Downstream Planning.

Midstream, defined as crude oil and trunk/natural gas pipelines and tankers, may be usually included in the downstream category. However, crude oil pipelines may also be viewed as an integral part of the upstream sector. In general, investments in pipelines are profitable and investments in tankers are not. The opportunities will be limited but it is highly likely that all opportunities for investments in pipelines will be accepted.

Of the large oil companies, Shell has remained the most faithful to its tanker company. But Shell has reduced the number of owned and time chartered crude oil carriers from 58 in 1995 to 35 in 1999. Shell does not provide separate accounts for its tanker operations nor does it make its future plans available. Other companies do not even mention tankers in their annual reports and have accepted that they cannot compete with independent tanker owners. When tanker freight rates are high, the oil companies may find that their own costs are lower than the spot market rate. Their refineries will pay a price for crude oil (landed cost of crude) which is likely to set the gross product worth of the refinery output and the bulk market price for oil products. Certainly, tanker owners will benefit in the short term from the high spot market rates, but traditionally this leads to an over-ordering of tankers with a subsequent slump in spot rates.

It is therefore unlikely that any oil company will plan to take a leading position as a tanker owner.

BP has taken the lead in overtly stating its intentions in the refining sector. Refining, rather like tankers, has some periods of relatively high profitability with many periods of uneconomic operation. BP has therefore decided that its long-term objective should be to have ownership of refining capacity which covers about 60 to 70% of its product sales. This strategy is a reaction to long-term poor profitability of investments in refineries. Much of the recent investment in refining has been dictated by the need to produce lower sulphur motor fuels. This has been done against a background of reducing crude oil distillation capacity including refinery closures by the majors.

The marketing of oil products has changed considerably over the last 25 years. The majors have ceased to see national coverage as being important in any country, have closed terminals and depots, have concentrated on the larger end consumers and retail outlets (service stations) and made as much use as possible of external contractors.

When marketing oil products, it is theoretically much better to have 1000 customers buying one tonne each than one customer buying 1000 tonnes. The problem lies in that competition often does not allow the large oil companies to charge the small customers a price which will cover their costs and leave a satisfactory profit.

In the retail market, a further problem has been encountered in some countries when the margin obtained by resellers is insufficient to provide an adequate wholesale margin for the large oil companies. For example, for retailing transport fuels to be economic, a minimum gross margin of 8 US cents per litre should be obtained giving the wholesaler 3 cents and the retailer (reseller) 5 cents. When the margin has been significantly less than 8 cents per litre for some years and is forecast to continue to be under that level, the traditional wholesaling business becomes uneconomic. The large oil companies then sell product fob refineries and sell through wholly-owned high-throughput sites where they effectively have both the wholesale and the retail margin and the profits from forecourt shops. "Network purification" has been the term used by the majors to describe the transition in the retail market in the USA and in many other OECD countries. Some countries, including Italy and Japan, have been relatively slow to "purify" their networks but all countries will experience the phenomenon. An example of how the retail network in the UK has shrunk is included in Table 3.

In France, hypermarkets have taken half the market for motor fuels. Hypermarkets have set the standard for retail marketing with sales five times or more the national average with low cost operations. In recent years, when the major oil companies have expanded into new territories, they have copied the hypermarket method of operations.

Currently, the average throughputs of the sites included in Table 3 are 7.5 million litres pa for the hypermarket sites, 2.3 million pa for the oil company-owned sites and 1.0 litres pa for the independent sites.

TABLE 3 - THE DECLINE OF THE INDEPENDENT DEALERS IN UK PETROL RETAILING
1973-2000
Numbers of sites

Year at 1   Total UK   Independent    Company      Hypermarkets
Jan           Sites    Owned Sites  Owned Sites    Sites Selling Petrol

1929          28000          NA          NA          0
1968          39958          NA          NA          0
1971          37129          NA          NA          0
1972          35948          NA          NA          0
1973          34491         26352       8139         0
1974          32974         25220       7754         0
1975          32662         25133       7529         1
1976          31426         23004       8458
1977          30383         21439       8944
1978          29751         20928       8823
1979          28295         19663       8632
1980          26480         18314       8166
1981          25527         17516       8011
1982          24760         16964       7796
1983          24108         16545       7563
1984          23097         15764       7333
1985          22032         15107       6925       165*
1986          21140         14498       6642       190*
1987          20641         14178       6463       214*
1988          20197         13777       6420       232*
1989          20016         13312       6704       270*
1990          19756         12960       6796       369*
1991          19465         12618       6847       294
1992          19247         12396       6851       357
1993          18549         11821       6728       467
1994          17969         11262       6707       567
1995          16951         10263       6688       685
1996          16244          9551       6693       823
1997          14748          8343       6405       877
1998          13953          7636       6317       934
1999          13241          7085       6156       977
2000          12849          6839       6010      1013

* Number of brands represented at hypermarket sites with some sites carrying more than one brand. >TE All hypermarket sites are company owned. In 2000 there were 1013 hypermarket sites.

Prior to 1971 there was only one hypermarket and 22 superstores in the UK and prior to 1976 there were 12 hypermarkets and 59 superstores. Source: Motor Fuels Business in the UK 2000 ISBN 1872546 021