Published in National Petroleum News Magazine, December 2002

Author Update:  This article was written back in 2002 as a forward-looking statement on the impact of consolidation just as BP, Amoco, Chevron, Texaco, Conoco, Philips, Exxon and Mobil had started (and finished) a wave of “Major Oil” mergers and acquisitions. We as an industry watched what began as the breakup of Standard Oil at the beginning of the last century, now reuniting the brands most of us grew up with in America.

The article’s vision of the retail fuel operation landscape has certainly come to fruition. Conoco was the first Major Oil company to publicly announce selling off their retail division and over the last decade, one by one, pretty much all the majors have quietly exited the fuel retailing business as we have watched the rise of  independent operators such as WaWa, RaceTrac, QT , Sheets and the “big box retailers” became the brands the next generation is learning to trust.

As predicted, this move has certainly been good for consumers, but it has in fact wreaked havoc on the supply chain, making the managing the fuel supply and its distribution infinitely more difficult for the fuel marketer

The Good, Bad and Ugly of Major Oil Consolidation and the Downstream Supply Chain… “Wet” and Paper

Author: Gary D. Bevers, President. Bevers & Co - Downstream Petroleum Solutions

The petroleum industry continues to go through consolidation and restructuring of the major oil companies with increasing efficiency gains for their corporate structure, company operations and upstream/midstream supply chain. A corresponding domino effect on the downstream supply chain and its critical trading partners does not necessarily fare as well.

The Good

The desired objective in this top to bottom industry restructuring is to streamline the supply chain processes with reduce costs and improve the financial performance of the newly combined major oil companies. Although the number of major oil companies involved is small in number; the size, business unit and geographic diversity makes the task very large in scope to accomplish.

Though this goal is accomplished to some degree on the physical supply chain i.e., pipelines, company owned terminals, inventory management, utilization and tracking systems, this represents only the top half of the downstream supply chain. The bottom half, commercial terminals, co-located physical stockholders, allocation stakeholders, exchange partners, independent marketers, common carriers and the un-branded market account for exponentially more than half of the “wet” transactions. The transaction (sale) activity between the oil companies and their wholesale marketers is only the first step in the supply chain.

The Bad

Of the 200+ billion gallons of gasoline and mid-distillates sold yearly, independent marketers distribute approximately 50-60 % of the gasoline, 70+ % of the diesel and 90+% of the heating fuel. Each transaction has a number of costs associated with it to complete the receipt of order to deposit of payment cycle. These costs include time to receive and dispatch orders, paper documentation, credit exposure, transportation and so on.

The current Marketer distribution channel is represented by 8,500+ companies where only 5 years ago their number exceeded 12,000. Oil Company consolidation, declining fuel margins, marketer cost containment and competitive pressures are projected to decrease the marketer numbers by another 25% n the next five years. Higher levels of sales through fewer marketers generally results in reduced average operating costs per gallon sold through economies of scale with existing systems and processes. However, the gains are marginal and smaller than those realized by a truly integrated ERP system.

The physical movement of refined products from the refinery to the Bulk Terminal only accounts for a small number of the transactions that occur in the marketing, distribution and delivery to the retail and commercial/industrial end users. The much higher number of transactions is between the marketers and their customers due to purchases not in bulk i.e. full transport, etc. These transactions are the least efficient by virtue of their shear number and fixed non-variable order costs.

The Ugly

When you factor in company owned and commercial terminals, common carriers, both contract and keep-fill transporters, then physical stockholder, allocation stakeholder, exchanger and paper/wet barrel position holder then you can easily have 5 to 7 Trading Partners involved in just one transaction or product lifting at the “rack”. Each of these stake holders needs a copy of the BOL and currently the communication device of choice is the lowly fax (paper) with mail and then email following close behind. EDI accounts for only a fraction of the total data communications supply chain for the downstream. And, each of the previous methods requires manual processing with the attendant inefficiency and mistakes.

While consolidation in the industry has improved supply chain efficiencies, to some degree in the “wet” supply chain, the “data” supply chain is over due for improvement. The major Oil Companies made significant system upgrades to meet Y2K compliance and replaced legacy systems with new ERP systems and benefited from the increased system integration and the corresponding efficiency gains in data communication. On the other hand, marketers also upgraded or replaced existing systems, but with similar systems and did not gain any significant process efficiencies. Lower cost enterprise level computer systems, telecommunications transmission and the development of cost effective Internet leveraged eBusiness systems have delivered lower costs and operational efficiency gains to major oil’s primary exchange partners. But this usually accounts for only 20% of their trading partner relationships.

To put it bluntly, the opportunity to improve the data supply chain in the downstream is significant. The level of friction (inefficiency) that exists in the Marketer distribution channel will continue to put tremendous pressure on the whole downstream petroleum industry until they are brought fully inside the data connectivity circle.

Do the Math

When you factor in the number of trading partner and stakeholder relationships involved to ensure efficient delivery to the entire geographic petroleum market, the task seems daunting — but the long term cost reduction/revenue enhancement opportunities justify the efforts to integrate the downstream supply chain. It will take more than Major Oil and Marketer consolidation to accomplish the end game. Total industry supply chain efficiency at the oil company level is only one piece of the picture.

It will take integrating supply chain process efficiencies beyond the Oil Company’s internal processes and primary trading partners down through all their trading partners. Then extending the data eConnectivity to their critical independent marketer channel will be the ultimate “Holy Grail”.

Published December 2002, National Petroleum News