Petroleum Product Marketing

This downstream oil and gas overview discusses what we talk about in our popular ‘What is Downstream’ course which also covers petroleum product marketing.

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Marketing is where you finally have a view to the public, this is where the oil companies finally show their face, with their brands.

The Shell brand, believe it or not, comes from John Samuels, whose initial trading commodity was mother of pearl oyster shells, in Singapore, and he actually started out in the transportation business. Samuels did one of the first crude oil tankers, back in the early 1900’s.

Everyone knows the Shell logo.

The ExxonMobil combined logo – first Exxon was brought out to replace the seven different logos that Exxon was marketing under. Humble Oil was part of Exxon, ESSO, in Southeast Asia. They had six or seven different brands, so Raymond Lowe, who was an industrial designer and, by the way, designed the ’53 Studebaker, if anybody’s interested, came up with the Exxon logo.

Unfortunately, it was called the double-cross company, because at the time the oil companies were not in a whole lot of favor, so they combined the ExxonMobil logo.

The Texaco, the star of Texaco, and of course BP, their new logo is Beyond Petroleum, so the solar and the wind energy, etc. BP has totally cut back their whole Beyond Petroleum concept, with the Macondo incident, where they really shrunk a lot of initiatives.

However, BP does a really good job of tracking industry data. Not only crude and products, but also hydroelectric, they do an annual survey that is just a terrific source of information that we use all the time.

That’s the first thing you have, is the advertising, the second of course is the quality products, the branded products.

This is an industrial, 55 gallon drum, here’s the lube oil containers. You see products in tank trucks, and jet fuel products. BP, for example, has an entire jet fuel subsidiary, called BP Air, that manages the products that they move into the airline arena.

Finally, last but not least, is the sites. This is the logos, the layouts, of the retail sites that most customers are familiar with.

We’re talking about marketing from the terminal, wholesale side to final distribution and retailing, at this particular point. Remembering that Supply & Trading is where we left off, here, getting the product to the terminals, now we’re moving it from the terminals to the retail sites and the commercial customers.

Wholesale vs Retail Petroleum Product Marketing

We’re going to break it into two pieces, wholesale sales, distribution channels, reseller and driver sales and how the pricing is set, and then we’ll talk about retail as a separate piece of this section.

This was referred to in the movie, end user Airlines, was the example, an industrial customer, and end user customer. Railroads, big trucking companies, you see these big yellow freight liners are Jones Trucking, they’re considered an industrial end user.

Re-sellers or jobbers, this is a middle man, and we’ll talk about the kinds of jobbers that are out there in a second.

Finally, the retailer, which is the final service station site. Most people don’t know this, but 83-85% of your sales in an oil company are wholesale.

Where the balance is the final, end user retailer. You’re taking a business to business view of the way you look at customers, rather than a business to retail view.

Only 17%. I think that volume has dropped, because a lot of the major oil companies are no longer running the sites.

I think, again when I came in the industry, in the mid 70’s, it was 60/40? When I got to Australia, we were very small marketer in Australia, and it was probably 90/10.

We only had 25 company owned and operated sites out of 1,500 sites, because we were a small marketer, it was an extremely competitive market, we couldn’t afford the investment.

We had dealer sites, and a franchise dealer is considered wholesale. Direct retail is where you’re calling the price.

Remember that the futures drives the spot market, which drives the wholesale price, which is called the rack price.

In other words, that’s the terminal that I’m picking up product at. Now, whether that rack is at a refinery, like you see down along the Houston ship channel, or if you come up Interstate 45, there’s a gigantic Exxon Mobil terminal on the right hand side, an unmanned terminal, that would be also considered a rack.

Even though a rack used to mean that you literally climbed up and loaded it from the top, now almost everything is bought and loaded, so you don’t see the rack anymore, but it’s still called rack pricing.

The futures drives the spot market, which drives the wholesale rack price, which we talked about before.

The jobbers are a huge business, and the re-sellers are a huge business, and the franchise dealers are a huge business, again, making up 85-90% of the volume. Again, back to my time in Australia, the re-sellers bought at a rack price, plus a discount, they handled all the terminal operations, they handled all the trucking. Like any other independent operator, they were usually very efficient. Much more efficient than we were.

In Australia, had very strong unions, so the ESSO drivers were unionized, the drivers for the jobbers were not unionized and were always complaining to me that the margin that I gave them was never enough money. Just never enough. I would have an annual distributor meeting, they would be flying in in their private jets, and I would be taking a coach or driving my car, as they complained, totally, about the margins I was giving.

The other thing that we did, and this I inherited, we set their margin to handle our product annually, and then it increased by half the inflation rates, so we kind of forced them to be efficient. We had a very strong wholesale network.

Petroleum Product Marketing – Retail

This is where everybody is an expert, because we all buy gasoline, right?

The big change in retail has been a twenty year move to decrease US automobile fuel consumption, which we’re doing with legislation, we’re not doing with price, or tax. Other countries use price and tax to raise the price of a gallon of gas, which forces the car companies to become more efficient, kind of a market-driven way to do it.

I mentioned that the tax in New York state was 64 cents a gallon, which seems awfully high. That’s probably a third of the tax that’s paid in the UK. The prices in the UK are four times our prices in the US, and they do it with tax.

They don’t do it with spot pricing.

In seventy three, I had a ’67 Cutlass. I don’t think it gets 13 miles to a gallon, right? Here was the average fleet miles per gallon, only 13.4. By 2008 it kind of stabilized around 22 miles to a gallon, and there was a fuel economy target set for the vehicle fleet of, by 2016, 35.5 miles to the gallon, and we just changed that.

By 2025, the new goal for the fleet is 54.5 miles per gallon.

Now, I read this legislation, it’s almost like anything else, “Well, if you’re this size, you’ve got to do this, and if you’re that size, you’ve got to do this, you’ve got to do that, you’ve got to do this”.

I think this is almost impossible to achieve, even with everything going well for hybrids and electric vehicles, so we’re going to see whether it gets deferred.

The big impact in our industry, as you might guess, is you don’t need any gas stations. In the 70’s, this is in the 90’s, we went from 250 – 260,000 gas stations in the 70’s, because in those days you also had your car repaired at a gas station.

Here’s the data; from 1994, 202,000 gas stations, we’ve continued to drop the number of gas stations, and these are only gas stations. Some have convenience stores, some are not.

We’re down to 114,000 gas stations.

The number of gas stations has declined dramatically, which reduced a lot of the retail orientation of the oil companies. Most of the gas stations, even back in this period, were run by dealers on a franchise basis, very similar.

They paid a rent, they set their own price, and they managed the site, and in our case, in Australia, we provided a sign, and the tanks, and some guidelines on how to manage the site. In some cases, we didn’t own the real estate, in some cases we leased the real estate.

One of the best magazines, that is no longer in business, is called National Petroleum News. This is the latest one I could find, 2010. This was their last issue, that covered from 1909-2010. Used to have terrific statistics on the industry, it’s now out of print, and there’s another industry group that kind of follows retail.

The historical perspective is often really valuable. This includes anything that sells retail gasoline. Hyper market, service station, c-store, truck stop, et cetera.

Here’s the current branded outlet, in 2011, it was the latest information I could find, at that time Shell was the branded outlet leader, now, again, they could have the brand but they might not own the site, and they might not own the real estate.

There were 14,000 Shell sites, BP had 11,300, Chevron at about 8,000, Exxon Mobil 7,700, ConnocoPhillips, et cetera.

These were the majors.

Then there were independents, that did not have crude oil. Here’s Vallero, with 2 million barrels a day of refining capacity, only 5,000 sites, very strong here in the southwest. Citgo, Sunoco, Sinclair, this is Cenex, which is up in the Midwest. Here’s Speedway, Hess and Murphy.

Then there’s a ton of sites that are unbranded. As you drive to Colorado, you pass Billups, and Love’s, and all these other folks. 50% of the stations in the US are unbranded. They buy at the rack, they negotiate a price, they have no secret sauce.

No tigers in the tank, no V-power, no anything super-duper special, and that’s why their pricing is below regular in most cases.

For years, and I mean 100, Exxon would not sell unbranded gasoline. About 10 years ago, they realised the game is over. Exxon will also sell unbranded, and remember, at the refinery, you could have a branded rack, for your service stations, and you can have an unbranded rack, which is still made to good quality specs, it just doesn’t have the salsa, the secret spice and the additive packs in it.

Where do you guys buy your gas? Where do you buy your gas?

Speaker 4: Pretty much anywhere.

Marty Stetzer: Anywhere?

Speaker 4: Anywhere I need gas.

Marty Stetzer: You’re a price shopper?

Speaker 4: Not really, there’s a gas station around the corner from my house.

Marty Stetzer: There you go.

Speaker 4: Usually I’m not really that picky, if I’m on the way somewhere it has to be on the side that I’m traveling.

Marty Stetzer: On the right. This side of the light, or the other side of the light?

Speaker 4: If I’m going … It has to be, basically, on the right hand side, if I’m …

Marty Stetzer: You’re going through the light, or you’re going to do it before you get to the light, and then you have to come back in the traffic?

Speaker 4: I don’t care about that too much.

Marty Stetzer: You don’t care?

Speaker 4: I just don’t want to have to turn around and the go back around.

Marty Stetzer: Shane, how about you?

Shane: I usually get it at Valero.

Marty Stetzer: Valero?

Shane: Yeah, because it’s the closest one to me.

Marty Stetzer: It’s closest to you, right? Garret.

Garret: Same as her. Either if it’s on the way somewhere, it’s always the one on the right side, that’s on the way.

Marty Stetzer: But nobody’s a price shopper? You mean you pay 4 cents a gallon for … No. Do you notice?

Shane: Valero has very good setting.

Speaker 4: I do notice, and I notice, oh, I’m sorry, go ahead. I notice … One thing I did notice, when you’re in the smaller towns, like Friendswood or things like that, all of them are the same, all the prices are the same.

Marty Stetzer: Right.

Speaker 4: Here in Houston, the one right across the street could be 5 cents less.

Marty Stetzer: Right, and you can’t get to it at certain times, right?

Speaker 4: Right, exactly. Sometimes I’ll do that. If there’s a few in the vicinity, I’ll be like, “Oh, they’re cheaper, I’ll drive an extra whatever just to go over there”, but I’m really not a price shopper.

Marty Stetzer: How about you, Mary?

Mary: Well, I do try to, kind of … When I hit the Kroger, because when I shop at Kroger and use my card it gives me a discount. Sometimes 20 cents a gallon.

Marty Stetzer: Wow.

Mary: Costco, also, has got a usually pretty good price on. So I’ll watch my tank, and I’ll think, “What am I passing by?”. Sometimes I get caught out, obviously, but we, this weekend, drove to Pensacola, and we discovered at some of the exits along I-10 there can be almost 20 cents difference within a quarter mile.

Marty Stetzer: Quarter mile, yeah. Very good. Bruce, how about you?

Bruce: Generally, my benchmark is Valero, for one simple reason. Their pricing is always great.

Marty Stetzer: Sharp? Yeah.

Bruce: Secondly, I happen to go into a research center at one time, a lab in San Antonio, that did testing. We asked, “What are the top-tier gasolines?”, and they said, “Shell, Valero and Chevron”.

Marty Stetzer: Valero is up there, huh?

Bruce: We didn’t challenge, and ask about Exxon, because I’m sure they’ve got to be up there. However, again I’m a little bit of a dinosaur, but out of college, working for Shell in retail, they taught us that the branding, if you went to an intersection that had 4 stations, that most shoppers would, was it up to 3 cents a gallon.

Marty Stetzer: 3 to 4 cents, was the value of the brand.

Bruce: The value of the brand. If you were kind of loyal to any of those companies, you’d maybe go a little out of your way. Now I’m not so sure. It’s a different world we live in.

Marty Stetzer: That’s not dinosaur mentality. I did a project with Texaco in ’96. That sounds like dinosaurs, right? They still thought he had 4 cents brand value.

Speaker 4: I will avoid a Shell station, just because they’re always more expensive than all the other ones.

Bruce: They are. That Kroger thing is sort of a scam. They mark it up 10 cents, and then they give it back.

Speaker 4: Yeah.

Bruce: It’s more expensive.

Marty Stetzer: In the 80’s, that we talked about earlier, when everything hit the tank, hit the wall, Shell and Exxon had 2 different views of the world. Exxon knew it was never coming back, and over a weekend laid off, I think, 14% of their people worldwide. Efficiency, efficiency, efficiency. Mid-80’s. Shell said, “It’s all about the brand, customer, retail”, they went totally the other way. Hate to say it, but the proof was in the Exxon model, because it never came back in that same format, and they still have that premium brand image strategy. It’ll be interesting to continue to see how that goes.

Bruce: What they did beat into us, I remember all this stuff like it was yesterday, I was 24-ish, pass, hours, appearance, service and price. Florida, that’s when the [ service station at the bays was getting into self-serve, they were taking the beige, and glassing them up and putting in planters, and that was in about ’76 when the c-stores were bred, I guess you’d say. Lastly, gallonage, everything went to gallons, and Shell had 33,000 gallons a month average in Tampa, Texaco had 15-18, and Shell was kicking Texaco’s you-know-what, because they went too far with market penetration and they didn’t really get the return.

Marty Stetzer: Too many sites.

Bruce: It was all about, as you see today, if you get the cars coming in, you get the volume, and you up-sell on Bic lighters, and cigarettes, and all this other stuff.

Marty Stetzer: Yeah. I’m going to have you do this … I’ve got a lot more slides you can do next time.

Bruce: Gasoline’s just kind of a loss. No, I think the gasoline, I don’t know what the margin is today, but they called it a [crosstalk 00:19:36], but I think back then it was 7, 8 cents for the dealer. They never made a lot of money on the gasoline, but you didn’t need to. It’s all the other items.

Marty Stetzer: The other thing that changed, we’re talking a 25 year history here, was the move of service away from the service stations.

Bruce: Right.

Marty Stetzer: Into Sears, into Good Year, into Canadian Tire in Canada. Moving into these gigantic big shops, which took away a very high revenue portion for the dealer.

Bruce: I always wondered if they ever went back, the retro, you know? The young kids are into it, they went back to the guy with the little hat, and came out, and …

Speaker 4: I like that, I …

Bruce: Said, “Here, ma’am, here’s your oil”, and he’d show it to you.

Speaker 4: I pulled into a full service, and he was like, “Your tire’s low, let me fill it”, I was like, “Oh, thank you”, you know. I like that, I don’t know …

Bruce: It may be time to experiment with it.

Marty Stetzer: Up until 2 years ago, there were only 2 states that disallowed self serve, New Jersey and Oregon, and I made the mistake, in New Jersey, of getting out of my car and getting ready to fill up. 3 guys came over and said, “Oh, wait a minute, mate, get back in your car”. Yes, exactly.

Back to lesson

The challenge of the retail format is the same challenge that everybody else has, you know? How do I attract my customer? Sounds like, what I’ve found is location, location, location, and at an intersection an oil company will talk about a PR site, a Prime Retail site, like the one that you talked about.

As these numbers came down, in that previous slide, let me see if I can get back to it. As the numbers came down these sites didn’t go out of retail, they got moved over.

For a while, the video rental stores took over old gas stations, because they were prime retail locations, but the oil company couldn’t show the revenue, because of the margins in competition to justify that retail location.

They had huge divestment programs underway, to get rid of the sites and try to raise money. The big measure of efficiency in an oil company is the return on capital employed. What kind of return am I getting on my money invested?

Interesting thing with Mobil, that I learned, I learned this after Superior was merged into Mobil. Mobil takes all their divestment money and puts it in the Mobil education foundation, which then provides scholarships and matching for employees, which I thought was really, really cool.

Of course, you never hear about that on the news.

Now, the retail price to your point across the street a little bit to do with the rack price.

There’s a rack price, and then there’s a delivered tank wagon. In other words, the price to get it to the site, okay? DTW, and it’s called a tank wagon because it was drawn by a horse, and they still call it a tank wagon even though it’s a Peterbilt with 12,000 gallons, right?

Then you have to add on your taxes, and you have a retail price. That retail price is set by the oil companies only on the company owned and operated sites, which are very, very few.

All the other sites are run by dealers, and a dealer could be renting the site from Shell, and he would look at all the gas stations around, and set that price.

It could be 20 cents different 3 miles away because everybody likes local supply, and 3 miles on the highway could be another state. It’s so much on that little trading area in that neighborhood. Usually, inside the neighborhood, retail prices are higher, where out on the highway, where there’s a little more competition, they’re lower, but that’s not always the case.

There’s a Texaco in my neighborhood that’s always 5 cents a gallon below the Texaco that’s out on the highway, but he’s got this gigantic convenience store, so he wants people to stop by, get the gas, and go into the convenience store.

A lot of sites are owned by dealers who have 5 or 10 sites, not by 1 guy.

It’s just like everything else, just like the car dealers. A good operator in that environment will end up owning more sites. He can make a little better deal on the rack price with the discount, and he makes a good deal with the transport people to say, “Hey, it’s a volume kind of a deal”, and he’s a really good operator. Watches his cash, keeps an eye on the merchandise, and that kind of thing.

Again, some of my jobbers, the jobber that I had in Melbourne owned 45 sites. He was a big guy, he was a Greek. He was just fantastic. Really good operator. Very tough to negotiate with, because he had 45 sites. What was I going to do? Lose him?

The next thing that happened is convenience stores started taking off.

Now this is not only convenience stores that have gasoline, this is true convenience stores, like 7-11 that may or not have gasoline. There’s 154,000 of these sites. The National Association of Convenience Stores used to publish market facts, but the now have, again, an excellent website. I think they’ve just gone from print to web to keep track of what’s going on there.

80% of the US gasoline is sold at a site that’s a convenience store. Now, the challenge of a convenience store is you got dirty, smelly gasoline, self serve, and you got clean stuff inside, always trying to reconcile the wholesale rack market leader with the fancy-schmancy stuff inside.

Do you all go in convenience stores?

I mean, rarely.

Marty Stetzer: Rarely?

Speaker 4: Bucky’s.

Marty Stetzer: Bucky’s? Oh, now Bucky’s is different. I should have worn my shirt. Bucky’s …

Mary: The model is clean and in stock.

Bruce: Cheap ice, clean restrooms.

Marty Stetzer: Clean restrooms, huge, well lit.

Mary: Clean and in stock.

Marty Stetzer: Clean and in stock.

Mary: That’s from the mouth of Mister Bucky.

Marty Stetzer: Mister Bucky himself. Well, again, really good merchandisers. There’s another group, have you ever been to a QuikTrip, on some of your …

Garret: Up in Oklahoma.

Marty Stetzer: Up in Oklahoma, or Kansas?

Garret: Fresh produce …

Marty Stetzer: Quik Trip was originally founded by a grocery merchandiser, and then they moved into the gasoline to build the cross merchandising at the pump, they now have their own additive pack.

Bruce: I’m not quite sure I understand, when you have gasoline out on the island, and it’s proven if you have a canopy, protection from the elements, and well lit for security, I didn’t know there was a connection, like the store.

Hydrocarbons versus food, really, is that sort of a psychological thing?

Marty Stetzer: It’s still not as big as it used to be, because remember the old convenience stores were just not as cool as Bucky’s, right? You go to Bucky’s for the fudge, and you buy gas while you’re at it, or whatever.

But it’s still been a challenge. The other thing that happened is the oil companies were not used to shelf space. They’re used to bulk trucks stuff, they had to completely shift their mentality in their marketing departments to start thinking like Costco, or thinking like Wal-Mart.

Shelf space, and turns, and small-ticket items, and by the way, who keeps track of the bananas on the shelf, right? Do they take stock of the bananas, or is that the guy behind the counter saying, “Hey, have a banana on me”, right? It was a nightmare for an oil company used to bulk rack wholesale business.

Bruce: I see, you’re right. Everything was based on gallons, we had a D-264 report, tires, batteries, lubricants, belts, hoses, it was all a ratio based on the gallonage.

Marty Stetzer: Right. I made a huge mistake when I was in Australia, one of my many that I admit, we were having a lot of trouble showing margins in our sites, we had 25 company owned sites, so I brought in a merchandiser from the automotive supply store industry, he says, “We’ve got to move into tires, batteries, and accessories, and stuff, and cleaners and shammies, and all that other stuff”.

He put together a business plan, and we started buying all this stuff, and of course nothing happened, and I went out to do a tour in west Australia, and I saw my gasoline guys unloading tires from a truck. I said, “You know what? This is not our business. This is just not our business. Manhandling tires, we’re not Firestone”. We had to buy all the equipment, so I shut it down in a year.

The other thing, we had these unbelievable sites, bigger than Bucky’s, with a car wash, right? The margins were so bad, we said we’d give you a free car wash with 10 gallons. We should have given them free gas, and made them pay for the car wash, the margins on gasoline were so bad. I went to the management, I said, “We’ve got to get out of this business. We can’t show a return”.

Garret: [crosstalk 00:30:12] out of TBA, tires, batteries, filters.

Marty Stetzer: We get out of TBA, and we got out of company owned while I was there. Anyway, this whole retail thing continues, it just continues. When I used to drive around Australia, drive Kathy crazy, I would look at the prices on the right hand side of the road, going out, and then look at the prices on the right hand side of the road coming back, and she says I still do that. I guess I still do it. I’m a price shopper. A branded price shopper.

Co-Branding

Now, then the fun thing happened, right? This is called co-branding.

You’ve got a Burger King and you’ve got a Shell, and you’ve got the Bacon Tender Crisp done. All you’re trying to do here is get more revenue through that retail site. One of my favorites, he’s got Conoco, he’s got Smoking Pit Barbecue, and you can rent a Budget truck, in the back of his site.

Mary: How about a full service and repair shop, plus the barbecue, plus the gas.

Marty Stetzer: Now we’re talking. Okay, when you went over to Louisiana, did you happen to see the co-branding site of the century? With the gambling casino, the restaurant, and the 12 pumps on the right hand side? Oh, and the big cigarette barn. It’s on the right hand side, right across the border. I have a picture of it, but I couldn’t find it.

It’s a retail site, you’re trying to maximize the revenue through the site.

Everybody’s trying something different.

This is an integrated, independent refiner with a c-store and, often, the mid-priced gasoline. Here’s Valero, Phillips, and the old Tesco in the west coast.

Then you’ve got the major. Integrated, high-price gasoline and a c-store. Generally, the higher priced, so you’ve got Shell, ExxonMobil, Chevron and BP.

Then discount super-pumper with a c-store, Race Track. There’s a Race Track on the way down Interstate 45, unbelievable high canopies, small c-store, usually the cheapest gasoline price. I did some research, the Race Track owner spoke at a conference, again this is the 90’s, he had 2-way radios in his trucks that picked up at the rack, his own trucks, and if that truck was on its way to the Exxon rack, and Shell made them another quarter of a cent a gallon, that truck was diverted to go to the Shell rack.

Unbelievably sharp operator, and from his pricing he’s still doing it. Totally unbranded, not very many secret recipes in there so you kind of have to watch the unbranded stuff.

Quik Trip, and I’d put Bucky’s in here – full, really cool c-store with unbelievable gas pumps, and you’d mentioned 33,000 gallons a month. Some of these sites are doing 500-600,000 gallons a month, and if they get 5 cents a gallon as a margin it’s a ton of money.

Last but not least, here’s your Costco, it’s called a hyper market, you kind of have to watch because it’s unbranded and has very few additives in it, so get some Techron and throw it in the tank every now and then, because unbranded will foul your engine over time.

Speaker 4: Some of the higher end HEB’s have the, “You pay $5 extra, and you get the additive.

Marty Stetzer: That’s right, yeah. The Chevron Techron is available in stores, [inaudible 00:34:35], or Wal-Mart, or wherever, as Joe was saying. I always use either Chevron or Texaco, because it has the additive in it.

The hyper-markets are interesting, even though they’re big they still only have 13% of the market. This is from the convenience stores. In France 56% is sold through hyper-markets. The UK, 33%, and this is 5 year ago data. It’s continued to grow. One of the reasons that’s happened in France and the UK, they have tremendous amount of control on retail development. They won’t let them build new sites.

Again, 10 years ago or 15 years ago, Exxon would not sell unbranded, but the hypermarkets, 12.4% of our volumes is a lot of gasoline and diesel, so these things change around.

Bruce: We used to get calls a couple years ago, again on the testing side, for what they called appliances, like test refrigerators. Appliance is a term for the pump dispenser, but it’s for the compressed natural gases, popular.

Now I’m seeing the little electric plug ins at Cracker Barrel. I’m kind of wondering the future of retail, if they’ll have other complimentary services for other hybrid vehicles?

Marty Stetzer: I agree, and you’ve got diesel, you’ve got gasoline, you’ve got E-85, just in the fluid, nightmare. I am really skeptical about this move over to dealers with all of these multi-various hydrocarbons, including CNG, and biodiesel.

I think the oil companies have shifted the load away from company owned and operated to franchise operator, and you hope he or she has the same safety.

Bruce: Has the quality oversight.

Marty Stetzer: Quality and safety, yeah. The site of the future is really looking unusual.

Bruce: Joe’s really very knowledgeable on additives and the means, and additive cocktails every so often, just mix it up a little. One last thing, and I’ll shut up.

Marty Stetzer: Sure.

Get the Receipt

Bruce: Always have a receipt. Whether I get one physically or it’s on your credit card.

Marty Stetzer: Always take the receipt, absolutely.

Bruce: Because I’ve been a rep, many years ago, and when customers call in and they say they got water in the gasoline, you have to prove you bought it at a particular time at a particular location, and getting a fuel filter system in a modern car, or a whole new gas tank, is very expensive. There’s always, water can get in gasoline, it’s not normally intentional, condensation in the tank, right?

The dealers are supposed to, from ever since I’ve been in the business, even now, you’ll see the stick out back. They’re supposed to go put a little water finding paste, put it in the tank every day. They don’t always do it, they haven’t done it ever since I’ve been in the business, to check for water and moisture. If it exceeds a certain amount, they call their landlord, and they come pump the water out.

Bruce: How does water get in there? Not so much today, but the driveway, when you get these extreme floods, have you seen those little hatches when the tanker comes out? Sometimes you’re in a hurry, they don’t put those back on, sometimes the seals, and a little rainwater will seep in.

Otherwise, you’ll just get normal condensation. It’s not like anybody’s intentionally put something in the tank that’s not supposed to be there. It’s just a natural occurrence.

Bruce: Just keep your receipt.

Speaker 4: How would you know if you got that? What would happen to your car?

Bruce: Your car would start sputtering, it’d start shutting down.

Speaker 4: Just right away, or …

Bruce: Yeah. I was in my hobby car, traveling a couple weeks ago to Dallas with some other Volkswagen guys, the old ones? We stopped at, I won’t mention the name brand, but it was a big one, a hyper-market, and I saw a little puff come out of it every time he’d shift, and I’d finally, 3 miles down the road, pulled him over and he got out and he had a little additive put in, he said, “Oh, it’s typical”.

A lot of this gasoline comes from corn, right? Ethanol. That’s where it comes from, and so there’s a natural amount of water that’s induced in the gasoline, and it falls out. Water and gasoline separate. Can’t tell you how many times, in the testing business, we would get called to come sample for water. It’s just a natural occurrence, in the new formulated fluids.

Speaker 4: So you’d know right away?

Bruce: Probably, you’d know pretty quickly.

Marty Stetzer: You would, pretty quick.

Speaker 4: Interesting.

Bruce: Sorry, just a little retail tip.

The other reason to keep your receipts is, what happened to me on … We used to go to Colorado every winter, a copy of my credit card was taken, and the number was, yeah. That’s less now, with pay at the pump, but at the time it was not a good deal

Key Marketing Takeaways

Okay, key marketing takeaways.

Transportation is still 65% of US demand.
The US is the biggest market in the entire world.
Wholesale channel management, very important, so it’s business to business, not business to retail.
Futures market drives wholesale. Retail prices set by thousands of dealers in a tributary area.
Majors are divesting company owned stations, and also getting out of company owned and company operated site. They may keep the land, but have a dealer in there paying rent.
C-stores move 80% of US gasoline demand, and if you don’t like that retail format, stick around, wait it out, it’ll change.
Remember, crude cost is the most important factor in the price of a gallon of gas, however it’s a margin business, so you’re watching the pennies.

Extra – Where did c-store site layout come from?

One of the other things when I did the research at Texaco, mid-90’s, Quik Trip was their model. Quik Trip came out of Atlanta, and then was very strong in the Midwest, and at that time Quik Trip was the only site that had the c-store along the back of the site and the gas pumps looking at the c-store. As you’re filling your thing with gas, you’re staring at the Coke on the driveway, almost every site has copied the Quik Trip layout, so you’re standing there, “Oh, yeah, Coke on the driveway, why not, right?”. Then the other thing everybody’s thrown on with all the digital stuff is gas pumps shouting at me while I’m filling up my, I have to wear my earplugs on some of the sites. “Come inside, da da da”, one had CNN on it, unbelievable.

Okay, any thoughts on marketing? Any questions? Thanks for all your input.

Final Wrap Up

Okay, wrapping up. We finally made it. We started with crude transportation, we did refining, supply distribution, our commercial group, Supply and Trading, you learned a lot about hedging, when crude price goes up sell your airline stocks, right?

We, lastly, talked about retailing and final distribution, and the risk management piece is kind of obvious, because prices are moving all the time.

Here are some of the references:

The Oil and Gas Journal, it has an online version.
American Petroleum Institute has a really good introduction to downstream. They had that write up that we looked at, it’s the Fundamentals of Downstream, the API.
Energy Information Agency – EIA
National Association of Convenience Stores
National Petroleum Council
Department of Energy – DOE
Pennwell Publishing publishes the Oil and Gas Journal, and has a lot of fundamental texts, the Basics of Refining, the Basics of Petrochemical.

We used to say, in the upstream it’s all about risk and making a lot of money, and in the downstream you watch everything about the pig, including the squeal. I mean, everything.

It’s such a margin, tenths of a cent a gallon can make a huge difference in your profitability.

Talked about the taxes, so we’ve covered the oil chain, refining, marketing, product transportation, retail distribution, and a little bit about petrochemicals and lubes.

There’s another whole side to this, the E&P side. Gas, gathering process, marketing. This is covered quite a bit in the Society of Petroleum Engineers New Hire Orientation, oil patch.

Bruce: You were always at a pretty high level, with your oil career. What I kind of wonder, it’s kind of a question of, “What’s the meaning of life?”, but, if you look at the chains, go back roughly 4 or 5 years, and you saw ConocoPhillips, they had everything. Fully integrated.

You saw Marathon, and they must have known something guys like me weren’t smart enough to know, but they separated Conocophillips upstream, Phillips somewhat midstream, downstream. They separated those out.

In my thinking, obviously by now it’s pretty smart. Because of the upstream business is in the tank, and they’re doing relatively well in the rest.

I guess the thing i’m trying to understand is an Exxon, an XTO, their affiliate, they’ve got the full value chain. I get confused with the philosophy, I guess that’s what it is, some companies want to keep it all together, forever and ever and ever.

Others have broken it up, in recent years.

Marty Stetzer: There’s two theories. One is when prices are down, it’s bad for the upstream, can be good for the downstream. When natural gas prices are down, it’s especially good for petrochemicals.

You have this portfolio of assets, that gives you what Exxon calls a natural hedge. Exxon does very little of hedging. They say when prices go down on my E&P side, I’m going to make money here, and I’m going to make money here. That same philosophy was followed by Mulva, at Conocophillips, when he bought all those dang refineries.

The new management said, “We’re not making any money in this side of the business, we’re making all our money in this side of the business, so let’s split them apart at exactly the wrong time”. Exactly the wrong time, and there was no natural hedge.

When I say a natural hedge – When crude prices go down this side of the business should make more money, especially this, crude gas. When this side of the business is up, this side may not be making so much money, but on average, over 25 years, the integrated oil companies, that was the theory.

This is not the first time this split has been promoted. The last time crude prices fell, McKenzie came out and said, “Any integrated oil company is a dinosaur”. That was in 1980. Mid ’80’s. I never understood their logic, because, I’ve been around Exxon maybe too long, but I believe the natural hedge argument is a really good one, while you’re in the hydrocarbon business.

Because E&P companies now, they’re in unbelievable bad shape. I mean, Conocophillips, terrible shape.

Marty Stetzer: I’d like to dig up an analysis by the industry analysts and say, “Okay, is the sum of the value of the two companies now, apart, greater than the integrated company?”

Bruce: Now would be a real good what if case, if they had stayed together.

Marty Stetzer: It’s probably on the web somewhere, but that’s a good question. Do you understand what I mean, by a natural hedge? Okay.

Then, last but not least, is the whole power generation side of the business. It is primarily gas, through a local gas distribution system, like your natural gas that comes to house for your stoves, and hydro-generation.

The whole industry is just huge, and we’ve only hit relatively one small piece of it.

Thank you very much, that’s my crib sheet on the back, in case you want to know why he was really talking about all this stuff.