nless you have been living under a rock, you would have noticed the amount of merger and acquisition activity going on in the Australian convenience and petroleum marketing industry. Like sharks feeding on a school of tuna, international and local companies alike have been actively pursuing and devouring each other for some time now.
The most recent and undoubtedly the largest Vitol and Shell has seen the sharks starting to attack a beaching whale.
If you are somewhat in the know about the industry, you would think the watershed moment that led to all this merger and acquisition activity was July 2011, when Shell announced that it was going to close the Clyde Refinery, converting it and Gore Bay into an import terminal.
To many, this was the sign that refining was over in our country and that major oil companies were starting to review their approach to trading in the Australian economy. With this announcement closely followed by Caltex heralding the closure of the Kurnell Refinery, you would have thought the die had been cast.
But it was really events 17 years before Shell’s announcement that kick started proceedings.
Those of you who have history in the Australian fuel industry (and there are many of you) will recognise that the seed for this garden of activity was planted in late 1994, when AMPOL and Caltex broadcast their intention to merge. Granted, the garden has grown wildly in the past few years, but it was this merger and the rules that the then Federal Government placed on the transaction that, nearly 20 years ago, acted as the dynamic lifter of growth and set the industry on the trajectory towards today.
What happened at that moment gave rise to United, brought Woolworths (and then Coles) into the fuel industry and reignited the fortunes of the two David’s (Goldberger and Wieland) in the form of Liberty Oil. This happened due to the fact that a condition of sale was the undertakings that the ‘new’ oil major, which overnight became the largest oil company in Australia, had to comply with certain undertakings including the sale of terminals, distribution facilities and fuel to independents.
Activity since this time can be broadly categorised into one of four major groupings: the growth of the supermarkets in the retail sector; the regulatory effect; the closure of refineries; and the rise of imported fuel. These are the four pieces of a jigsaw puzzle that is the Australian fuel industry, and to understand the timing and consequence of each of these elements builds the picture as to why we have landed at today.
The supermarket operators first entered the Australian retail fuel market in 1996, when Woolworths opened a service station in Dubbo, New South Wales. By the year 2000, Woolworths had grown moderately to around 2 per cent of the Australian petrol retail market.
It was in 2001, when momentum really took off. This was when Woolworths constructed a deal with Liberty Oil to take over the operation of more than 270 service stations, growing to 10 per cent of the market. Of course the 4-cent shopper dockets were helping Woolworths’ steady rise as well.
By 2003, Coles, watching their main competitor grow into a new retail market, had had enough. In May of that year Coles announced an alliance with Shell that would allow it to operate 580-plus service stations across the country – or 16 per cent of the county’s retail petrol sales – overnight.
Not to be outdone, Woolworths, by August 2003, had secured its own alliance with Caltex. This provided the supermarket giant with a further 150 locations and secure supply across the country, a key move for rapid expansion.
The two supermarket superpowers have used deeper (20cpl) and deeper (45cpl) discounts ever since to belt each other into competitive submission. This drive for market share has delivered, but not as they would have expected.
While focused on one another, they have achieved the result of mirroring their size in the market; about 13 per cent of the retail sites and 24 per cent of the national retail petrol volume each.
And there lies the link to today.
While running at each other, they have stomped on independents in the industry to the tune of 17.4 per cent over the past five years; if decent statistics could go back further this would be even worse. That’s 1100 sites closed or sold to the majors in this time and is why the ACCC is concerned with the future of competition, especially the negative impact it may have on motorists.
The independents are not the only ones to feel pain during this time. Both Mobil and BP have seen their market share of retail volume drop as well – BP by 5 per cent in the past ten years.
Mobil took a dramatic step in restructuring its business, which led to the Mobil brand all but disappearing from the retail landscape. By selling 230 company-owned service stations to 7Eleven, Mobil exited retail trading, placing 7 per cent of the market in the hands of a ‘specialist retailer’; as the ACCC like to call companies such as 7Eleven.
The year 2006 saw the introduction of OilCode in the fuel industry. Brought in by the Howard Government, OilCode, as part of the ACCC’s competition arsenal, was set to balance the contractual and dispute playing field between major oil and their independent small-to-medium resellers and retailers.
The introduction of OilCode has acted to remove the Petroleum Retail Sites Act 1980, which in essence had limited the growth of major oils company owned/operated across Australia. By repealing this Act in 2007, the Government thought it was levelling the playing field between wholesale suppliers and their resellers.
Fast forward to today and OilCode, if it has done anything, has driven the fortunes of companies such as United, Neumann Petroleum, Freedom Fuels and AUSFUEL, with some smaller regional players as well. This is due to the fact that OilCode enshrined in regulation the existence of Commission Agents. Whilst placing rules around the operation of Commission Agents, OilCode left a yawning hole that allows for limited tenure to the retailer, something that can be exploited for growth.
Today as well, the reward for growth in volume by these independent wholesalers has been the sale of all or part of their business to international raiders. By 2014, United, Neumann Petroleum, Freedom Fuels and AUSFUEL, among others, have shared in close to $1 billion in investment income. This comes mainly from international commodity traders and Asian region refiners.
Refining the business
It can be clearly seen that the advantage in the Australian fuel industry goes to those who can interact with the wider Asia-Pacific region. There are well-documented facts, like the size and complexity of refineries being built in South Korea and India, and their comparison to our 1950s built facilities.
There are benefits of being a developed economy in one of the fast developing economic regions in the world. The main one being a requirement for refined fuels to satisfy our demand, coupled with an ever increasing availability from our growing trading partners. It helps that the lower cost-base, both capex and operational, of many Asian countries refines products at a far lower cost.
As Australia’s demand increases, past the volume all our once operating refiners could produce, it is inevitable that the measuring sticks of cost and margins would be ruled across our production facilities. The outcomes are not attractive, and it is sensible to begin a greater interdependence of refined importing.
There are advantages to Australia from this as we move into the Asian century.
Given that the Australian Petroleum Industry participates heavily in our engagement with Asia, exporting 74 per cent of our crude oil to the Asian region, while importing 15.7 per cent of our petrol requirement and 59.6 per cent of our diesel. Singapore and South Korea already account for 97 per cent of imported fuel volumes.
Getting the import model right has great advantage for the Australian economy. Look to the United States, and while recovery there is driven by internal energy factors, you can see that the fall in energy costs is serving economic recovery well.
This can also be achieved here in Australia. However, to break open the import market to a wider group of companies it is important that the industry and Government capitalise on this by supporting the development of a framework that will allow for open-access terminals providing more Australian-based petroleum wholesale companies the opportunity to compete in this trade.
The next story
Revolution over the past two decades in the convenience and petroleum marketing industry was all Australia’s doing. The growth of supermarkets, the regulation changes that brought on new development activity and the closure of refiners. That is the long story of how we have arrived to today.
The short story is that evolution over the next two decades, as recent increases in import activity and acquisitions by new international players have shown, is about Asia Pacific regional development.
How we get there is a long story in itself.
– Nic Moulis, ACAPMA CEO