Petroleum Product Marketing Fundamentals

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Lesson Overview

The Marketing Fundamentals Lesson consists of the following topics

Marketing Image – The Public Interface
Refiner – Supplier
Product Uses – Light Products
Product Uses – Heavy & Specialty Products
Global Demand Barrel Differences
Global Measurements
Value of Branding
Independent Marketers
Marketing Business Structure
Marketing Distribution Channels
Marketing Price Structure

Marketing Image - The Public Interface

The petroleum industry presents its face to the public through its marketing. The Marketing Department is responsible for three components of a company’s image:

1. Quality products are a significant part of the image that an oil company brings to the public. Marketing has the responsibility to advise the research and manufacturing functions on changes needed in product specifications or new product opportunities to meet changing customer preferences.

2. Branding is the term for all the visible manifestations that distinguish a company from its competitors, such as products, package design, advertising, company emblems, trademarks and the logos. A branding strategy is another responsibility of the Marketing Department.

3. Retail sites or service stations are the most prominent public representation of the industry. Operating a successful service station network is a challenging task. Many of the service stations in a company’s network are owned and operated through franchise dealers, not directly by the oil company. A strong dealer network is one of the key success factors in oil industry marketing.

Refiner - Supplier

For this lesson, refiners will be defined to include both:

Integrated oil companies – crude oil upstream exploration and production companies with petroleum product manufacturing and marketing operations; and
Independent refiners – companies with petroleum product manufacturing and marketing operations, but no upstream exploration and production.

Through the early 1970s, refiners dominated the retail market with extensive chains of branded service stations.

Petroleum Product Uses

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Light Products

The marketing department is responsible for ale and distribution of the refined petroleum products as they are moved into the marketplace. Refineries classify products in terms of the production barrel – i.e., based on their position in the distillation process. But product marketers classify them in terms of the demand barrel – i.e., based on their end use by the customers.

LPG, naphtha and gasoline are often referred to as “light” products, by both refiners and marketers because they are composed of the lightest hydrocarbon compounds found in crude oil.

Cooking

Liquefied petroleum gas (LPG) is used for home heating and cooking, particularly in areas with limited access to other fuels. LPG is sold to retail customers in small pressurized bottles for home cooking. In many developing markets retail LPG prices are set and controlled by the government. Industrial customers receive LPG in bulk, truck deliveries and need to have a large tank at their site to receive the product.

Solvents and Feedstocks

Naphtha is a solvent like paint thinner, and a feedstock used to produce other petrochemicals and plastics. Naphtha is sold in bulk to major industrial customers and can be delivered by truck or in a small specialty tanker.

Transportation

Gasoline fuels most of the automobiles and other passenger vehicles. Diesel, like gasoline, is used to fuel engines – in cars, trucks and heavy machinery. The common term for gasoline and diesel is motor fuels. Across the world, kerosene is primarily used for domestic and military jet fuel. All transportation fuels can move and be sold in large bulk quantities via pipeline barge or tanker. The final delivery of motor fuels to a retail site is by a tank truck of 8-9000 gallons.

Lighting and heating

Internationally, kerosene is still used for lighting today, but mostly in areas without access to electricity. Kerosene is used in space heaters and cook stoves. Like LPG in developing markets, retail kerosene prices can be controlled. As its name suggests, heating oil (known in US and European markets as No. 2 fuel oil) is used to heat homes, businesses. Kerosene and heating oil are also sold in bulk. Heating oil for home use is delivered by tank truck.

Heavy and Specialty Products

Fuel oil, asphalt and coke are known as “heavy” products. They have very high boiling points, and are thick and gummy at normal temperatures.

Power Generation

Residual fuel oils often are customized for specific industrial applications, like generating electric power or propelling a ship. Residual fuel oil is sold in bulk and can be moved by tanker or pipeline. The industrial customers have large tanks to receiver fuel and provide a continuous supply to their plant operations. Petroleum coke is also used to generate power, often as a cheaper blending compound, or substitute for, coal.

Petroleum coke is moved by truck or ship, and is sold in a solid state like coal. Petroleum coke is used to make anodes for aluminum manufacturing and the graphite in pencils.

Road Surfacing

Asphalt covers the surface of most roads used by gasoline-powered automobiles around the world. In the industrial world, asphalt is sold in heated bulk facilities. In emerging markets asphalt is sold in drums.

Lubrication

Lube oils and waxes are called “specialty products.” They are produced in refineries using highly specialized chemical processes. Lubricants are used to reduce friction between bearing surfaces, and to aid certain manufacturing processes.

Water Repellant

Wax is used not only for candles, but also as a water repellant in paper-based packaging and wood-based composite boards.

Lube oils and wax are sold to industrial customers in bulk truckloads,. Retail lubricants are sold in 1quart or 1 liter bottles at retail sites and mass merchandisers.

Global Demand Barrel Differences

As the chart indicates, the demand barrel differs across the world - for the following four reasons:

The level of income and need for vehicle transportation drives gasoline and diesel demand. Asia’s gasoline consumption is a small percentage of the demand barrel but growing rapidly as more of the population acquires automobiles.
Government tax policy can affect the use of diesel in Europe versus the US. As a fuel for automobiles diesel can give better fuel economy than gasoline.
Government pricing policy also can impact the use of LPG and kerosene for heating and cooking applications in emerging market countries in Asia.
The level of industrial development and types of fuel used for power stations affects the amount of residual fuel needed and produced at the refineries.

Global Measurements

The motor fuel used in most cars is known as gasoline in the United States, and petrol in the United Kingdom and elsewhere.

Retail fuel units-of-measure also vary around the world. Common definitions for sales of fuel products are listed below:

Litre - is the original metric system base unit of volume for measuring liquids.

Imperial gallon - in the Commonwealth countries and Ireland is legally defined as 4.546 litres, which is about 1.2 U.S. liquid gallons. The Imperial gallon is no longer legal in the UK for trade or public administration purposes, but it is still used for advertised vehicle fuel consumption in miles per gallon.

Gallon - in the US, a liquid gallon is legally defined as 231 cubic inches, and is equal to 3.785 litres. This is the most common unit of volume used for measuring liquids.

The Value of Branding

For most people, the major interface with the industry is the branded service station.

Product branding occurs as close to the final distribution destination as possible. It is the process of blending of specific (and proprietary) additives which are chemical compounds that improve product performance.

The term branded and unbranded in this Module refers to the perspective of the refiner supplying gasoline and diesel fuel to retail service stations.

The gasoline sold at a refiner’s branded location could have been made at another refinery. The refiner’s specific additives are added at the refiner’s terminal, before it is loaded into a tanker truck for final delivery to the branded service station site.

The benefits of branded gasoline and diesel provided by a refiner (over unbranded fuels) include:

customer perceptions of reliable product supply and high quality,
national brand recognition and
better market acceptance of new products.

Independent Marketers

Independent marketers are companies with no refining operations that market motor fuels that is unbranded when it leaves a refiner. Independent marketers must purchase fuels from a variety of sources, including integrated oil companies and/or independent refiners. They sell these fuels through their own chain of service stations.

Most independent marketers began as a "no-frills" fuel retailers, generally selling gasoline for a few cents per gallon less than oil company branded gasoline.

In the past, perception of an unbranded independent gasoline facility was lower quality fuel and poor facilities. All fuel products sold by US independent marketers meet the API (American Petroleum Institute) specifications and can be used in all vehicles.

Today, unbranded sites are often associated with respectable, larger multi-store convenience store chains, often with very high quality facilities.

Some US independent marketers have become so strong that they are now branding their own gasoline and adding their own additives to improve performance - just like the major refiners. However, the refiner supplying the independent marketer considers this fuel to be an unbranded sale.

Marketing Business Structure

Marketing is an exciting business, with a lot of complicated terminology. The terminology can vary somewhat from refiner to refiner, but the basic concepts described below are the same.

Simply stated a channel is a set of intermediaries used to get products to the end customers. Channels vary in complexity and efficiency. In downstream marketing, the two key channels are wholesale and retail. Each channel can move both unbranded and branded product.

The general public sees the refiners from the vantage point of brand advertising and filling their automobiles at the local service station. In reality, petroleum product marketing is more about executing long term contractual relationships with large, sophisticated wholesale customers than the retail site operations, product, brand and advertising.

Over 80% of the industry volume in the US is sold through the wholesale channel.

Marketing Distribution Channels

Three types-of-sale are used by all refiners to sell and deliver products to their customers.

Retailers are the most obvious type-of-sale to the public which cover sales of branded gasoline, diesel, (or heating oil) directly to end customers. Retailers also include independent marketers that sell fuel through their own service stations.

The two basic types-of-sale in the wholesale channel are:

End Users – Those customers such as airlines, utilities and chemical plants. They generally take delivery from a refiner in large quantities (even hundreds of thousands of barrels) directly into their storage tanks.
Resellers - Sometimes called “Jobbers” or “Distributors” are considered middlemen. They conduct the business of purchasing refined petroleum products and reselling them - without substantially changing their form. Branded resellers handle the products of one refiner. Unbranded resellers get the oil wherever they can and sell it under their own brands.

Marketing Price Structure

The pricing group within the marketing department is responsible for tracking a complex set of global supply and demand factors, and using them to set and manage retail and wholesale prices. The prices that a marketing department considers are as follows:

Futures prices are set at a futures exchange – e.g., New York Mercantile Exchange – for commitments to sell or purchase a standard quantity of a petroleum product at a specific location at a specified time in the future. They are an indicator of the risk associated with the volatility in costs and prices, and act as a barometer of future market conditions.

Spot prices are current and set at global auction markets, in major producing or import centers, for commitments to sell or purchase bulk quantities of a petroleum product – 40,000 gallons or more. They are an indicator not only of the manufactured cost of, and demand for, the product but also of general pricing trends. These auction market spot prices are highly volatile, so participants can face large risks.

Rack prices are set by the terminal owner – a refiner or independent marketer – for a tanker truckload of a petroleum product received at the terminal loading rack.

Dealer tank wagon (DTW) prices are set by the refiner for a tanker truckload of a petroleum product delivered to the dealer’s retail station. These are the least volatile wholesale price.

Pre-tax street prices are set by the retailer to reflect local market conditions and the marketing strategy of the retailer. Street prices are very sensitive to prices at competing stations. Note that the price on the pump paid by the customer also includes taxes.

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