Petroleum Refining and Marketing in Australia-Changes Ahead


Current Issues Brief 11 1999-2000

Mike Roarty
Science, Technology, Environment and Resources Group
23 November 1999

Contents

Major Issues Introduction Petroleum Refining

Petroleum Product Imports

Fuel Prices

Retail Petrol Pump Price Components
Taxation and Petroleum Product Excise

Future Investment in Australia's Refineries

Fuel Standards and Investment
Rationalisation and Merger Proposals

Petroleum Retailing

Company/agent Operated Sites and Franchisees
Variously Owned Sites-Distributor Supplied
Dealer Owned Sites-Supplied by Oil Majors
Independent Chains
Supermarkets
Retailing Trends

The Deregulation Process
Conclusion
Endnotes

List of Tables

Table 1: Australian Refinery Capacities (barrels per day)
Table 2: Retail Outlet Ownership and Management

List of Figures

Figure 1: Location of Australia's Refineries and Petroleum Product Terminals
Figure 2: World Crude Oil and Petrol Prices
Figure 3: Breakdown of Indicative Petrol Price
Figure 4: Taxation and Petroleum Product Excise

Acronyms

ACCC

Australian Competition and Consumer Commission

ASSA

Australian Service Station Association

AIP

Australian Institute of Petroleum

CPI

Consumer Price Index

LPG

Liquefied Petroleum Gas

LRP

Lead Replacement Petrol

MTAA

Motor Traders Association of Australia

PRRT

Petroleum Resource Rent Tax

Major Issues

The petroleum refining and marketing industries with their diverse and widely dispersed range of facilities have provided Australia with, in the main, secure and reliable fuel supplies. These industries account for around one per cent of gross domestic product of the overall Australian economy.

As with many other industries, the petroleum refining and retailing markets have been subjected to significant restructuring. This has resulted to date in the abandonment of the setting of a maximum endorsed wholesale price for automotive gasoline (petrol) and automotive diesel oil (diesel) by the Australian Competition and Consumer Commission. It has also led to open access to bulk terminals owned by the refiners, allowing wholesale bulk purchase of refined product by interested parties on commercial terms.

Despite an apparent stable appearance of present arrangements, it is almost certain that significant changes are likely to occur in the foreseeable future to the petroleum refining and marketing industries because of a number of emerging factors including:

  • present low levels of profitability of Australia's refineries deemed by industry commentators as unsustainable, brought about by competition from imports, aging infrastructure and small size
  • the necessity for substantial capital expenditure for refinery upgrades to accommodate production of cleaner, lower sulphur fuels due to increasingly tight vehicular emission standards. If all refineries were upgraded to produce the cleaner fuels, an investment of the order of $1 billion would be required
  • the stalling of the deregulatory process, particularly the Government's decision in September 1999 not to proceed with the repeal of the Petroleum Retailing Marketing Franchise Act 1980 and Petroleum Retail Marketing Sites Act 1980 (Franchise Act and Sites Act) and the establishment of a mandatory Oilcode. The Sites Act disallows any rearrangement of company and franchisee retailing sites
  • continuing fierce competition from independent petroleum product retailers who now account for approximately 25 per cent of the retail petrol and diesel markets. The independent retailers are not governed by the Franchise Act and Sites Act
  • the apparent regulatory hurdles to further rationalisation and merging of current refining and marketing operations and arrangements between the four majors, Caltex, BP, Mobil and Shell.

Australia's refineries presently supply around 95 per cent of petroleum product required by the Australian retail market. The remaining five per cent is imported and purchased largely by the growing number of independent retailers. The independents have introduced a new level of competition into the petrol and diesel retailing markets and use the ready availability of imported product as a bargaining tool to secure bulk supplies from the Australian refiners. An oversupply of petroleum product has developed in the Asia Pacific region as a result of the downturn in the Asian economies coupled with either capacity expansions or new refineries being brought on stream in a number of Asian countries.

Petrol prices, despite recent rises, still remain relatively low in comparison to other OECD countries and in real terms have actually declined since the 1980s. Petrol price differentials in metropolitan and country areas still remain a major concern and the large difference in most cases cannot be solely attributed to transportation costs. There is a lack of transparency between the petrol pricing components in country and regional areas and in many instances it is difficult if not impossible to see which component (refined petroleum product, distribution or retail) margins are being adjusted.

Federal government petroleum product excise is by far the largest component of the petrol and diesel retail pump price (around 60 per cent) and this component is automatically increased every six months in line with the consumer price index. Petroleum product excise has risen dramatically over the period 1980-1981 to 1999-2000 and is now a major component of the Commonwealth Budget. Commonwealth petroleum taxes have switched from the wellheads in the oilfields to the petrol pump or point of sale.

Recent price increases for petroleum products (petrol, diesel and liquefied petroleum gas (LPG), all popularly attributed to profiteering by the major refiner/marketers, have been largely due to the upward movements in world crude oil prices. Australian upstream crude oil producers together with world crude oil producers have been the main beneficiaries of the upward movement in oil prices. The Australian crude oil market was fully deregulated in 1988 and Australian crude prices now reflect world market prices.

As the crude oil price only comprises some 25 per cent or so of the retail petrol price at the pump, the movement in crude oil price is much more marked than the movement in the retail petrol price. For example, from March 1999 to September 1999, the quarterly average crude oil price increased 98 per cent from $US10.93/bbl to $US21.63/bbl compared to petrol prices which have increased by 13 per cent from 67.1 c/litre to 76.1 c/litre.

Petroleum retailing is changing rapidly with the appearance of retail convenience stores and large fully serviced fresh food supermarkets as adjuncts to many petrol station outlets leading to substantial income generated from non-fuel sales. The trend seems to be combining supermarkets with petrol retailing.

Introduction

The aim of this paper is to outline some current issues pertaining to the Australian petroleum refining and marketing industries and to provide commentary and insight into future developments.

The paper outlines Australia's refinery industry structure and the role of petroleum product imports and provides some analysis of fuel prices and their relationship with world crude oil prices. Other topics include fuel price components and taxation, petroleum product retailing arrangements and retailing trends, the extent of new investment in refineries, developments in emission standards for vehicular transport and the deregulatory process to date.

One of the foremost issues is whether the current refiners will undertake the substantial capital expenditure required to upgrade refinery infrastructure capable of producing clean, low-sulphur fuels. Such fuels are necessary to accommodate increasingly stringent exhaust emission standards in vehicular transport. These decisions must be made against a backdrop of increasing competition from independents in the retailing sector and persistent low margins and poor profitability in the domestic petroleum refining sector and the ability to meet requirements by imports.

Whilst present refiners/marketers have supplied Australia with, in the main, a secure and reliable domestic supply, many changes are sweeping the industry. These changes are predicted to significantly alter present arrangements in the foreseeable future.

Petroleum Refining

Australia's downstream oil industry has been built on a platform of refineries, producing fuel in Australia to supply a nationwide network of fuel distribution and retailing. This system has to date ensured security of supply of fuel and other petroleum products to all sectors of the economy and the community.(1) Local refineries make a major economic contribution to the Australian economy. For example, they directly employ some 3000 people, account for between $800 and $1000 million of annual expenditure and between $200 and $400 million of yearly capital investment. In addition local refineries provide a reliable supply of local petroleum products which otherwise would need to be imported and as such contribute positively to the country's foreign trade balance.(2)

Petroleum refineries are a complex array of petrochemical units that separate crude oil feedstock by various means (distillation, catalytic cracking, alkylation and polymerisation) into a range of petroleum products including petrol and diesel. The units are connected with an extensive array of piping (there are over 7.5 kilometres of pipes at the Kurnell refinery in Sydney); overall management of the refinery is run from centralised control centres that are now invariably computer controlled.

Since 1980, the number of refiner/marketers in Australia has fallen from nine to four and two refineries have closed. Employment numbers in the industry have almost halved since the late 1980s and there have been major reductions in the numbers of distributors and service stations.(3)

Australia currently has eight main refineries owned by the four majors (Caltex, BP, Mobil and Shell) located in the capital cities-Sydney, Melbourne, Adelaide, Perth and Brisbane. These companies also have either crude oil or refined product terminals at most Australian ports (see Figure 1). The total capacity of the Australian refineries is around 860 000 barrels of oil per day. The capacities of the individual refineries are also detailed in Table 1.

Table 1: Australian Refinery Capacities (barrels per day)

Company

Location

Capacity

Caltex/Ampol

Lytton, Qld

100 000

 

Kurnell, NSW

116 000

BP/Amoco

Kwinana, WA

138 500

 

Bulwer Island, Qld

86 500

Mobil

Altona, Vic

135 000

 

Port Stanvac, SA

78 000

Shell

Geelong, Vic

119 000

 

Clyde, NSW

86 000

Source: AIP

In addition to the major refineries, there is a small refinery located at Eromanga in Qld owned by Inland Oil Refiners with a rated capacity of 1 500 barrels a day (b/d).

In 1998-99, Australian refineries produced in total 42 943.7 megalitres (ML) of marketable products of which 18 705.3 ML was petrol and 12 296.7 ML was diesel.

Figure 1: Location of Australia's Refineries and Petroleum Product Terminals

Figure 1: Location of Australia's Refineries and Petroleum Product Terminals

Australia's refineries are quite dated and small, especially in comparison to new capacity being brought on line in Asia. Australia's oldest refinery, at Clyde in NSW, was built in 1928. Most of the others were built in the 1950s and 1960s, the two newest being Lytton and Bulwer Island in Qld, being built in 1965. Major capital investment programs undertaken at most refineries in the early 1990s were largely related to the production of unleaded petrol (total investment exceeding some $2.0 billion). The most recent major investment undertaken was that at the Bulwer Island refinery which belongs to BP/Amoco. Some $450 million was committed to the refinery upgrade termed the Clean Fuels Project where novel use of technology was utilised to cut sulphur content and produce high quality fuels from lower cost crude oil and residues. BP's stated aim is to position itself to produce fuels to cater for markets where fuel emission standards are increasingly being tightened as well as produce a different mix of retail products to satisfy the company's projected demand scenario for growing markets such as that for jet fuel. An essential part of the upgrade was the installation of a hydrocracker (a unit that converts heavy oil feedstocks into high quality products), an Australian first, at a cost of around $200 million. BP has also invested heavily at its Kwinana refinery near Perth spending $200 million in 1999 to move to low benzene, lead replacement petrol. But it will still need another $100 million to implement changes to meet ultra low sulphur diesel standards. (4)

Australian refineries are presently largely configured to refine light crude, such as that produced from Bass Strait. Heavy imported crude from areas such as the Middle East is required in part to produce the heavier range of petroleum products such as lubrication oils. These products are refined in what are termed lube units. To produce the product mix required by the Australian market from light crudes, Australian refineries have needed to be relatively complex and refining involves a high degree of secondary processing. To accommodate changes aimed at improving the ability to process heavy Middle Eastern crude as the availability of light Australian crude declines and to produce cleaner lower sulphur fuels, such as has occurred at Bulwer Island, major capital investment programs will need to be undertaken.

Petroleum Product Imports

Imports presently account for around five per cent of the petroleum refined product market. However, the major independent chains and supermarkets account for around 25 per cent of retail sales. The independents are able to source supply from either imports or domestic refineries. Because of an oversupply of petroleum product in the Asia Pacific region, the independents are able to negotiate competitive terms with domestic suppliers for fuel supplies. The oversupply is the result of the downturn in the Asian economies and either capacity expansions or new refineries being brought on stream. For example, Caltex has greatly expanded capacity at its Yoecheon refinery (600 000 b/d) in Korea and a new refinery is due to come on stream in the near future in Taiwan, with a capacity of more than half of Australia's total capacity.(5) By and large, most refineries in the Asian region are much larger than the ones in Australia and have better economies of scale. Additionally, many also have coexisting petrochemical plants that boost economic viability.

Much capacity in Asia and the Pacific has been targeted to produce diesel to satisfy Asian markets where diesel vehicles dominate the transport sector. As such, petrol output is almost a by-product and available for export to countries in the region such as Australia.

Independent import terminals are located in NSW, Victoria, Queensland, and Western Australia in addition to terminals operated by the oil majors at all of the major Australian ports. The independent terminals are used to unload imported product prior to distribution and sale.

Fuel Prices

Recent price increases for petroleum products (petrol, diesel and LPG), all popularly attributed to profiteering by the major refiner/marketers,(6) have largely been due to the upward movement in world crude prices. Crude oil is the basic feedstock for the manufacture of refined petroleum product (including petrol and diesel) and its price has a major bearing on petrol pump prices. The Australian crude oil market was fully deregulated in 1988 and Australian crude prices now reflect world market prices. It is the crude oil producers who have been the major beneficiary of recent price increases.

Both crude oil and petrol prices have increased substantially in the last six months. These changes are illustrated in Figure 2 which shows movements in the quarterly average world crude oil price and retail petrol prices in Australia since early 1995. World market prices of crude oil have increased dramatically over the last six months as a result of the Organisation of Petroleum and Exporting Countries (OPEC) and a number of other major world producers reducing production of crude oil after an extended period of low prices. Since March 1999, the spot price of crude oil has increased from around US$10 a barrel (bbl) to around US$23 a barrel.

Figure 2: World Crude Oil and Petrol Prices

Figure 2: World Crude Oil and Petrol Prices

Source: Australian Institute of Petroleum (AIP) and ABARE. Note: The crude oil prices shown are the world trade weighted average price compiled by the US Department of Energy. The petrol prices are the Australian capital city averages (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin and Canberra) for unleaded petrol.

It is evident from the graph that there is only a broad correlation between the world crude oil price and the retail petrol price. This can be explained by the fact that there are a number of components that make up the final retail pump price. The crude feedstock price accounts only for between 15 and 25 per cent of the retail pump price (see Retail petrol price components). Both crude oil and petrol prices trended upwards from March 1995 to December 1996, although there was considerably more volatility in the average retail petrol price. Furthermore, both prices trended downwards from March 1997 to March 1999. However, the decline in the average retail petrol price from 75 c/litre to 67.1 c/litre was only of the order of eleven per cent whereas the decline in world crude oil prices from US$20.69/(barrel) bbl to US$10.93/bbl was of the order of 47 per cent. In a similar vein, both crude oil prices and petrol prices have trended upwards from March 1999 to September 1999 and again the percentage changes are heavily skewed towards a substantial change in the crude oil price compared with a smaller percentage change in retail petrol prices. In this period, crude oil prices have increased 98 per cent from $US10.93/bbl to $US21.63/bbl compared to petrol prices which have increased by 13 per cent from 67.1 c/litre to 76.1 c/litre.

The main producers of Australian crude are the BHP/Esso joint venture in Bass Strait, the Woodside consortium on the North West Shelf in Western Australia and the Santos consortium in the Cooper/Eromanga Basin in northeast South Australia. These companies have been the main beneficiaries in Australia of higher world crude oil prices. Some benefit will flow to government in the form of taxes. Australia is around 80 per cent self-sufficient in crude oil, although this is expected to increase to a high of 99 per cent in 1999 because of a return to full production in Bass Strait and increased output from the North West Shelf. This high level of self-sufficiency, however, is expected to gradually drop away to around 62 per cent by 2007.(7)

Retail Petrol Pump Price Components

The major components of the retail petrol price are federal government petroleum product excise, crude oil feedstock prices, and refining, distribution and marketing profit margins. Crude oil feedstock is priced on the world market. Its price in Australia is also affected by the Australian/US dollar exchange rate as world prices are denominated in US dollars. Depreciation of the Australian dollar against the US dollar will increase local prices. A report published in 1997 established the breakdown of the indicative retail prices as outlined in Figure 3.(8) This study found the combined return to the refiner, distributor and retailer to be only 15 per cent of the retail pump price.

Figure 3: Breakdown of Indicative Petrol Price

Figure 3: Breakdown of Indicative Petrol Price

Source: ACIL Economics

Taxation and Petroleum Product Excise

Taxation comprises some 60 per cent of the retail pump price. It is the only component that is totally transparent, although not readily displayed at retail petrol outlets. The government petroleum product excise tax is currently 43.485 cents per litre for both unleaded petrol and diesel. This tax is increased in February and August each year in line with the Consumer Price Index (CPI). Product excise includes a charge of 8.2 cents a litre collected on behalf of the States in place of the State franchise tax that was previously collected. Some States, notably Queensland, rebate the whole of this tax whereas other States rebate only smaller amounts and others rebate nothing, notably NSW (except for the far northern region), Western Australia and the ACT.

The trends in the taxes raised over the period from 1980-81 to 1999-00 are outlined in Figure 4. It is clear that revenue from petroleum product excises has risen dramatically over this period and is now one of the major components of the Commonwealth Budget. In marked contrast, revenue from crude oil and LPG excises (largely replaced by the Petroleum Resource Rent Tax (PRRT-an excess profits related tax) has declined significantly. It is easy to see that taxes have switched from the wellheads in the oilfields to the petrol pump or point of sale. The rationale for the switch has largely revolved around successive Australian governments' expressed intentions of encouraging the exploration for and development of Australia's oil and gas resources. Governments have relied heavily on the relative unresponsiveness of petrol and diesel demand to changes in prices to continue to raise taxes at the petrol pump.

Figure 4: Taxation and Petroleum Product Excise

Figure 4: Taxation and Petroleum Product Excise

Source: Commonwealth budget papers, Note: The 1998-99 and 1999-00 figures include allowances for rebates under the Diesel Fuel Rebate Scheme to make figures comparable with previous years.

Future Investment in Australia's Refineries

Profitability of the Australian refiner/marketers has been poor in recent times, and according to many commentators, well below the risk-free rate of return on 10-year bonds. Australia's oil refiners/marketers have publicly stated that such low levels of earnings are unsustainable so major changes will need to occur.

There is a misconception that because the same companies undertake crude oil production and refining, Australia's refining and retailing industries must be reaping the benefits because of the recent surge in world crude oil price. However, there is only a very low degree of vertical integration in Australia from exploration and development of crude oil through to petroleum refining (see Australia's main crude oil producers in the section Fuel Prices on page 6). Whilst Australia's oil refiner/marketers are largely owned by world majors (Caltex, BP, Shell and Mobil), there has been a worldwide separation of business into both upstream and downstream entities due to the increasing forces of globalisation and each entity must operate profitably within its own market environment. Caltex Australia Ltd, unlike the other three refiner/marketers, which are foreign owned, is 50 per cent owned by Australian public shareholders. The BHP/Esso joint venture, the Woodside consortium and the Santos consortium (see page 6) dominate the upstream sector in Australia. Shell and BP are part of the Woodside consortium although these holdings are separate from their refining and marketing interests in Australia. Refiners buy crude oil at prevailing world prices even though it is dominantly produced in Australia.

Fuel Standards and Investment

Apart from Bulwer Island, Australia's refinery industry would require major investment to cater for the production of higher quality and cleaner fuels. This is especially so for diesel where sulphur content standards are anticipated (see below) to reduce from the present standard of 5000 parts per million (ppm) to 50 ppm by 2006 (although most refineries are now producing diesel to around 1300 ppm sulphur). For diesel, this is a 100-fold reduction in the sulphur standard and also well under the present 500 ppm US and European standards.

The move will bring Australia's diesel fuel specifications into line with standards to apply in Europe from 2005. Changes in petrol standards are also being introduced to coincide with the adoption of Euro3 petrol vehicle emissions standards in 2005-06. This will necessitate further reduction in sulphur levels in petrol and the production of higher-octane fuel. The introduction of tighter fuel standards anticipates in part the outcome of the Downstream Petroleum Products Action Agenda, commissioned by the Federal Government, which is expected to report towards the end of 1999. As an aside to the above developments, most refineries are expected to curtail and terminate the production of leaded fuel in the near future. BP has announced that it will be introducing Lead Replacement Petrol (LRP) at its Kwinana refinery in Perth from September 1999 and from its Bulwer Island refinery in 2000.

As an incentive to switch demand to cleaner fuels and speed the introduction of new refinery investment, differential excise treatment of ultra low sulphur diesel (50 ppm) and other diesel will be introduced from 1 January 2003 at one cent difference per litre, increasing to two cents a litre from 1 January 2004. Additionally, only ultra low sulphur diesel will be eligible under the Diesel and Alternative Fuel Grants Scheme Act 1999 from 2006 for on road vehicles.

Production of new fuels would require the Australian refineries to undertake substantial new investment. It is estimated that if all eight refineries are to produce fuel at the new standard, it is likely that new investment of $1 billion would be required.(9) A difficulty in any decisions relating to refinery closures is that plant-decommissioning costs can be of the order of $400 million.

Other problems according to the refiner/marketers is that considerable associated investment is tied up with both their company controlled sites and their retail franchisee outlets (see Petroleum Retailing). The Federal Government announcement (see section The Deregulation Process on page 12) that it will not proceed with the repeal of the Franchise Act and Sites Act means the majors will not be able to proceed with the rationalisation of their retailing sites. This, according to the majors, will hamper their competitiveness with the independent retailers.

Rationalisation and Merger Proposals

Several merger proposals have not proceeded past formal discussion with the Australian Competition and Consumer Commission (ACCC).(10) Many industry commentators maintain there are considerable economies of scale and huge benefits to be had from the linking of facilities and the pooling of skills. In August 1998, Mobil and Shell announced they had signed a memorandum of understanding on a proposal to combine their refining operations into a new joint venture to be owned equally by the two companies. The proposed venture, however did not proceed when Mobil informed Shell Australia in January 1999 that it was withdrawing from negotiations. Whilst the ACCC had not made a determination on the proposal, it was mooted that a much larger proposed worldwide merger between the oil giants Exxon and Mobil may have had a bearing on the decision. Mobil's withdrawal from the talks with Shell came at a time of its planned merger with Exxon. Esso Australia (a former subsidiary of Exxon) pulled out of marketing and retailing in Australia several years ago.

Another similar planned joint venture between Caltex and BP surfaced in December 1998. A statement announcing the talks said both companies believed efficiencies were necessary in their Australian refining businesses to fend off 'intense regional and domestic competition in refined petroleum products'. Despite no obvious progress on the merger proposal, Caltex and BP and have proceeded to merge their oil lubricant businesses.(11) The venture will combine the blending, packaging and warehousing of lubricants into an equally owned new entity, Australasian Lubricants Manufacturing Company. Caltex's Lytton refinery is just across the river from the Bulwer Island (BP's refinery in Brisbane) which enables such things as terminal sharing and rationalisation of transportation. Under the proposal, BP and Caltex will reduce the total number of blending plants from four to three. BP is to close its Spotswood blending plant in Melbourne and will take supplies from Caltex's nearby Newport operation. Caltex will retain its Brisbane plant and BP its Perth plant.

Petroleum Retailing

A number of well-defined groupings or entities undertake the retailing of petroleum products in Australia. The nature of retailing is presently highly regulated by the Franchise Act and Sites Act. However, the activities of the independents do not come under the gambit of these Acts and as a result, it is no understatement to say that the nature of petroleum product retailing in Australia is changing rapidly.

Although individual retail petroleum product figures are not publicly available, sales of petrol and diesel in 1998-99 were 18 229.7 and 12 818.4 ML respectively.

Petroleum retail ownership and management are outlined in Table 2.

Table 2: Retail Outlet Ownership and Management

Number

Per cent of total

Company/agent operated sites

373

5

Franchised sites

2497

30

Branded owner dealer sites (supply agreement)

936

11

Sites supplied by distributors of refiners/marketers

3920

47

Independent chains (Liberty, Burmah etc)

479

6

Woolworths (Supermarkets)

85

1

Total

8290

100

Source: ACIL Economics and AIP

As outlined above, there are six well-defined categories of retail outlets and these are described under the relevant headings below:

Company/agent Operated Sites and Franchisees

This category accounts for some 35 per cent of the market sites although the company owned and operated sites only occupy some five per cent of the market as specified in the Sites Act. With company operated outlets, in most cases the operator is paid a fixed commission on product sales, or in some cases the operator is a company employee. For products other than petroleum products, the operator conducts business in a similar manner to other dealers.

With franchisee operated refiner/marketer owned retail sites, the refiner/marketer buys or leases the site, installs the buildings, tanks and dispensing equipment. A franchisee leases the outlet from the refiner and operates to franchise standards. The franchisee buys fuel products from the refiner/marketer and sets the price.

Variously Owned Sites-Distributor Supplied

This category has by far the largest number of outlets; they have various owners and retail either branded or unbranded petroleum products. These distributor-supplied sites are either independent or linked to a refiner/marketer. These sites may be owned by the distributor or independent chains or be dealer-owned. They may carry the brand name of the distributor, their own brand, the brand of the refiner/marketer company or no brand.

Dealer Owned Sites-Supplied by Oil Majors

In this case, the owner/operator enters an agreement with a refiner/marketer or distributor to carry the symbols of that brand and sell its products exclusively. Some owners operate a number of sites where individual outlets may be contracted to more than one refiner/marketer.

Independent Chains

These include networks operated by companies that display their own brand. Others comprise cooperative buying groups in which a number of independent owners make joint product purchases and display a common brand throughout the chain. The common independents include Liberty, Burmah, Gull, Southern Cross, Matilda and United.

Supermarkets

The entry of the supermarkets into petroleum retailing is now well established. The dominant player is Woolworths, closely followed by Safeways which is a wholly owned subsidiary. Woolworths currently operates around 85 outlets and plan to have around 200 outlets by the end of 2000. In addition to offering competitively priced fuel, Woolworths outlets offer a further discount per litre with minimum purchase vouchers obtained from their supermarket grocery stores. The Franchise and Sites Acts do not cover supermarkets and other large independent retailers. They have therefore been able to manage their businesses as they see most appropriate, in marked contrast to the refiner/marketers.

Retailing Trends

Industry analysts generally agree that there are too many service stations to supply the Australian retail fuel market. Service station numbers have been falling for some time-from around 20 000 in 1970 to the current count of around 8 300. This number will continue to fall according to industry analysts to 6 000 or even 5 000. The decline is likely to affect all sectors of the service station industry, including the networks of the majors.

The two most striking developments that have occurred in the retailing sector have been the increasing market share of the independent retailers and the trend to develop convenience stores in close association with retail outlets. These convenience stores now substitute for the disappearing 'corner store'. The oil majors are expanding on what they initially developed as supplying car washes, fast foods and convenience items to more ambitious moves into the supermarket business. For example, Caltex has taken a step up from its Starmart convenience stores attached to the forecourts of its service stations to full size supermarkets, with grocery chain IGA featuring a wide range of fresh foods. The trend seems to be towards combining supermarkets with petrol retailing.

Whilst some service stations in metropolitan areas have a strategy heavily dependent on maximising petrol sales volume at very low retail margins, most service stations in metropolitan and country areas have needed to increase their non-fuel revenue substantially to remain viable. The main growth areas for non-fuel revenue are convenience retailing, with stores ranging from relatively small shops to large fresh food supermarkets.

The Deregulation Process

As with many other industries, the petroleum refining and retailing markets have been significantly restructured. However, Peter Duncan, Executive Director of Shell Australia claims Australia remains one of the most regulated petroleum markets of all developed countries. He maintains that 'the heavy-handed regulatory framework covering prices, site ownership and franchise relationship contrasts sharply with the near absence of these types of intervention in France, Germany, UK, US and New Zealand'.(12)

Restructuring to date has resulted in the abandonment of the setting of a maximum endorsed wholesale price for petrol and diesel by the ACCC. It has also been associated with the open access to bulk terminals owned by the refiners allowing bulk purchase of refined product by interested parties on commercial terms. The four majors- Caltex, BP, Mobil and Shell-have made a commitment to provide open access to their product terminals around the country. This means that so long as safety requirements are met, independent operators are free to approach any terminal to buy their petrol and diesel supplies direct at wholesale prices on a negotiated contractual basis. As in the course of any business, the proviso will need to meet volume criteria and be a commercially viable proposition to both parties. The exception to this open access arrangement will be franchisees that, as part of their franchise agreements with the oil companies, have exclusive supply contracts. Such contracts are legally binding.

Apart from the above developments, the deregulatory process has now stalled. A measure designed to promote greater competition within the industry was the Federal Government's intention to repeal the Franchise Act and Sites Act of 1980 and the delivery of a mandatory Oil Code. However, the Government announced in September 1999 that it would not proceed with this legislation as it was maintained that agreement could not be reached between all stakeholders.(13)

The oil majors were pushing strongly with continuing reform as they maintain that the 1980 Acts disallow them to compete with the new independent marketers on an equal footing. The recent increase in the availability of fuel sources outside Australia (particularly in Asia) has made it relatively easy for independents to bring in their supplies direct from foreign refiners through independently owned and operated terminal facilities located in several Australian States.(14)

The Motor Traders Association of Australia (MTAA), which represents service station franchisees, argued that the repeal of the 1980 Acts could hand more power to the big oil companies.(15) The Association maintains that despite the deregulatory process to date, there is still inadequate competition for fuel at the wholesale level. Although a number of organisations including the Australian Institute of Petroleum (AIP), MTAA and Australian Service Station Association (ASSA) were reportedly close to agreement in April 1999, there were still outstanding unresolved issues according to the independent marketers and the MTAA about the proposed tenure provisions. Agreement between all parties on all issues was an essential proviso that the Government required before it would proceed with the repeal of the Franchise Act and Sites Act and the establishment of the Oilcode for the final implementation of the Reform Package.

Conclusion

Whilst the petroleum and marketing industries have provided Australia with, in the main, secure and reliable fuel supplies, it is almost certain that significant changes are likely to occur in the foreseeable future to the petroleum refining and marketing industries because of a number of emerging factors. These factors include the fierce competition from independent retailers who now account for 25 per cent of the retail market. Other issues are claimed present low levels of profitability of Australia's refining industries, deemed as unsustainable, and regulatory hurdles to further rationalisation and merging of current refining and marketing operations between the four majors-Caltex, BP, Mobil and Shell.

Recent petrol price rises for petroleum products (petrol, diesel and LPG), popularly attributed to profiteering by the major refiner/marketers, have been largely due to the upward movement in the world price of crude oil. Significant concerns remain, however, regarding the petrol price differential between urban and regional Australia as the price differential lacks transparency. The major beneficiaries of increased world crude oil prices are crude oil producers (both Australian and global), not the Australian refining/marketing entities. Because of the forces of globalisation, there has been a disaggregation of oil businesses into regionalised upstream and downstream entities and these entities must operate profitably in their own market environment.

There is little vertical integration between the upstream and downstream sectors of the petroleum business in Australia. The main Australian crude oil producers are BHP/Esso, and the Woodside and Santos consortiums. Whilst Australia is about 80 per cent self sufficiently in crude oil, this is expected to fall to around 62 per cent by 2007.

It appears that the deregulatory process has stalled with the Government's announcement that it will not proceed with its earlier expressed intention to repeal the Franchise Act and Sites Act and the delivery of a mandatory Oilcode. The oil majors have indicated that present levels of profitability are unsustainably low and they are faced with further large capital investments to cater for new clean low-sulphur fuels. Despite apparent regulatory hurdles to further rationalisation and merging between the oil majors under present arrangements, the Government will release its much-awaited Downstream Petroleum Products Agenda towards the end of 1999. This may provide indicators as to future action and strategies. The economic effects are not clear, with on the one hand employment likely to fall in the refining industry if refineries were closed, countered to come degree with a likely to rise in employment in the importing industry. Most industry analysts predict substantial changes to the present industry structure and whether that will be a series of mergers, closures or further expansions of independent retailer activity remains to be seen.

Endnotes

  1. ACIL Economics, 'Turning Point or Crisis, A Study of the Australian Oil Refining and Marketing Industry', Canberra, November 1997, p. v.

  2. Petroleum Gazette, 'Refiner/marketers face the need for fundamental change in Australia's downstream petroleum business', Australian Institute of Petroleum, vol. 33, no. 2, Melbourne 1998, p. 13.

  3. ACIL Economics, 'Turning Point or Crisis, A Study of the Australian Oil Refining and Marketing Industry', Canberra, November 1997, p v.

  4. Petroleum Gazette, 'BP Beefs Up Brisbane's Bulwer Island Refinery', Australian Institute of Petroleum, vol. 34, no. 1, Melbourne, 1999, p. 5.

  5. Oil and Gas Journal, 'Outlook improving for South Korean refining, petrochemical firms in the wake of restructuring', vol. 97, no. 41, Penwell Corp, Tulsa, 1999, p. 25.

  6. The Canberra Times, 'Outcry over rising price of petrol', 7 August 1999, p. 2.

  7. C. Glascodine, 'Essentially Oil and Gas', Australian Institute of Petroleum, Melbourne, 1998, p. 4.

  8. ACIL Economics, 'Turning Point or Crisis, A Study of the Australian Oil Refining and Marketing Industry', Canberra, November 1997, p. 15.

  9. I. Howarth, 'Shell may close Clyde refinery by 2006', Australian Financial Review, 5 November 1999, p. 7.

  10. J. Starkey, 'New Challenges for Australia's refiners', Australian Institute of Petroleum News, Issue no. 2, Melbourne, 1999, p. 3.

  11. J. Macleay, 'Oil giants combine to handle lubricants' The Australian, 5 August 1999, p. 25.

  12. Petroleum Gazette, 'Refiner/marketers face the need for fundamental change in Australia's downstream petroleum business', vol. 33, no. 2, Melbourne, 1998, p. 15.

  13. Media Release, Senator Nick Minchin, Minister for Industry Science and Resources, 'Government's petrol Reform package will not proceed', 99/309, September 1999.

  14. Petroleum Gazette, 'Australia's downstream petroleum industry poised for landmark reform, AIP, vol. 33, no.3, Melbourne, 1998, p. 21.

  15. Trudy Harris, 'Bush urged to dob in a petrol cheat', The Australian, 11 August 1999, p. 7.

 

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