Petroleum Products Division
The Petroleum Products Division is responsible for the purchase, transportation (import), storage, and distribution of all Petroleum Products in Nunavut. In 2 communities (Iqaluit & Cambridge Bay), the distribution and inventory management has been outsourced, and in the remaining 25 locations PPD uses local contractors to provide the required services. Head Quarters is located in Rankin Inlet, with 3 regional offices in Rankin Inlet, Cambridge Bay and Pond Inlet.
What does the Petroleum Products Division do?
The PPD is responsible for performing the following functions:
- Annual bulk fuel resupply – The GN currently awards contracts for bulk purchasing and transportation of fuel products to communities.
- Bulk fuel storage – The GN owns all the bulk fuel storage tanks and dispensing facilities in each of the 27 communities served by PPD except Cambridge Bay, where the facilities are privately owned.
- Local delivery contracts – The PPD awards and administers contracts with local businesses in each of the 27 communities to deliver fuel products to customers.
- Overhead and administration – The PPD is responsible for all functions related to overhead and administration including: managing local delivery contracts; training local contractors; managing accounts (invoicing and accounts receivable); designing and maintaining data systems; conducting safety inspections; and controlling product quality and inventory.
- Policy and Planning – Although new operational strategies and policies require approval by Cabinet or the Financial Management Board (FMB) prior to implementation, the PPD is responsible for monitoring and anticipating issues and events that may impact on the effectiveness of its operation. PPD is responsible to plan strategies and develop policies, for GN approval, that will mitigate negative events or ensure better value to the GN and customers.
What products does PPD provide?
The PPD provides four primary fuel products as follows:
Gasoline is used primarily as a fuel for light vehicles snowmobiles and outboard engines.
Jet A-1 is certified for aircraft used and is supplied for turbine aircraft. This product may also be used for diesel and hearting fuel purposes, thereby increasing flexibility in inventory management.
Aviation gasoline is provided in only four communities throughout Nunavut. Most air traffic requires “Jet A-1” and there is minimal demand for Avgas. Due to the low demand for this product, there are no plans to extend the supply of aviation gasoline.
Diesel fuel which is the fuel most consumed in Nunavut has multiple uses. It is used for heating, motive (heavy equipment), aviation and production of electricity.
In addition to the four primary products, Naphtha is also supplied by the PPD. Because Naphtha is supplied either in drums or 3.78 litre containers, it is labour intensive and is highly subsidized by other fuel products to keep the price affordable.
It is useful to look at the current PPD pricing structure in comparison to other jurisdictions. There are so many variables that it is difficult to compare diesel prices. However, gasoline prices are readily available and comparable.
How does the GN/PPD currently purchase fuel?
PPD purchases the fuel for the Kitikmeot region from Imperial Oil Limited in Edmonton in late June and early July, which is sent by rail car to Hay River for furtherance by the Northern Transportation Company Limited by barge to Kitikmeot communities in August and September. PPD buys the fuel when the rail cars are unloaded into the NTCL barges.
How does GN set fuel prices?
The Financial Management Board has the authority to set retail prices in the communities served by PPD.
The retail price of fuel is based on the following cost components:
- Actual product cost;
- Actual transportation cost;
- Commissions for local fuel sales, dispensing and delivery services;
- Operations and maintenance expenses;
- Product evaporation/shrinkage; and
- Taxes (where applicable).
The sum of these components determines the base cost of fuel and is used to set the retail price in each community. In some communities the retail price is lower than the actual costs of providing the service. The difference is the level of subsidization that occurs between communities and fuel products. The intention is to set retail prices that are a fair value for the products and services in a particular community.
What is the Petroleum Products Revolving Fund (PPRF)?
PPD operates under the Petroleum Products Revolving Fund Act. The Act sets up the mechanism to purchase, transport, store, distribute, sell and supply refined petroleum products to residents in communities of Nunavut in a safe, economical, efficient and reliable basis.
Unlike most government operations, the expense of these activities is intended to be offset by revenues from the sale of the product. Thus, a financial mechanism is required to allow the PPD’s operating costs to be financed through the Petroleum Products Revolving Fund, which provides the financial resources to purchase and distribute the fuel consumed annually in Nunavut communities. The Revolving Fund operates similar to a commercial line of credit that is used by the private sector to finance account receivable and inventory.
The Fund provides working capital advances to finance inventory, accounts receivable, operating expenses and applicable taxes. The authorized limit of the Fund, which is the maximum amount by which the assets may exceed the liabilities, is $110 million. PPD is required by the PPRF Act to recover the advances from the Revolving Fund through retail sales.
Based on the 2005-06 estimated annual requirements the Petroleum Products Revolving Fund limit of $110 million will be inadequate to allow PPD to purchase the annual community consumption requirements for 2006-07. Thus, in order for PPD to purchase the 2006-07 annual requirements, the PPRF limit will need to be increased in 2006-07 by at least $20 million.
The Petroleum Products Revolving Fund Act requires the PPRF to operate on a “break-even” basis. However, because of fluctuations in the profit and loss, the Petroleum Products Stabilization Fund was established so that the price of fuel did not have to be revised each year to accommodate the variances. The limit of the Petroleum Products Stabilization fund is ± $5.0 million, after which an appropriation is required. The Stabilization Fund accumulates the profits/losses in the PPRF. It is similar to the Retain Earning Account recorded in the financial statements used in the private sector.
What are the cost pressures on the PPRF?
The price of worldwide fuel is affected by supply and demand on world markets. In the past two to three years fuel prices have experienced extreme volatility as a result of political instability, terrorism and surging demand from countries such as China and India.
The average price of crude in 2003 was $26 U.S. a barrel. Crude prices have steadily increased, to an average of $40 U.S. per barrel in 2004 and to $60 U.S. per barrel in 2005. Due to hurricanes in the Gulf of Mexico and the continuation of the armed conflict in the Middle East the price of crude soared to over $70 a barrel in September, 2005.
The increase in both volume and cost of fuel over the past three years is shown in the table below. Note that the increase in diesel includes the change for PPD to purchase all fuel supplies for QEC which happened during that period.
What can be done to reduce cost pressures?
To avoid the uncertainty of volatile pricing caused by world market supply fluctuations, the GN can attempt to mitigate the higher cost by implementing a “hedging strategy”. The hedge allows the buyer to predetermine a market price he wants to pay for his fuel by buying financial instruments in the “futures” or “options” markets on the New York Mercantile Exchange (NYMEX)
There are numerous options available in the market place, and one needs the guidance of experienced market traders to tailor-make an appropriate option that suits a client’s financial standing. Basically we must attempt to predict what the cost of fuel will be on the market place during the GN delivery period of sealift re-supply July - October each year. We then take a risk by buying up front futures/options at the selected price, and when the delivery time arrives sell them at a gain, loss or breakeven value.
PPD recently completed a Request for Proposal call and has awarded a contract to a consultant for the development of recommendations on a strategy for alternative options to forward purchase (hedge) fuel for the GN to consider. The consultant will assist the GN in developing policies, procedures and guidelines for establishing a Risk Management Policy that will allow for more stable fuel pricing over an extended period of time.
This is a long term strategy that may take more than six months to put in place. It is hoped that it will help moderate the cost of fuel and avoid further dramatic price increases. Because of the risk involved, the strategy will be undertaken carefully under the guidance of experts and with full cooperation of Finance. It will likely require changes to the Financial Administration Act and will have to be submitted to both Cabinet and the Financial Management Board for review and approval.
Contact Information Petroleum Products Division
P.O. Box 590
Rankin Inlet, NU