Refinery Market Of Petroleum Industry In The UK: Competition, Consumer Needs, Suppliers, And Government Policies

The downstream industry is characterized with low margins and returns with government regulation being a major factor in the United Kingdom however, 2030 economic forecasts predict that the refinery production in the United Kingdom will return to historical levels of utilization. This is increasing competition from countries to attract investments from International Oil companies.

Drivers of financial investments in refinery activities in UK

The oil sector that is present in the United Kingdom comprises of more than 200 companies that are involved in the process of distributing, marketing and refining of the petroleum products. The refineries that are present are divided in to two sectors such as the retail and the commercial sector where the oil is transported to government agencies, fuel distributors and others. It can be seen that the number of refineries that are present in the country is finding it difficult to invest more money in to their business due to the lack of proper management. The investments that are done in the refineries help them to filter the petroleum products so that it can be used for various purposes. The major companies that deal with oil refining activities in the UK are Lindsey Oil Refinery that is situated in Immingham and Stanlow Refinery that is situated in Ellesmere Port in the UK (Yusuf et al. 2013).

There are various factors that affect the size and structure of the oil and gas refining industry in the United Kingdom such as the consumers, competitors, suppliers and the government. The demand of the consumers regarding the fuel is dependent on the price of the oil. The rise in the price of the fuels will see that the consumers will opt for the gas stations that will be offering comparatively lesser amount. The UK oil market is divided in to two sectors, which are the retail and the commercial sector. The retail sector consists of the gas stations that deal with petroleum and it can be seen that there has been a major downfall in the last 25 years (Bunn et al. 2017).

The needs of the consumers play an important role for the refinery market of petroleum in the UK market. The consumer behavior depends on the level of the price and the convenience that they would get with respect to the access of the petroleum. The demand depends on the price of the fuels so that they can purchase it according to their limits. According to a survey conducted by UKPIA, it was seen that price and the availability of the gas stations were the factors that attracted the customers in purchasing it. The consumers also stressed on the point that the stations that provide benefits such as the loyalty cards and bonuses are the ones that attracts those (Yusuf et al. 2013).

Consumer needs

The suppliers are another factor, as they are the channels through which the supply of fuel depends directly or indirectly. The agreement is based on the price, as the parties have to sign a contract based on the price that has been bargained. This will help them in controlling the prices so that there is an even competition within the market (Bunn et al. 2017). The contract is inclusive of the cost of distribution and storage, which indirectly leads to the rise in the prices of the oil. The cost of distribution is dependent on the distances from the gas stations and the place of the suppliers. Apart from this, other factors such as the nature of the contract, price of the fuel in the wholesale market, arrangement of logistics and the terms under which the payment has to be made needs to be taken in to consideration. The contracts are also subjected to limitations such as the risk of the whole sale prices and the prices that may get increased on the spot as well. These factors affect the oil industry in the UK market (Chmutina and Goodier 2014).

Another factor is the level of competition that is growing in the refinery market of the oil industry in the country. The increase in the hypermarkets has led to the intense competition.

Figure 1: Level of competition

(Source: Bunn et al. 2017)

The figure suggests that by the end of 2013 there were around 1350 supermarkets that provided gas stations to the consumers in fulfilling their demand for petroleum, which shows that around 15 percent of the stations were under the control of the supermarkets. Apart from the time and the distance that the consumers look forward in searching the alternate filling stations, the factor of competition with respect to price also needs to be taken in to consideration in the refinnery market of petroleum industry. The aspect that is important is the availability of fuel in the fuel stations along with other services on a continuous manner to the customers (Yusuf et al. 2013). The sale of the filling stations is dependent on the other aspects such as the rewards that are being given to the consumers so that they would come back again to the particular stations. It can be seen that the consumers will be attracted to the filling stations that offers other other benefits as well apart from the primary commodity. The availability of the parking lots along with other benefits will help in attracting the customers towards those particular fuel stations. Therefore, it can be seen that the business models need to put more focus on the sale of non-fuel products, which will help them in earning better profits (Leete, Xu and Wheeler 2013).

Suppliers

Another factor is the government policies and the regulations that are being framed by them that will create a significant impact on the behavior of the investors, producers and the consumers. The policies in the country have been divided in to three stages that consists of the safety measures, fiscal drivers, environmental policies along with the regulatory policies. The fiscal policy is inclusive of the duties that are present in fuel along with the other taxes and corporate taxes that result in decreasing the margin of profits for the companies. The rate of corporate taxes also had a negative impact as it led to the decrease in the profit of the company. It was seen that the percentage of vat was lowered to 15 in 2009 but was increased in the year 2011 to 20 percent (Mitchel, Marcel and Mitchell 2015). The other driver is the safety standards and the environmental policies that will help in increasing the share of the renewable sources, which are being consumed by the transport sector along with the recovery of the vapor system that will help in reducing the organic compounds that are volatile in nature. These policies ensure that the environment is protected and it does not affect the business of fuel stations. There has been a huge decrease in the level of emissions after the onset of new technologies, as it has helped in completing the process in an easy manner (Mitchell and Mitchell 2014).

The presence of the various regulatory bodies has also affected the refinery market of the petroleum industry in a direct manner. Apart from these policies, the emergency plan for fuel on a national basis and the improved system of planning has helped the gas stations in improving to a great extent. The extra cost of refining and storing the fuel has to be borne b y the government, which will help in regulating the prices and keep it within the capacity of the customers.   

Startup costs

The new companies that want to enter the market with the refinement of the oil has to face trouble, as it is difficult to establish the company in the UK market. The refining companies that are presently operating in the market will play a crucial role in preventing further investment in their business due to the rise in the level of competition. The use of methods such as drilling in a vertical manner will help in pushing up the prices of the refining companies that want to enter the market. There is a lot of involvement of money, if these new companies after getting established stop their work due to the pressure that will face from the present refinement companies. The prediction of the prices with respect to the refinement activities by the new companies will be difficult, which may result in loss for these companies in the future. Therefore, price plays an important factor for the new refining companies, as they have to understand the present condition in the UK market (Cucchiella, D’ADamo and Gastaldi 2015).

Competition levels

Politics can affect the oil and gas companies not only by its rules and regulations but in other ways as well. The political risks may not only depend on the country but may vary from state to state as well. The companies will tend to establish themselves in the stable political systems so that it can help them in carrying out its business in an organized manner. The UK market does not allow any refinery company to come within the country to set up its own establishment, as it may give rise to the sudden nationalization or shift in the regulatory bodies within the country (Atil, Lahiani and Nguyen 2014).

The refinery companies may face risk in the change in the government, which may result in the end of the company after the capital has been invested by them within the economy. This will lead to the loss of the companies, as the amount that has been invested cannot be retrieved anyhow. The rules present in the country try to raise the interest of the local companies in investing in the oil refineries rather than depending on the foreign companies. The mitigation of these risks will help in building sustainable and successful relationships with the partners so that the business can be carried out in an organized manner (Mallabum and Eyre 2014).

The anchor market that is present in the United States has been longing for new buyers since the supply market has not been good in the past years. The search for the new buyers has led to the market penetrating in the UK market, as the research conducted by them saw that the demand is more in the market. This has led to the increase in the operating cost, as the supply and demand for the barrels kept on changing. This type of fluctuating industry has led to the play of the power between the new and the traditional refinery companies of oil. The Middle Eastern countries are trying to increase their flow of products in the Asian and the UK market that will help the country in investing more in this sector rather than America. This has lead to the increase in the consumption of petroleum products in the European countries (Stevens 2016).

The demand of the oil has increased in the UK market, as more number of customers in the UK market is increasing within the European nations. This has led to the change in the demand and the supplies within the country. Moreover, the construction of the gas stations in the country has to be done in a way so that it can provide the customers with other benefits as well. This will help in attracting the customers towards the particular stations (Carney 2015).     

Government policies

The UK government has taken a stern action against the level of pollution that is present within the country. The construction of these new sites will lead in the increase in the level of pollution within the surrounding area. The rise in the environmentalist activities is also preventing the companies in building up of new areas. The excavation of the sites will lead to the damaging of the areas, which will increase the factor of pollution. The drilling by the refinery companies and the ecological effects of the new sites will affect the lives of the local residents (Mallabum and Eyre 2014).

The future of the oil industry in the UK market is dependent on the improvement that they make on the technological front. The oil companies on a global level are not in a state to accept the new technologies that are present in the market, which will help in increasing the sale of the oil. The use of the 3D seismic mapping has to be adopted so that the exploration of the resource can be done in an easier way. This will help in decreasing the cost of computing so that there can be rise in the production by drilling in a horizontal manner. This process will help in controlling the surface and evaluating the reservoir at the time of drilling process (Bolton and Foxton 2015). The fracturing technology plays an important role in the oil industry in the UK that needs to be adopted so that it can help in setting up of the stations in an easy manner. The adoption of the new technologies in the market is slow, as it leads to various risks in the project that are of huge nature. The use of the technology in this sector is slow that has led to the depletion of the oil fields and managing the reservoirs in an economic manner. The government of UK needs to support the technological drive so that the refinery activities can be done in an efficient manner (Stevens 2016).       

Conclusion

Thus it can be concluded that the refineries have to find certain alternatives so that it can help them in finding investments for the proper management of the oil. The barriers such as the government policies and the geographical risks have to be mitigated so that it can help the companies in attracting the investors to raise money within the company with which they can continue their refining activities. this would help them in serving the needs of the customers who are totally dependent on the petroleum products.

References

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