel price is based on data provided by one importer, Teron. On that basis, it is difficult to make recommendations as to how to improve the Aitutaki fuel pricing except to suggest that the Pricing Tribunal should monitor Aitutaki fuel pricing regularly and make changes as necessary. Aitutaki fuel costing tends to be simpler than either Rarotonga or the other island groups in that it applies a single percentage administration charge to the Landed Cost, applied to both mogas and diesel. Wholesale and retail then simply attract different profit margins. It is interesting to note that although Aitutaki fuel has a significantly higher landed cost, its retail fuel prices are very competitive compared with Rarotonga due to the reduced industry overheads. It has been suggested that one way to reduce fuel costs in Cook Islands in general is to consolidate Aitutaki volume (7% of total Cook Islands) into Rarotonga bulk shipments. It is, however, useful for Aitutaki to act as an independent indicator against which Rarotongan fuel cost performance can effectively be measured. 6.3 Contract Supply There are a number of fuel supply contracts that are outside fuel price regulation. Some are offered by tender, such as Te Aponga Uira while others like shipping and the fishing fleet are privately arranged. The relevance of contract volume to price regulation is that the current practice of charging the bulk of oil company operating costs to price- regulated fuel results in the public and government effectively subsidising contract customers. We are instead proposing a more robust and equitable cost distribution allocation system.

7.0 Fuel Terminals The volume capacities of the three Rarotonga fuel terminals are summarised in Table 3 below. When we compare tank ullage with annual volume, we see that the Mobil terminal has a volume turnover factor of 5.5 overall and 5.9 for diesel. This implies that the terminal is capacity constrained which was confirmed in our discussion with Toa Petroleum. Clearly, the Mobil terminal will need to expand capacity in the very near future. Triad is in a much more relaxed situation, with an overall turnover factor of 1.5 and only 1.0 for diesel. We understand, however that there are some problems with the age of some of the Triad tanks and their suitability for continuing service. The jet aviation fuel specialist JUHI facility is relatively well placed, with a turnover factor of 1.6, although this may be a bit low, given the need to vigilantly monitor product shelf life, especially in tropical conditions.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 22 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

Table 3 Tank Storage Volumes and Turnover - Rarotonga Fuel Terminals

Product Mogas Kerosene Diesel Total Mobil Total Storage Volume 570,211 417,546 1,729,013 2,716,770 Annual Sales Volume 3,227,149 1,594,537 10,150,032 14,971,718 Turnover 5.7 3.8 5.9 5.5

Triad Total Storage Volume 381,660 0 1,137,118 1,518,778 Annual Sales Volume 1,124,707 0 1,117,566 2,242,273

Turnover 2.9 1.0 1.5

JUHI Total Storage Volume 0 2,600,000 0 2,600,000 Annual Sales Volume 0 4,072,410 0 4,072,410 Turnover 1.6 1.6

Mobil Oil / Toa Petroleum Mobil is currently the dominant fuel supplier to Cook Islands, supplying 54% of the total market in 2004 after winning back the Te Aponga Uira contract in mid-year. The Mobil owned terminal is operated by a local company Toa Petroleum, the management of which informed us that it is Mobil’s intention to divest ownership of their terminal in 2005, potentially opening the opportunity of establishing an independently owned fuel terminal on Rarotonga and corresponding lower fuel prices. Fuel Storage and Transportation in 1600 litre boxes Most of the fuel, including that supplied in 1600 litre cubical boxes, for the Outer Islands originates from the Mobil fuel terminal in Rarotonga. We are extremely concerned about the safety aspects of the 1600 litre box, especially when used to transport motor gasoline. We have heard anecdotal accounts of leakages of fuel from these containers in the hold of inter-island ships (where they are normally transported), thus creating a potentially catastrophic combination. We have been advised by a Toa director that the 1600 litre boxes were originally manufactured by or on behalf of Mobil Oil, but that neither Mobil nor Toa Petroleum accept responsibility for them beyond the terminal gate. This is a highly questionable practice in itself and should not be seen as exonerating either company of responsibility in case of any future accident relating to the safety of using these boxes. We strongly recommend that as a matter of urgency and high priority, that a safe and acceptable alternative be found to the 1600 litre box for all products and that they be immediately discontinued from use for shipping gasoline. In the meantime, while these boxes continue to be used for fuel storage or transportation, written assurances should be obtained from both Mobil and Toa Petroleum as to their safety and compliance

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 23 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System with appropriate international standards on the storage and handling of Dangerous Goods, including for inter-island shipping. Triad / BP The Triad fuel terminal has, for many years, offered some alternative to the dominant supplier, with BP using the Triad terminal to throughput its contract diesel volume supplied to Te Aponga Uira until they lost the tender in mid 2004. We have heard of concerns over the ongoing viability of the terminal, the principal one being the age of many of the storage tanks and possibly compliance factors in terms of Dangerous Goods standards. It is proposed that this is addressed through a formal inspection of both domestic fuel terminals. Conversations with the Triad manager confirm that the terminal could be for sale, presumably if a buyer can be found at the right price. The Triad fuel discharge pipeline had developed severe leaking problems and is no longer in use, with Triad now using the JUHI owned pipeline. BP currently supplies Triad, using the Shell owned Pacific Ventura LCT. JUHI The JUHI fuel terminal is jointly owned by Shell and BP and exclusively services the international airport with jet aviation turbine fuel, which is a type of kerosene. We were informed that fuel sales from the JUHI terminal, which are almost exclusively to international airlines, are generally handled overseas, with Air Rarotonga currently sourcing its jet fuel from Mobil. Management of the terminal rotates every five years, with BP taking over operations in 2005. Imported volume arrives on the Pacific Ventura, the Shell owned LCT which currently co-ships Shell and BP volume. For the purpose of this study, the fact that the Shell LCT regularly visits Rarotonga could provide future alternative fuel sourcing options, with the potential for even more cost benefits through combined economies of scale. Proposed Independent National Fuel Terminal We strongly recommend that it is in the best interest of all Cook Islanders that the government take an active interest in transfer of ownership of the fuel terminals. Ideally, the terminal ownership should be independent of any one MNOC, thus creating an opportunity for a truly competitive fuel procurement environment through periodic international tenders, as has been successfully employed in other island countries. We have been advised (by CIIC) that it is unlikely that government would be interested in taking ownership of the fuel terminals, nor, in our opinion, should government ever be directly involved with operating the terminal. Government can and should, however, create the environment for independent terminal ownership. We envision that this would include • Multi-party ownership, ideally a mixture of public entities and private companies or individuals. Island Councils should be encouraged to participate in ownership. • No single owner should have more than 10-12 percent shareholding. • An Independently appointed Board should decide policy and oversee operations • Triad terminal assets can be included in the National Fuel Terminal, providing they are of a high enough standard and can be purchased at reasonable value. The alternative of leaving Triad (or any other potential new supplier) should remain an option. • Terminal operation to be periodically tendered out to a qualified company capable of operating to the highest international industry standards, perhaps in conjunction with a multi-year supply agreement.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 24 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System • Future fuel sales could be based on a defined ‘Terminal Gate Price’, which would encourage local competition for local supply. • Income generated by leasing the terminal to third party supply and/or service companies should be prioritised for terminal maintenance and improved infrastructure development.

8. Fuel Import, Storage and Distribution Rarotonga Fuel distribution on Rarotonga is reasonably straight forward in that, for the domestic market, Mobil, Triad and JUHI all receive fuel down a bulk pipeline, store the product in purpose built terminals use their own delivery vehicles to deliver bulk fuel or drums to their various customers. In future, after the establishment of an independently owned fuel National Fuel Terminal and a competitive international fuel tender, it would be reasonable to have all fuel sales in Rarotonga regulated at the wholesale level at the Terminal Gate, thus allowing competition between potential fuel distributors supplying to the retail and contract markets. It is at that point that we would recommend the deregulation of retail fuel pricing, thus encouraging increased competition. Aitutaki Aitutaki supply is dominated by the importation of 20 tonne ISO containers directly from New Zealand. There is no reason why this practice should be curtailed in any way, in that it provides cheaper fuel than had previously been supplied from Rarotonga. Aitutaki entrepreneurs have clearly demonstrated that substantial changes are needed in Rarotonga and that if they can be enacted, that we can expect Rarotonga fuel prices to decrease as market efficiency increases. There is no reason why, in future, Aitutaki could not return to supply from Rarotonga once the proposed pricing and market reforms are put into place and Rarotonga fuel costs drop substantially. We note, however, that to satisfy quality concerns, it is likely that Aitutaki will insist on continuing to receive their fuel in ISO containers even when it is again sourced from Rarotonga. Outer Islands Supply to the outer islands (except Aitutaki) is currently from Rarotonga in either 1600 litre boxes or 200 litre drums. This is unsatisfactory on a number of levels; including; Currently, fuel is purchased from the fuel terminals, either by OMIA or by individual customers. Freight is then arranged and paid for by the customer. For the future, we recommend that the transport of all fuel to the outer islands should be tendered out to a specialized contractor who would effectively be awarded a distribution contract for outer island fuel supply for a set time period. The contractor would be responsible for effectively addressing the identified issues concerning the continuing suitability of 1600 litre boxes and the cartage of flammable fuels below decks or, for that matter, as deck cargo on passenger ships. Their ongoing contract could be performance based against identified criteria. We suggest that this new contractor will need to find innovative solutions for these problems, perhaps adapting a military landing craft as a purpose built fuel delivery vessel. Inter-island Shipping We understand that fuel is currently carried in the hold of inter-island ships, creating a potentially disastrous situation should fuel leak out of them into the hold. We have heard anecdotal accounts of exactly this situation occurring, with luckily no long-term consequences. We have been told that the decision to carry fuel in the hold of ships was a better alternative than carrying them as deck cargo together with smoking passengers. An acceptable alternative needs to be found to both those cases, perhaps, as previously mentioned, a dedicated fuel delivery vessel or perhaps some method of segregating passengers from flammable deck cargo.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 25 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Lack of lifting capacity in Outer Islands As discussed elsewhere, there is a lack of lifting capacity on the wharves and jetties of some outer islands, making it necessary to decant fuel from the inter-island ship, into a lighter, then repeat the process on shore. This is unacceptable from both a safety and fuel quality point of view. The preferred answer to these concerns is a dedicated fuel supply vessel as per the above discussion. The alternative would be to locate a suitable lifting capability on each of the outer islands in question.

9. Standards and Regulations Handling, Transport and Storage of Dangerous Goods (DG) There are serious concerns as to the compliance with internationally accepted standards on the handling, transport and storage of dangerous goods in Cook Islands. This is creating potentially dangerous situations, which could eventually negatively impact on the health and safety of the general population. Concerns include but are not limited to; Government agency responsible for dealing with Dangerous Goods regulations needs resources It has been ascertained that the administration of DG regulations falls under the Ministry of Internal Affairs. The Director responsible needs to be allocated an adequate budget for training staff and conducting inspections that are required and long overdue. In the short term, until local staff are trained, there may be a need to rely on imported expertise to conduct site inspections and follow up visits. Dangerous Goods Standard updates Over time, international Dangerous Goods standards change. For example, the Australian DG Standard AS 1940 in currently undergoing a major review. It is advisable that Cook Islands officials are aware of the changes, perhaps by attending international seminars, to be able to determine whether the changes are relevant to local conditions. DG compliance of the 1600 litre boxes for Outer Islands We have been assured by Toa Petroleum that these boxes were designed and built to Mobil specifications and should therefore comply with accepted DG standards. While this may have been true at one stage, we question whether these containers were ever meant to transport highly flammable materials of any kind, much less motor gasoline for the outer islands. In fact, we challenge that these boxes are indeed compliant or are still adequately safe to transport fuel of any kind. This matter should be raised in writing, by the relevant CIG authority directly with Mobil and Toa Petroleum. We strongly recommend that assurances be sought as to the suitability and compliance of all the 1600 litre boxes still in circulation for the transport of motor gasoline and diesel fuel, especially on the deck of and/or in the closed hold of inter-island ships. Fuel storage separation distances in Aitutaki The importation of fuel directly in ISO containers directly into Aitutaki is a relatively new phenomenon. While it is good to see that the entrepreneurial spirit is alive and well, it is also necessary to ensure that the population is safe and protected from what are essentially very risky products. During the visit to Aitutaki, it became apparent that ISO fuel containers were being treated much like any other import and storage container, being stacked near the wharf on import and export and near the road and commercial buildings while in private storage. This is a problem in that, there needs to be consideration given to the highly flammable nature of in these ISO containers, whether they are full or empty. When storing diesel fuel or kerosene in close proximity to motor gasoline, for example, it is necessary to consider the entire volume as highly flammable, even though diesel fuel is relatively non-flammable in its own right. It may be necessary and is highly advisable, for example to increase separation distances between fuels and between the ISO tainers and public thoroughfares, especially in populated areas in order to maintain a relatively safe environment for the population of Aitutaki.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 26 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System Decanting of liquid fuels in transit to outer islands We were advised that it is a common practice, especially in some of the outer islands, to decant fuel from the transport ship into 1600 litre (or larger) boxes on the lighter, then decant again from the lighter onto shore. This is a highly risky business, poses significant dangers to those undertaking it and in any case, seriously compromises the quality of the fuel thus transported. We understand that this practice has been necessary since there is a lack of adequate lifting capacity on some remote wharves and jetties. There is an urgent need to explore other transport for these remote locations. Possible options include; • Fuels to remote islands could be transported by a motorized landing craft, which makes a periodic ‘milk run’ around the islands. There may be a case, for example to have two of these landing craft in operation, one based in the Southern Group operating out of Rarotonga and the other out of Penrhyn for the Northern Group. • Alternatively, adequate lifting capacity could be installed on at least one jetty per island, either in the form of a fixed crane or an appropriate mobile vehicle. If this option is pursued, adequate consideration should be given to the type of container that is likely to succeed the currently used 1600 litre box, given our concerns raised above.

Storage, Transport and Disposal of Used and Waste Oil Safe collection, storage, transportation and disposal of used and waste oil can be a very serious concern, especially on islands that have limited potable water. It has been shown in studies undertaken by the American Environmental Protection Agency (EPA) that one litre of motor oil has the potential to seriously pollute one million litres of potable water. Pollution is caused not just by the oil but also its heavy metal additives, which can accumulate over time as more and more waste oil finds its way into the ground water. From there, waste oil pollution can also find its way into near shore fisheries, and ultimately into the human food chain. It is imperative, therefore that island countries take a very proactive stance on the collection, transportation and proper disposal or re-exportation of used and waste oil. We have suggested on numerous occasions that the organisations best suited to deal with this issue are, in fact, the oil company suppliers. We strongly recommend, however that in order for this issue to be taken seriously by all concerned, government needs to take a very strong stand and mandate that the oil companies demonstrably and effectively deal with this issue. We therefore recommend that; • Government mandate that oil company suppliers actively collect, store and transport used and waste oil off-island • All companies importing lubricating oils should be required to develop formal plans for systematic oil collection, storage and transport and report progress annually against agreed targets, perhaps in the format of ‘remove or arrange for the removal of 65% of the volume of oil originally imported’ • Annual reports should track volume imports and re-exports

Fuel Terminal Environmental Degradation This issue is especially important given that the ownership of the fuel terminals is likely to change hands in the near future. Experience in developed countries suggests that fuel terminals can be the source of significant pollution to the soil and ground water. It can be very costly to remediate this pollution and the potential cost can significantly reduce the land value of the terminal property. Certainly this factor needs to be taken into account when a fuel terminal is being sold or purchased. We therefore recommend that prior to the sale of any of the fuel terminals, a formal environmental assessment be carried out to determine the degree and likely remediation cost of any pollution relating to the terminal(s). This will, of course, correspondingly affect the property value.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 27 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

10. Lessons from other Pacific Island Countries Many countries in the Pacific Islands region approach the supply of fuel in innovative ways. Different rates of excise and taxation apply depending on government methods and decisions concerning revenue collection. There is a very wide differentiation in the cost and price of fuel in the region, depending on a large number of factors, including whether governments actively apply fuel price regulation, the degree of free and open competition, the size of the markets and industry logistics. There are an increasing numbers of independent fuel terminals around the region, as governments recognise that the best way to reduce fuel costs is to encourage open and free international competition for their fuel supplies. This could eventually lead to multi-country fuel tendering and international purchasing cooperation, similar to arrangements already being put into place for other commodity goods such as pharmaceuticals. It is also interesting to note, as shown below, that some Pacific Island Countries have taken the decision that the cost of fuel should be the same for everyone in their country, independent of whether they live on the main island or on the furthest of the outer islands. 10.1 Excise and Taxation During our meeting with the Chamber of Commerce, it was suggested that this report should touch on the issue of relative level of fuel taxation in the Cook Islands. Perhaps the best way to address this issue is to compare fuel tax levels with other Pacific Island Countries. As can be seen from Chart 8 (below), Cook Islands is moderate in its fuel tax regime, being less than countries such as French Polynesia, New Caledonia, Vanuatu and Australia, but higher than FSM, Kiribati, Tuvalu and Solomon Islands. On that basis, there is no compelling reason to change the tax regime, at least from a comparative regional perspective. It could be argued perhaps that some fuel tax revenue could be used in the short term to support the proposed industry restructure. A review could then be held again in future against the expected backdrop of the resulting lower fuel prices. Chart 8 Relative fuel taxation levels in the Pacific Region

Pacific Region Mogas and ADO Total Excise and Tax in Retail Price average July-Dec 2003

70.0

60.0

50.0

40.0

30.0

20.0

10 . 0

0.0 i a ) i a e ti s e u s ) ) o a j i a d ru ia u a G a d a lu tu u g i s p b n u n i l N o n g a a W l m n F e n ri a a o N a P m a n v u S lu a o n h i l d P a sl o u n N o S t ly o K Is N le S I T T a ( n ro o P ll a n V o n a P - a o lia H ca R h C a ( ri ( ch M s w m tr ii e s n S r e lo s a k e F a o u w m o r M N S A a A o F H C

Mogas Excise & Tax ADO Excise & Tax

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 28 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System 10.2 ROCE rates in other Pacific Island Countries In those Pacific Islands Forum Island Countries that employ price regulation, the profit component of the pricing formula is calculated as a Return on Capital Employed (ROCE), taking into account Capital Assets, Stock and Debtors, which is often offset by Creditors. The rates allowed vary between 15-19% after tax, as do the before tax rates due to the differing tax rates employed. 15% after tax is used in relatively stable countries such as Tonga and Fiji while 19% after tax has been reserved for high risk countries such as Solomon Islands and Papua New Guinea. 10.3 Comparative Fuel Prices – Pacific Region In Charts 9 and 10, the average fuel price (without taxes and duties) in Rarotonga is compared on a volume weighted basis with other Pacific Islands3. In this graphs, the yellow lines represents an approximation of the volume effect in improving island fuel economics. It is perhaps understandable that Cook Islands pricing is higher than, say American Samoa and Samoa that have independently owned terminals and rely on MR tankers. What is interesting to note, however, is that fuel prices in Tonga and Kiribati, which rely on LCT shipments and strict price regulation also outperform Cook Islands. This analysis suggests that both Price Regulation and Independently owned terminals can achieve lower fuel prices. Chart 9 Regional Mogas Price comparison, Volume Weighted

Pacific Region Wholesale Mogas Price compared w ith Annual Volume (average July-Dec 2003; w ithout excise and tax)

70 .00

60.00 Cook Islands (Rarotonga) 50 .00

40.00

30.00

20.00

Size of symbo l is prop ort io nal t o t o t al annual vo lume (all f uels) 10 . 0 0 0 20,000 40,000 60,000 80,000 100,000 M ogas Annual Demand (kilolitres)

A merican Samoa Cooks (Rarotonga) F i j i French Polynesia FSM - Pohnp ei Kiribati M arshall Island s Nauru New Caledonia Niue Palau PNG Samoa Solo mon Island s Tonga Tuvalu V anuat u

3 Data extracted from Pacific Fuel Price Monitor, published by the Pacific Islands Forum Secretariat

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 29 CONFIDENTIAL TO GOVERNMENT Cook Islands Review of Fuel Distribution and Pricing System

Chart 10 Regional Diesel Price comparison, Volume Weighted

Pacific Region Wholesale Diesel Price compared with Annual Volume (average July-Dec 2003; without excise and tax)

70.00

60.00 Cook Islands (Rarotonga) 50.00 l 40.00 US cp

30.00

20.00

Size of symbol is proportional to total annual volume (all fuels) 10.00 0 100,000 200,000 300,000 400,000 500,000 600,000 Diesel Fuel Annual Demand (kilolitres)

American Samoa Cooks (Rarotonga) F i j i French Polynesia FSM - Pohnpei Kiribati Marshall Islands Nauru New Caledonia Niue Palau PNG Samoa Solomon Islands Tonga Tuvalu Vanuatu 10.4 Independently owned terminals Independently owned terminals can be found in the Pacific Region in American Samoa, Majuro, Marshall Islands, Nauru, Niue (prior to their cyclone), Samoa and in Noro, Solomon Islands. Other countries are in various stages of moving toward independent terminal ownership. These countries have largely enjoyed the benefits of being able to negotiate between suppliers to the ultimate benefit of their populations. Of course in some cases, these terminals are significantly larger that those found in Cook Islands and the shipping draught allows the much more economical MR tankers to deliver fuel. The principle remains the same, however, in that having an independent fuel terminal allows much greater access to alternative supply options, with a resulting cost advantage.

10.5 Equitable Outer Islands Fuel Pricing – Kiribati and Tuvalu Economically equitable supply arrangements for outer island can be found in the Pacific in the countries of Kiribati and in Tuvalu. In Kiribati, equitable fuel pricing across all islands is achieved through the government Kiribati Oil Company (KOIL). In Tuvalu, the same effect is achieved through the broadly publicly owned Tuvalu Co-operative Society. This is done for all consumer products, not just fuel products. In both Kiribati and Tuvalu fuel is sold at the same price to all islanders, independent of whether they live on the main island or on an outer island. Effectively the higher population of the main island subsidises the cost of fuel in the outer islands. The governments of both countries have taken the view that there is a national responsibility to support those of their population that choose to live in more remote locations. Should the government of Cook Islands choose to pursue this avenue, there would be a number of alternatives that could be considered. As always, we would suggest observing the good ideas of our neighbours, then developing an optimum solution adapted for local conditions.

Ouro Preto International..CI Fuel Review Final Report Oct 2005 v1.2 30 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment A Cook Islands Fuel Pricing Template

Submission date 2-Feb-05 Ship Voyage MR Loading Date 14-16 Dec 04 Bro Albert P 077 Fiji Loading Date 7-Jan-05 Pacific Discoverer PD 376 Rarotonga Discharge Date 17-Jan-05 Voyage Pattern Vuda, Suva, Pago Mobil Submission Consumer Market Government Mogas ADO Mogas ADO Mobil calculated 124.01 124.96 111.01 102.96 Pre-VAT Selling Price NZ cpl 124.02 124.98 111.02 102.98 VAT 12.50% 15.50 15.62 13.88 12.87 Post-VAT Selling Price 139.52 140.60 124.90 115.85

Price Change Mogas ADO Mogas ADO Pre-VAT Previous Approved NZ cpl 136.38 131.43 123.38 109.43 Requested New NZ cpl 124.02 124.98 111.02 102.98 Increase (decrease) NZ cpl -12.36 -6.46 -12.36 -6.46 Post-VAT Previous Approved NZ cpl 153.43 147.86 138.81 123.11 Requested New NZ cpl 139.52 140.60 124.90 115.85 Increase (decrease) NZ cpl -13.91 -7.26 -13.91 -7.26

Company: Mobil Submission

1 Period

2 Exchange Rate NZ/F$ 1.1363 0.8800 Westpac Sell Rate US$/F$ 0.6071 1.6471 10-Dec-04 NZ$/US$ 0.6899 1.4495

3 Rate of Return After Tax 18.00% Tax Rate 28.00% Before Tax 25.00%

Product Mogas ADO 4 Conversion Factors litres/USgal 3.785 3.785 litres/barrel 158.987 158.987 litres/MT 1335 1175 5 Cook Islands Duty Rate NZ$ / litre 0.28 0.22 VAT 12.50% 12.50% 6 Ocean Loss %CIF 0.50% 7 Insurance MR %C&F 0.75% Insurance LCT %C&F 0.75%

31 Review of Fuel Distribution and Pricing System Cook Islands May 2005

8 Terminal Charge Fiji FJ$/litre 0.0141 Wharfage - CI NZ$/litre 0.0045

9 Proportion Spot 50% 10 Proportion Posted 50% Offshore Costs 11 FOB $/bbl 46.820 51.648 US$/l 0.2945 0.3249 MR Shipping WorldScale 2 Port 11.94 Spot AFRA 421 Vuda Port Charges F$/litre 12 Freight rate US$/MT 50.2674 US$/litre 0.0377 0.0428 13 C&F Fiji US$/litre 0.3321 0.3676 Insurance US$/litre 0.0025 0.0028 14 CIF Fiji US$/litre 0.3346 0.3704

15 Landed Cost Fiji US$/litre 0.3346 0.3704 FJ$ / litre 0.5512 0.6101 Ocean loss FJ$ / litre 0.0028 0.0031 Fiji Onshore Costs Wharfage FJ$ / litre 0.0141 0.0141 Security Fee FJ$ / litre Storage & Handling FJ$ / litre 16 FOB Fiji F cpl 0.5680 0.6272 NZ cpl 0.4999 0.5520 LCT Freight 17 Unit cost of LCT F$/MT 160.00 160.00 FJ$ / litre 0.1199 0.1362 NZ$ / litre 0.1055 0.1198 18 C&F LCT NZ$ / litre 0.6054 0.6718 Insurance NZ$ / litre 0.0045 0.0050 19 CIF LCT NZ$ / litre 0.6099 0.6769 20 Landed cost Rarotonga NZ$ / litre 0.6099 0.6769

21 Duty NZ$ / litre 0.2800 0.2200 22 Wharfage NZ$ / litre 0.0045 0.0045

23 FIS Cost NZ$ / litre 0.8944 0.9014

24 Distribution NZ$ / litre 0.2035 0.2035 25 Return on Investment NZ$ / litre 0.1423 0.1449

26 Pre Vat Selling Price NZ$ / litre 1.2402 1.2498

Distribution Expense NZ$ 1,014,458 Budget 2005 Volume litres 4,985,000 Budget 2005 DE cpl 0.2035

32 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Guaranteed Return on Capital Employed (GROCE) Calculation Mobil Submission Mogas ADO GROCE allowance rate 25.00% Assets Value NZ$ '000 1,707 Return Req'd NZ$ '000 427 Volume kl 4,985 Asset allowance NZ$ / litre 0.0856 Debtors Average days 42 Selling Price NZ$ / litre 1.2402 1.2498 Debtors allowance NZ$ / litre 0.0357 0.0360 Stock Average days Rarotonga 50 50 Into Store cost Rarotonga 0.6144 0.6814 Stock allowance NZ$ / litre 0.0210 0.0233

Total GROCE Allowance NZ$ / litre 0.1423 0.1449

carry forward 0.1423 0.1449

33 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment B Cook Islands Fuel Pricing Template Parameters - Elements in Need of Review

Pricing Element Current practice Proposed

1 Fuel Pricing Template Submitted only by Mobil Both domestic fuel supply companies provide updated fuel price submissions on a monthly basis. Template parameters reviewed annually based on previous year actual (audited) operating costs, income statement and end-of-year balance sheet. Based on actual previous year data provided by both companies, FOB pricing formulae, eligible volume, freight related allowances, operating cost allowances, company profit (based on an agreed Return on Capital Employed) are agreed for the coming year. More details on each fuel pricing element as per below). 2 FOB Price Mobil submission based on Price review every month based on average MOPS (mean product value on Bill of Lading of Platts Singapore) SPOT price for previous month period. date of ‘Mobil selected’ ex- FOB based on Singapore SPOT plus an agreed reasonable Singapore shipment. premium, say, US$ 1.00 per bbl. Triad claims that they are unaware of the basis of BP pricing to them 3 Distribution Costs Mobil current year Budget with Company previous year actual, audited accounts ‘catch-up’ adjustments from - Justified, including allocation across market sectors previous years allowed - Need to scrutinize all allowed costs line by line with the repeating question ‘what portion of this is directly related to the price regulated market?’ 4 Asset Values Historic Cost allowed Net Book Value (NBV) allowing depreciation as a cost No depreciation allowed - verified and justified No asset verification or - allocated across market sectors allocation across business - An alternative is to allow a ‘fixed’ agreed allowance sectors and review every five years. 5 Volumes Total distribution charges and Previous year actual total volume reported for all products Asset values allocated across including oils, lubes and kerosene and all contract volume. ‘current year budget’ regulated All distribution costs and assets to be fairly allocated across price volumes. various market sectors. 6 Regional and Head Office As claimed, allowed across Provide detailed justification across market sectors. charges ‘price regulated’ volume Allocate across total volume. 7 Government preferential Mogas 28 / 15 (gov) cpl Requires separate calculation; simply subtracting duty fuel price based on reduced ADO 22 / 0 (gov) cpl difference results in an effective overcharge of 0.3-0.5 cpl duty due to cascading GROCE allowance effect. 8 Template summary a) FOB price basis Singapore Spot: Posted 50:50 Mean of Platts Singapore Spot (MOPS) plus fixed premium of maximum US$1.00 per bbl. b) FOB price date Bill of Lading date Singapore Previous month average & monthly review c) MR WorldScale Three Port discharge Allow Three port discharge d) MR AFRA MAFRA - not transparent or Maximum WS Assessment 30kMT Clean Singapore - independently verifiable Japan e) LCT $160 per tonne flat Change to Verified Actual f) Ocean losses 0.5% (MR only) Maximum 0.4% CIF

34 Review of Fuel Distribution and Pricing System Cook Islands May 2005

g) Insurance 0.75% (MR & LCT) MR maximum 0.05% C&F LCT maximum 0.5% C&F 9 Exchange Rate Unknown basis Commercial rate for same period as template calculation Define timing, banks and cities 10 Return on Capital Employed (ROCE) Allowances a) Assets Historic Value Change to Net Book Value - To be verified and allocated as being directly relevant to price regulated market

Base on 50% shipment cycle plus safety stock b) Stock 50 days Verify from y/e balance sheet c) Debtors 42 days Include to actual credit from supplier (30 days on FOB Fiji) d) Creditors not included and reduce working capital

11 GROCE Rate 18% after tax Reduce to 15% after tax 28% tax 25% before tax 12 Previous year ‘catch up’ Currently allowed since pricing Not allowed. compared with submitted is based on current year budget. Irrelevant if there is a switch to Previous Year Actual budgeted operating costs

35 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment B1 Mogas Comparative Costing by Island / Group

Mogas Feb-05 Rarotonga Aitutaki Southern Northern Comparative Costing Group Group Landed Cost 0.6098 0.7800 0.6098 0.6098 Levy at wharf 0.2800 0.2800 0.2800 0.2800 Wharfage & Cartage 0.0045 0.0140 0.0045 0.0045 Cartage 0.0080 Landed Cost 0.8943 1.0820 0.8943 0.8943

Admin Costs 6% 0.0649 Sub-Total 1.1469

Distribution Cost 0.2035 0.2035 0.2035 ROI 0.1423 0.1423 0.1423 Profit 10% 0.1147 Pre-Vat Wholesale 1.2401 1.2616 1.2401 1.2401 VAT on Wholesale 12.50%

Inward Charges 0.3228 0.3579 Outward Charges 0.1844 0.1844 Pre-Overhead, Profit & VAT 1.2401 1.7472 1.7824

Overhead Allowance NG 19.75% 0.3520 SG 17.25% 0.3014 Raro 6.25% 0.0775 Aitutaki Pre Profit & VAT 1.3176 2.0486 2.1344

Profit Margin NG 7.75% **see note 0.1654 SG 7.75% below 0.1588 Raro 7.75% 0.1021 Retail Profit Aitutaki 17.75% 0.2036 Pre-Vat Retail 1.4197 1.3505 2.2074 2.2998

VAT 12.50% 0.1775 0.1688 0.2759 0.2875 Retail Price 1.5972 1.5193 2.4833 2.5872

Summary Mogas Cost (cents per litre)

Wholesale to Government 1.259 Wholesale to Retailers / Bulk Users 1.3951 1.420 Retail Selling Price 1.60 1.520 2.48 2.59

** Unlike Rarotonga, Aitutaki Retail Price is not additive to Wholesale Price plus Retail Margin, but rather refer directly back to Landed Cost plus Administration, since Aitutaki fuel importers tend to directly retail.

36 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment B2 Mogas Comparative Costing – Proposed Changes

Mogas Feb-05 Rarotonga Aitutaki Southern Northern Comparative Costing Group Group Landed Cost 0.6098 0.7800 0.6098 0.6098 Levy at wharf 0.2800 0.2800 0.2800 0.2800 Wharfage & Cartage 0.0045 0.0140 0.0045 0.0045 Cartage 0.0080 Landed Cost 0.8943 1.0820 0.8943 0.8943

Admin Costs 6% 0.0649 Sub-Total 1.1469

Distribution Cost 0.2035 0.2035 0.2035 ROI 0.1423 0.1423 0.1423 Profit 10% 0.1147 Pre-Vat Wholesale 1.2401 1.2616 1.2401 1.2401 VAT on Wholesale 12.50%

Inward Charges 0.3228 0.3579 Outward Charges 0.1844 0.1844 Pre-Overhead, Profit & VAT 1.2401 1.7472 1.7824

Overhead Allowance NG cpl 0.2000 SG cpl 0.1500 Raro cpl 0.0500 Aitutaki Pre Profit & VAT 1.2901 1.8972 1.9824

Profit Margin NG 10.00% **see note 0.1982 SG 10.00% below 0.1897 Raro 10.00% 0.1290 Retail Profit Aitutaki 17.75% 0.2036 Pre-Vat Retail 1.4191 1.3505 2.0870 2.1806

VAT 12.50% 0.1774 0.1688 0.2609 0.2726 Retail Price 1.5965 1.5193 2.3478 2.4532

previous value 1.5972 1.5193 2.4833 2.5872

Change -0.0007 0.0000 -0.1355 -0.1340

** Unlike Rarotonga, Aitutaki Retail Price is not additive to Wholesale Price plus Retail Margin, but rather refer directly back to Landed Cost plus Administration, since Aitutaki fuel importers tend to directly retail.

37 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment C1 Diesel Comparative Costing by Island / Group

ADO Feb-05 Rarotonga Aitutaki Southern Northern Comparative Costing Group Group Landed Cost 0.6768 0.7800 0.6768 0.6768 Levy at wharf 0.2200 0.2200 0.2200 0.2200 Wharfage & Cartage 0.0045 0.0140 0.0045 0.0045 Cartage 0.0080 Landed Cost 0.9013 1.0220 0.9013 0.9013

Admin Costs 6% 0.0613 Sub-Total 1.0833

Distribution Cost 0.2035 0.2035 0.2035 ROI 0.1448 0.1448 0.1448 Profit 10% 0.1083 Pre-Vat Wholesale 1.2496 1.1917 1.2496 1.2496 VAT on Wholesale 12.50%

Inward Charges 0.3228 0.3579 Outward Charges 0.1844 0.1844 Pre-Overhead, Profit & VAT 1.2496 1.7567 1.7919

Overhead Allowance NG 19.75% 0.3539 SG 17.25% 0.3030 Raro 6.25% 0.0781 Aitutaki Pre Profit & VAT 1.3277 2.0598 2.1457

Profit Margin NG 7.75% **see note 0.1663 SG 7.75% below 0.1596 Raro 7.75% 0.1029 Retail Profit Aitutaki 17.75% 0.1923 Pre-Vat Retail 1.4306 1.2756 2.2194 2.3120

VAT 12.50% 0.1788 0.1595 0.2774 0.2890 Retail Price 1.6094 1.4351 2.4968 2.6010

Summary Diesel Cost (cents per litre)

Wholesale to Government 1.069 Wholesale to Retailers / Bulk Users 1.4058 1.341 Retail Selling Price 1.61 1.436 2.50 2.60 ** Unlike Rarotonga, Aitutaki Retail Price is not additive to Wholesale Price plus Retail Margin, but rather refer directly back to Landed Cost plus Administration, since Aitutaki fuel importers tend to directly retail.

38 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment C2 Diesel Comparative Fuel Costings – Proposed Changes

ADO Feb-05 Rarotonga Aitutaki Southern Northern Comparative Costing Group Group Landed Cost 0.6768 0.7800 0.6768 0.6768 Levy at wharf 0.2200 0.2200 0.2200 0.2200 Wharfage & Cartage 0.0045 0.0140 0.0045 0.0045 Cartage 0.0080 Landed Cost 0.9013 1.0220 0.9013 0.9013

Admin Costs 6% 0.0613 Sub-Total 1.0833

Distribution Cost 0.2035 0.2035 0.2035 ROI 0.1448 0.1448 0.1448 Profit 10% 0.1083 Pre-Vat Wholesale 1.2496 1.1917 1.2496 1.2496 VAT on Wholesale 12.50%

Inward Charges 0.3228 0.3579 Outward Charges 0.1844 0.1844 Pre-Overhead, Profit & VAT 1.2496 1.7567 1.7919

Overhead Allowance NG cpl 0.2000 SG cpl 0.1500 Raro cpl 0.0500 Aitutaki Pre Profit & VAT 1.2996 1.9067 1.9919

Profit Margin NG 10.00% **see note 0.1992 SG 10.00% below 0.1907 Raro 10.00% 0.1300 Retail Profit Aitutaki 17.75% 0.1923 Pre-Vat Retail 1.4296 1.2756 2.0974 2.1910

VAT 12.50% 0.1787 0.1595 0.2622 0.2739 Retail Price 1.6083 1.4351 2.3596 2.4649

previous value 1.6094 1.4351 2.4968 2.6010

Change -0.0011 0.0000 -0.1372 -0.1361

** Unlike Rarotonga, Aitutaki Retail Price is not additive to Wholesale Price plus Retail Margin, but rather refer directly back to Landed Cost plus Administration, since Aitutaki fuel importers tend to directly retail.

39 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment E Meeting Agenda – In Country Visits

Ministry of Finance and Economic Management Honorable Vaine Wichman, Government MP, Undersecretary to the Minister of Finance Kevin Carr, Financial Secretary

Fuel Pricing Committee Kevin Carr, Chairman Apii Timoti, Member Tingika Elikana, Member David Greig, Member

Te Aponga Uira or Tumu-te-Varovaro (Electricity) Apii Timoti, Chief Executive Officer (CEO) George Pitt, Chairman Unakea Kauvai, Board Member Randolf George, Board Member Mata Nooroa, Board Member Gaye Enoka, Financial Controller

Ministry of Internal Affairs Honorable Peri Vaevae Pare, Minister David Greig, Director Price Tribunal

Office of Minister of Island Administration (OMIA) Nandi Glassie, Secretary of OMIA Pa Epi, Manager Special Projects Tenga Epi Mana, Civil Engineer

Ministry of Police – Te Kukupa Patrol Boat Richard Stephenson, Maritime Surveillance Adviser

Ministry of Marine Resources Ian Bertram, Secretary of Marine Resources Andrew Jones, Fisheries Officer Jason Marurai, Fisheries Officer Josh Mitchell, Fisheries Officer Peter Graham, Legal Adviser

Ministry of Foreign Affairs & Immigration Edwin Pittman, Secretary of Foreign Affairs Carl Hunter, Director, Pacific Division

Energy Division, Ministry of Works Mata Nooroa, CEO Bruce Clay, Diesel Power and Renewable Energy Consultant

40 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Cook Islands Investment Corporation Tarita Hutchinson, CEO

Office of the Leader of Opposition Honorable Tangata Vavia, Opposition MP, Deputy Leader of Opposition Honorable Ngamau Munokoa, Opposition MP Honorable Sir Pupuke Robati, Opposition MP Honorable Winton Pickering, Opposition MP Man Unuia

Media Charles Pitt, Pitt Media Group Trevor Pitt, Pitt Media Group Nannette Woonton, CI Television, Pitts Media Group Ulamila Kurai-Marrie, Cook Islands News

Mobil & Toa Petroleum Brett Porter, Director Okirua Apera, Mobil Representative Bruce Manuela, Manager Glen Armstrong, General Manager

Triad Petroleum Ltd George Ellis, Director

Cook’s Island Bus Passenger Transport Ltd Kevin Cook, Director

Mataroa Shipping & Trading Ltd Solomona William, Director

Juhi Main Office Mii Nicholas, Manager

Air New Zealand Brandon Jones, Engineer

Aitutaki Island John Baxter, Businessman and Fuel Importer Ronald Henry, Teron Fuel Importers Tai Herman, Mayor and Fuel Importer (courtesy call - Mayor preoccupied with Cyclone Meena) Honorable Teina Bishop, Government MP, Businessman and Fuel Distributor Long Tuiravakai, Aitutaki Power Supply

Chamber of Commerce Teresa Trott, President

41 Review of Fuel Distribution and Pricing System Cook Islands May 2005

Attachment F Agenda – Meeting with Cook Islands Chamber of Commerce

GENERAL MEETING CALLED TO DISCUSS THE REVIEW OF FUEL DISTRIBUTION & PRICING SYSTEMS IN THE COOK ISLANDS TUESDAY 07TH FEBRUARY 2005 STAIRCASE RESTAURANT & BAR 4.30PM

AGENDA

1. WELCOME BY CHAMBER OF COMMERCE PRESIDENT

2. INTRODUCTION/OVERVIEW – Mr. Kevin Carr, MFEM Finance Secretary and Chairman of Fuel Pricing Committee - Overview of current situation - Why the Cook Islands needs the TA

3. GUEST SPEAKER – Mr. Alan Bartmanovich - Work in progress and findings to date - Possible models that may be considered for the Cook Islands

4. QUESTION & ANSWER SESSION FOR CHAMBER MEMBERS

5. RECEIPT OF REPORT, RECOMMENDATIONS AND THE NEXT STOP FOR THE COOK ISLANDS

6. CLOSE MEETING

42