As mentioned in a recent Herald article, and discussed by Matt in this post, Z Energy expects petrol use in New Zealand to be flat or slightly declining in the next few years. In this post, I want to go back to the source material – a Z presentation which they gave at their 2014 Investor Day. There’s quite a bit of interesting stuff in there.

Firstly, Z Energy has a number of “strategic presumptions” which it sees as “the foundations of their core business”. These presumptions are listed below, and I’ve highlighted some of the interesting ones from our perspective.

  • Oil will remain the predominant transport fuel for New Zealand and the world
  • Global oil markets will ensure continuity of supply to New Zealand and oil price volatility will increase
  • New Zealand will remain an import pricing market
  • New Zealand transport fuel demand will remain flat to declining
  • Fuel standards will not be a key differentiator
  • We expect no major or extreme new regulatory shifts impacting our industry
  • Shipping freight rates remain flat due to increased global capacity
  • NZ consumers are value seekers and respond favourably to offers and Kiwi ownership
  • NZD:USD will revert back to long term averages ─ 0.70 by 2018
  • NZR refining margins will remain flat in the short term before recovering
  • Rational competitive behaviour will continue

Looking at these in a little more detail:

Oil will remain the predominant transport fuel for New Zealand and the world

No arguments here – it’ll be at least a couple of decades before electric vehicles really start to make inroads into world vehicle fleets. LPG and other fuels could have a growing niche, as could biofuels, and electrified public transport could become more important. But oil will remain the big one.

NZD:USD will revert back to long term averages ─ 0.70 by 2018

For the last few years, the NZ dollar has been quite strong against the US dollar, compared with historical levels. This is insulating us from petrol and diesel price rises, to some extent. Z Energy are working on the assumption that the NZ dollar’s value will drop back to a more ‘normal’ level over the next few years.

NZD $1 currently gets you about USD $0.87. If that were to fall back to $0.70, with everything else staying the same, petrol prices would rise from $2.15 to about $2.36. Not a massive difference, true – around 10% more at the pump – but enough to have a small dampening effect on demand. The main impact would be to our current account deficit, but that’s a story for another day.

New Zealand transport fuel demand will remain flat to declining

In the following slide, Z point out that the fuel efficiency of cars could very well improve over time, as I’ve written here. They also note that the top selling cars today tend to be smaller than those of the mid-2000s. Of course, the future of the Commodore and Falcon seems rather in doubt anyway, given that Holden and Ford are winding down their manufacturing operations in Australia.

Slide 15

Z also shows what they expect to happen to fuel efficiency in the next slide, below. I’m assuming it refers to fuel efficiency for new cars entering the fleet, as the total fleet won’t improve that quickly. More interestingly, though, they expect light vehicle travel per person to remain pretty much flat over the next five years. It won’t even recover to pre-GFC levels, let alone the peaks of the mid-2000s.

Slide 16

Z assume that GDP (economic output) will increase, boosting travel demand, but on the flip side, higher prices and “broadband connections” will weaken demand. The use of broadband connections is an interesting metric. Z aren’t saying that broadband directly causes people to travel less. They’re saying that changing trends in social media, online connectivity, etc – the kind of thing we talk about on the blog quite often – are meaning people tend to travel less. They’ve found that they can represent this quite well through using broadband connections as a proxy variable.

Based on their forecasts of essentially flat vehicle travel, and a vehicle fleet which is slowly getting more fuel efficient, Z come up with the following forecasts for retail fuel demand – showing it declining over the next decade. Note that they’ve shown this forecast going a bit further out than the travel ones above.Slide 17

So, an interesting release from Z Energy. As a private company in the mature (or slowly declining) industry of fuel distribution, it’s important for them to do this kind of forecasting. The industry is capital intensive, margins are slim, and the assets are often fairly long-lived – as are the liabilities, e.g. leases over petrol stations. Ultimately, the company will make investment decisions based on forecasts like the ones shown here. Forecasts which, it must be said, are a lot less bullish than the ones the NZTA are currently using for its Roads of National Significance…

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  1. This is really interesting John. I think explaining lack of travel demand due to broadband activity is missing the big picture. I believe Internet technology in particular smart phones and social media actually increases travel demand.This is resulting in the radical re-centralisation of cities (the Great Inversion) which allows people to take advantage of proximity and transport technology that doesn’t waste time.

    1. Yes and given that they haven’t understood this their forecast could actually optimistic [for their business].

      It is not unreasonable to expect every price signal to be responded to in this market and when the current petrol price quiet phase ends and the next repricing beginnings demand will take another hit.

      Thirdly, if they are right, and broadband access hits driving then don’t both of Joyce’s big infrastructure investments of this government, UFB and RoNS, undermine each other? Or one is in the right direction and the other a waste of our money. And we know which is the bigger.

      1. Using broadband penetration could be liked to what that increased Internet experience gives the population and the resulting change in behaviours. Global internet shopping rather than going o the Mall, on a local scale the consumer finds the shop that has the item they want and goes only to it, not driving to 3 or 4. Entertainment is streamed to the home, rather than driving to the venue. For business less the whole long term trend away from paper is taking freight volumes out of all sorts of areas. The introduction of the IPAD stopped the growth of print paper volumes, and it has been in decline globally ever since. Commercial printer shops are really struggling and many are closing in NZ. Thats a lot of heavy freight that has gone.

        Not so much working from home, but reducing the need for inter branch travelling etc Video conferencing is having a significant effect on the business travel volumes.

    2. The “explaining lack of travel demand due to broadband activity” is a modelling technique, a kind of proxy variable which helps their model give better predictions. Some of the trends we talk about on this blog, and which Z are trying to capture in their model, are a bit tricky to nail down in quantitative data, but they’ve found that broadband connections are correlated with them. Which I think is very interesting.

      1. The most interesting proxy I have read about is using latitude as a proxy for corruption. The studies have sought to test the relationship between low GDP and corruption but the problem is which one causes the other or are the mutual. Corruption was shown to correlate inverse to distance from the equator so it was used as an instrument variable or proxy. That assumption caused more debate than the original idea.

  2. If this is the long-term outlook (and there is no reason to believe it is not), then diversifying their business towards a “service station” rather than a “petrol station” is their only chance of long-term profit. Both BP and Z have made major steps in this direction.

    I’m interested to note that increased numbers of hybrid petrol-electric and fully electric vehicles haven’t been factored into their equations – “meaningful penetration of electric vehicles is still 10-20 years away”. This could change relatively rapidly as major manufacturers build to scale, home generated solar decreases in price, and as future governments change policy settings. Whether this is before 2020, 2025, or 2030 is an open question.

    1. ‘We expect no major or extreme new regulatory shifts impacting our industry’

      They could be well wrong here. A carbon tax is not at all unlikely once the deniers leave office..

      1. And equally as important is the “Black Swan Effect” whereby a breakthrough technology seemingly comes out of left field and renders their assumptions completely wrong.

        e.g. A major break through in Vehicle or Energy storage (Battery) technology (whether introduced with a Carbon Tax or not) could change the penetration of Electric vehicles pretty quickly within say 5 years.

        Other (somewhat more likely) issues:
        A major conflict in the Middle East (or former Eastern Bloc countries – seems more likely), or a major famine in the west,
        Prolonged drought in the US
        Sharper than planned ramp down of Shale-Oil wells,
        A major oil pipeline or transportation disaster in the US or Canada.

        Any combination of these could also change the picture quickly.

      2. I think the critical thing is – here is a very large “establishment” business of the sort that would fit a certain profile of corporate that might be expected to sing from the current government’s hymn book….

        Which according to the government is that; road traffic will “drive” the economy strongly into the future to pay off roading investments. Z Energy call flattening road traffic demand an effect caused by “broadband connections”. We know that is a simplistic term that actually represents a whole heap of trends encompassing new urbanism. I think it is great that Z Energy have been able to use broadband connections as a metric to represent these wider trends.

        The fact that road traffic is looking very flat should be making a number of sectors in the economy take notice – including the reserve bank, treasury and the banking sector as a whole.

        The RONS will have to be borrowed for, either directly by the government, or indirectly by the government through PPP means. This means that ultimately those loans have to be paid back. Yet Z Energy’s forecasting seems to indicate that there is no way that road traffic alone will be able to support the loans. Which can only mean that the larger New Zealand economy as a whole is going to have to act as a “receiver” to take over the debt in future – around $14 billion dollars worth. Alarm bells ringing anyone…..?

  3. To put it more bluntly, right now the world is not taking climate change seriously. At a certain point in the future, we will.

    Every week, the amount of carbon in the atmosphere is significantly higher than the year before. Worryingly, the rate of increase continues to increase. Addressing the world’s transport is a huge part of addressing this problem.

  4. Insurance companies are taking climate change seriously. That’s the litmus test – they actually have to deal with its effects. Same deal with Z – profits speak louder than ideology.

  5. There are some very big assumptions and some very big errors in Z’s predictions.
    1. Oil price volatility is actually likely to decrease (Wars, Famine, economic events excluded) – it is half this year of what it was in 2013.
    2. The Global and Domestic oil industry are likely to see more regulation that effects price – the world is becoming more carbon sensitive and this has a cost implication on production. As an example the European Diesel futures spec tightens from 0.1 to 0.001 sulphur in 2015
    3.Shipping is going to get more expensive. More European refineries are closing and more freight is required to move oil exports from the US to markets. An increase in freight costs between the US and Europe will have a knock on effect for freight for oil shipments to NZ.
    4. Refinery margins are likely to decline. Cheaper oil products (diesel and petrol) as a result of the Shale boom will erode refining margins.
    The problem for Z is that it is no longer a global oil company. It only see’s a very small picture and therefore quite out of touch with how the rest of the industry predicts the future.

    1. Oil price volatility is largely driven by the herd mentality of investors switching from one flavour of the month investment to the next. All commodities that allow futures trading suffer from this and the biggest downside is that the interference delays investment decisions by genuine longterm investors so that decisions to upscale or downsize happen late and exacerbate the normal lags that can occur in match supply to demand or in facilitating demand shift to alternative fuels or technologies.

      1. Kevyn oil is no ordinary commodity. Substitution is extremely difficult, it takes profound effort by individuals [changing where they live and work for example], or society [reducing auto-dependancy] to ‘facilitate demand or switch to alternative fuels or technologies’. And we aren’t doing it. There is no policy. The Ostrich is the best image for the policies our government has for both liquid fuels security and affordability, and carbon emissions.

        For three years oil price has been remarkably non-volatile; stuck on the USD ~100 shelf. Unable to rise because customers can’t afford it any higher and unable to fall because it’s already too low to bring on the next marginal barrel. A return to volatility is likely to mean a return to it breaking out towards 150 then crashing economies again like in 2008, killing demand so then falling back down. The only alternative is a slow but steady advance, only checked by OECD economies shedding demand. And we have to ask how possible is this? Have we been doing anything [other than running some electric trains in Auckland] to reduce our addiction to this resource? No.

  6. Z are really missing the boat here – They should be setting up networks of fast charging stations across the country for electric cars like Tesla is doing across the US. Other refueling will be done at home (with your plug in electric car), so urban service stations are set to wither.

    1. Petrol Sations are the corner dairies of the 21st century – but like their forebears they will end selling whatever moves to make their money.

      Selling coffees, drinks and pies while people do electric car top-ups may be to low a revenue stream.
      Who knows they may all end up selling booze and (re)legalised legal highs in the near future to stay relevant….

    2. Perhaps they could provide a bed and breakfast service for people charging their cars. The Tesla site indicates it takes a bout a minute of charge per mile using their fastest option. Do fifty miles and you will be sitting there for most of an hour.

  7. Okay so this is going to end well. Remember the Subprime mortgage crisis?
    Some of you may have noticed a strong bounce in new auto sales, both here and in the US. I assumed it was just catch up after years of deferred upgrades but it turns out it much weaker even than that, according to the Financial Times, prepare yourself for the Subprime auto loan crisis:

    “Subprime auto kind of moved up the food chain of asset classes in terms of perceived reliability,” says Marty Attea at Barclays. “Even bad credits pay their cars before mortgages – no one ever thought that before the crisis.”’


    “Automakers “need to keep pumping products to keep the factories humming”, Gagan Singh, chief investment officer of PNC Financial Services, said at a recent securitisation industry conference in Las Vegas. “One way they’ve traditionally done that is to start providing financing for people who really can’t afford a car and that’s where you have the troubles in subprime auto, and subprime anything.”

    Okay so these people can’t really afford that car loan in an economy with effectively zero interest rates and petrol price that’s been parked on a shelf for three years, getting ready to break out. So when that repricing occurs, what are going to choose to pay for; the car loan or the gas in the tank?

    And of course cars are not appreciating assets- daft to borrow to buy them even in good times. This looks like a dead cat bounce for Detroit [US big auto companies], gonna be a lot of cheap repossession sales, and a crash in new car sales.

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