Last year, Royal Dutch Shell left the Australian petrol refining and marketing sector after more than 100 years through the $3 billion sale of its “downstream” assets to Dutch-owned commodity trader Vitol.
Ironically, this will result in the well-known yellow-and-red Shell scallop emblem becoming even more prevalent on our roadsides as competition in the sector heats up and Vitol’s local unit tries to take market share from other players under the Shell banner.
Viva Energy, the Vitol subsidiary that now owns what was Shell’s Geelong refinery, its petrol stations and its wholesaling business, says it has earmarked about $300 million to increase its retail market share and will aggressively chase business, both inside and outside its Victorian stronghold.
Under the sale agreement, Viva retains the right to market its imported and locally manufactured fuel under the Shell brand.
And a more focused growth strategy means there will be more Shell service stations, both individual and in its Coles Express joint venture.
Viva chief executive Scott Wyatt said the release of Shell’s multinational ownership shackles meant his company was more nimble and could expand its retail business, as well as debottleneck the Geelong refinery and expand the refinery’s output.
“Now we can put capital into the network where we see opportunity to grow,” Mr Wyatt told The Weekend Australian from Viva’s new Melbourne office overlooking Etihad Stadium at Docklands. “We can escalate that and build more sites in locations where they are not well represented and continue with Coles to develop the offer – that’s a big part of our growth program.”
And the growth would not only be organic.
“Targeted acquisitions that offer a good network fit will form part of our expansion plans,” Mr Wyatt said.
He would not reveal how fast he intended to expand Shell’s network of 870 service stations (620 of which are Coles Express sites) but said the increase would be “significant” and that he intended to double the rate of network growth.
In the second half of last year, Viva and Coles added eight new stations to their network.
Headquartered in Rotterdam, Vitol burst on to the rapidly changing Australian oil refining and fuel marketing sector last year as the surprise buyer of Shell’s ageing, loss-making Geelong refinery, which many pundits had expected to close down after Shell’s announcement it was investigating sale or closure.
Vitol’s entry, and Shell’s exit, is typical of the change in the sector, where refineries are shutting down and majors are exiting to concentrate on oil and gas production, with the resultant increase in fuel exports attracting interest from traders such as Vitol and Trafigura.
Shell’s focus on upstream oil and gas production was evident this week when it agreed to pay £47bn ($91bn) for gas giant BG Group and increase its share of Australian LNG.
Vitol, the world’s biggest independent trader, is seemingly swimming against the current as Australia’s refining capacity rapidly shrinks as many find it hard to compete against the lower-cost mega-refineries of Asia.
Shell outlined the closure of its Clyde refinery in Sydney four years ago. Caltex has also closed its huge Kurnell refinery in Sydney, and BP has outlined plans to close Queensland’s Bulwer Island refinery.
But Vitol believes it can make the numbers work by offering to also buy Shell’s petrol stations and marketing business that sells fuel to the mining industry and other big fuel users.
Making the downstream competition more intense, the traders, and existing players such as BP and Caltex (whose former 50 per cent shareholder Chevron sold out last for $4.7bn last month), are competing for share in a retail market that has probably stopped growing.
“Despite the fact the population continues to grow, there are counters to this, like vehicle efficiency, the growing use of diesel over gasoline and the price of fuel, which has dampened demand,” Mr Wyatt said.
“So if you’re hoping to grow the business, like we are, you have to be more successful than your competitors.”
He said Shell’s tie-up with Coles was the best offering out there.
“I am confident our offer to customers is better than our competitors and provides more value, so if you make that available in more locations, you should be more successful,” Mr Wyatt said.
Viva would not say where the growth was to be targeted but said it was not limited to Victoria and NSW, with all states and markets being investigated.
Mr Wyatt was running Shell’s refining and marketing business (known as “downstream” in oil industry parlance) before it was sold.
The increased ability to expand the business, which had been set up as an Australian company with a separate board, was a key difference from the previous model. “We’re very much a stand-alone Australian company as opposed to part of a global multinational,” he said.
“Geelong was one of many refineries within Shell, it is small and a long way away from markets and you are always competing with other projects for capital. But Viva is an important investment for Vitol, so if the projects stack up and make sense you get the funding so we’re no longer competing with other opportunities.”
Vitol, which agreed to buy the Shell downstream assets in February last year, has committed about $1bn to invest in Australia over its first five years in operation.
Mr Wyatt said that about one-third of this would go on debottlenecking and maintaining the refinery and about one-third would go into the retail business. The rest would be for improving the supply chain, including a bitumen pipeline at Geelong for shipments to northern states, a pumping station to get more fuel to Melbourne and conversion of its closed Clyde refinery in Sydney to an import terminal.
Viva would not give any information on its profitability, but the Geelong refinery has been experiencing strong margins, like the rest of the refining sector, because of sliding oil prices and a low Australian dollar.
“I’m pleased with how Geelong is running, and the refining margin environment is more healthy than it normally is,” Mr Wyatt said.
“I’m pleased with our retail program and while the B2B (business-to-business) market is tough, that is more about economic circumstances.”
While analysts did not expect the current strong refining margins to last, Mr Wyatt said their strength when the wholesale market was under pressure showed the advantage of keeping a refinery.
“Where a refinery is part of your total downstream business, it can generate good yields when other parts of the business are not performing as well as they otherwise might,” he said.
Geelong’s fate appears safe for at least the next four years. After that, another substantial “turnaround” or $150 million maintenance workover, like the one that has just been approved, is required.
Extracted in full from The Australian.