Shell Autogas Pricing

The following sections explain the various components of autogas supply and prices, why they move over time and from day-to-day.

What makes up the price of Shell AutoGas?

What drives autogas pump prices?

Country pricing

Why use international prices as a basis for Australian prices?

Questions and Answers on Pricing

Price Breakdown

The chart below splits the price of autogas into three main components:

• Product and delivery cost
• GST
• Shell and service station dealer's gross margin

Note: Shell and the Dealer share is NOT profit. It includes all the cost of getting autogas from the importer, producer or refiners terminal to the consumer including the cost of operating LPG terminals, maintaining autogas equipment, administration and marketing costs, and the costs of running service stations (such as rent, electricity, labour).

Product and Delivery Cost

Product and delivery cost is the cost of purchasing and transporting Liquefied Petroleum Gas (LPG) to service stations for use as autogas. The cost of the auto LPG product accounts for over 90% of the delivered autogas cost. Shell purchases LPG from a combination of sources including the production facilities of large oil and gas producers, LPG import terminals and oil refineries.

The price that Shell pays LPG suppliers varies from location to location but in all cases moves monthly with the international LPG price and the Australian and US Dollar exchange rate.

Goods and Services Tax (GST)

The retail price of autogas includes 10% GST. Before the introduction of the GST, there were no taxes on LPG.

Shell and service station dealer's gross margin

The total amount shared between Shell and the service station dealer (i.e. the gross margin) must cover:

Price Movements

Autogas pump prices are driven by:

• Changes in the delivered cost of autogas
• Competition between individual service station sites and between LPG marketers

Every month, average retail prices for autogas follow the delivered cost of autogas – which closely follows the international price for LPG

...but on a daily basis, prices can often fluctuate rapidly with competition between sites – especially in metropolitan areas.

Why prices fluctuate from day to day

Autogas prices in many large cities often move up and down so much and so quickly because of intense competition. Service station operators set their own prices and discount their prices to attract more customers. One station may reduce its price, lowering profits but hoping to increase sales (not only of autogas but other retail goods). The service station's competitors closely monitor each other’s prices and usually respond by similarly reducing their prices, or discounting even further to attract more customers.

To compete in this downward price spiral, station operators request price support from their wholesale supplier (i.e. the distributor, LPG or Oil Company) when their margins are squeezed to unprofitable levels. In periods of heavy discounting service stations and LPG wholesale suppliers are often selling below the delivered cost price. In this downward trend the wholesalers begin to lose money and eventually they stop providing price support to the service station operators. As a result the service station operator will generally put up their prices again, usually returning to earlier levels.

Three factors lead to higher autogas prices in the country:

Higher transport and operating costs

Delivering autogas to country service stations costs more than in metropolitan areas due to the greater distance from LPG supply sources and because autogas storage at country sites are generally smaller than for sites in metropolitan areas, as sales volumes are far lower. The greater distance travelled, greater time required to deliver and lower delivery amounts add up to increase transport cost.

In some cases, it is impractical to supply country service stations directly from city terminals. Some country service stations are supplied by local LPG distributors, rather than being directly supplied by Shell Gas. These distributors incur their own operational costs that they seek to recover in the market.

Lower Volumes

Country service stations typically sell less than half the autogas of a metropolitan service station. This means that retailers in the country require higher margins in order to remain viable. An average Victorian country site may sell 30,000 litres per month, whereas metropolitan sites generally exceed 70,000 litres each month.

Competition

The extent and nature of competition in country and city markets also helps to explain some of the differences in autogas prices. Metropolitan service stations generally operate in a more intensely competitive market than their country counterparts.

Metropolitan consumers have a much larger number of outlets to choose from. This concentration of outlets means that once price discounting commences in one location, it tends to spread throughout the metropolitan area very quickly as sites compete to increase or maintain sales volumes.

In many country towns, particularly those with little passing traffic, the potential to increase sales through discounting is limited.

LPG imports

While Australia is a net exporter of LPG, state by state it differs. Most of Australia’s LPG demand is located on the East Coast of Australia — where the majority of the population live and where imports are required to top up local supply to meet demand. These imports must be purchased on the international market at international prices.

Locally produced LPG

The majority of Australia’s LPG production comes from large oil and gas fields located at the North West Shelf, Bass Strait and in Central Australia. The producers of oil and gas from these fields have LPG export facilities and sell a large proportion of their production overseas. If prices were held artificially low in Australia (i.e., below international levels), oil and gas producers would have no incentive to supply the Australian market. Consequently oil and gas producers base their price to the domestic market on international prices.

But what about refineries?

Refineries must compete with both imported LPG and LPG produced by the large oil and gas producers on the same price basis. At refineries, LPG is made during the process in which a barrel of oil is turned into petroleum products. Because the cost of crude oil forms such a large part of the cost of producing LPG, refineries do not necessarily benefit from high LPG prices. They must purchase the crude oil that they use to produce LPG at international crude oil prices.

Question: How does the crude oil price movement affect LPG prices?

Answer: Oil effects LPG prices in two ways:

 

Supply: Oil production affects LPG production as in almost all cases LPG is produced in conjunction with crude oil and natural gas. Consequently, when crude oil production falls, so does LPG production. Demand: When the demand for oil is high relative to oil production, the price increases. This increases LPG prices (particularly in the US and Europe) as LPG is used as an alternative to other oil products with prices based upon crude oil prices.