Factors Affecting The UK Oil And Gas Retail Sector

Key business drivers in the UK petroleum retail market

1. Demonstrate the ability to analyse the factors affecting the present size and structure of the current oil and gas retail sectors and the impact of the rising price of
oil.
2. Evaluate the potential of technological change on the energy retailing industry in the next decade.

The downstream oil sector in the united kingdom is comprised of 200 companies which are involved in the process of refining, distributing and marketing of the petroleum products. The companies range from oil companies to supermarket chains and even independent retail groups which are the members of the united kingdom petroleum industry association (ukpia). The oil market in the uk is categorized into two sectors; the commercial and the retail. The commercial sector involves power generators, independent fuel distributors, government agencies, public services, industrial, transport and agricultural customers and the military. The retail market includes mainly the fuels that are sold from the petroleum filling stations (pfs). It has been seen that the retail sector has undergone many downturn over the last 25 years (abraham, 2006). The number of fps declined from 18000 sites to only 8591 sites within the year 1990-2014. The uk petroleum retail market has transformed into a high volume and low business margins which is subject to increased competition due to the entry of supermarkets.  There are several factors that are going to be discussed in this paper that drive the petroleum retail market in the uk petroleum retail market (akli and kim, 2014).

There are several business drivers that affect the uk petroleum retail market which are grouped into four categories which are consumers, suppliers, competitors and government. The basic idea behind the key business drivers is diverse in nature which is critically analyzed below:

Consumer needs as a business driver- it is evident from the consumer behavior that there are two factors that associate the consumers with the pfs which are convenience and the price . It is quite obvious that the consumers demand for fuel depends upon the price of fuels. With the rise in the price, there are consumers who will fill cars at the pfs where the price is comparatively less (asche, oglend and osmundsen, n.d.). It is evident from the gross sales statistics by the ukpia member companies where around £98.8 billion sales were recorded in 2012 which have declined from the previous years. During 2010-2013, the price hiked at an average rate of 11% per year but with the decline in the prices in 2013, the overall average dropped to 8%. Below is the uk petrol pump price breakdown which has increased over the years (ukpia statistical review 2014, 2014).

Consumer needs as a business driver

 A survey revealed that there are different kinds of response from consumers. Some of them emphasize the price factor but for others the availability and convenience of filling car ranks high. The respondents are of the view that in areas where there are pfs at every 10 minutes distance, they prefer pfs that offer cheap fuels. There were about 40% of the respondents that gave convenience of fuel refilling importance more than price. There was another characteristic that the consumers prefer is the additional offerings by the pfs like the shops, loyalty card, cash point or the services of car wash (study of the uk petroleum retail market, 2012). When the pfs are homogeneous consumers generally chose those pfs who offer differentiated products. The general trend that the consumers generally depict is the changes in the fuel prices since the demand for fuel is inelastic hence consumers put a stress on the changes in its price (asche, oglend and osmundsen, n.d.).

Fuel suppliers- it is important for the pfs to establish a sound relationship with the fuel suppliers. There are different channels through which the pfs retailers can either directly or indirectly purchase petrol and diesels lie from the supply division of the oil companies and independent suppliers (study of the uk petroleum retail market, 2012). The relationship is typically price agreement based as both the parties must sign contract to pay the bargained price. The contract specified the fuel price to be plats plus which includes the storage and distribution cost of the fuel suppliers, thus the price of the oil increases. The distribution cost depends on the distance of the pfs from the location of the fuel suppliers (asche, osmundsen and sandsmark, 2006). There are several factors that help the pfs to decide to choose an appropriate fuel supplier which are type of contracts, payment terms, the wholesale price of the fuel and the logistics arrangement. But this platts plus contracts have limitations like the whole sale price risk and the use of spot prices affect the retail price response of the pfs when the refined fuel price increases (asrilhant, dyson and meadows, 2007).

Competition level- the brand loyalty is a significant aspect of the uk petroleum retail market that is exercised by the consumers, but it is the hypermarkets entry that increased the competition. It is evident from the statistics provided by ukpia, there were about 1347 supermarkets filling stations in the uk recorded at the end of 2013 which means that over 15% of all the filling stations are under the control of supermarkets. The chart provided proves that the supermarket sites have increased over the years (ukpia statistical review 2014, 2014).

Fuel suppliers

It has already been discussed that the distance and the time that is required to reach an alternative pfs, the availability and the size of the pfs and the different types of companies that are operating in the areas of the pfs affect the price competition within the petroleum retail market.  The most important aspect that must be considered is the 24×7 fuel service to the consumers. The sales of a particular pfs depend on the different offers on fuel that are rewarded to the consumers. It has been proved that the different non-fuel sales like the sales of the engine oils, tobacco, newspapers, and food products have increased and so the fuel sales (hitchin, 2014). Consumer prefers to refuel their cars in those pfs that offer non fuel services. This consumer preference is true to the fact that they are seeking for extra benefit from the every commodity. The level of competition depends on the convenience and the size of the pfs. The more convenient is the pfs, the more is the sales of the fuels of that particular pfs (study of the uk petroleum retail market, 2012). The level of competition has increase so the pfs must ensure that they must compete on the basis of non-fuel services like increasing the availability of the fuel pumps, access to parking lots on the sites of the pfs. Thus, it is true that the recent business model must focus on the non-fuel sales which are recorded to be higher than the fuel sales (jian and bing, 2014).

Government policies- one of the most important key drivers of the petroleum retail market is the government regulations and policies which have significant impact on the behavior of the consumers, producers and investors. The policies are grouped into three categories like fiscal drivers, environmental and safety measures and other regulatory policies. The fiscal drivers include the business rates, fuel duty and vat and the corporate tax which affect the fuel prices. In this regard the higher the vat and fuel duty, the higher will be price of the fuel which reduces the profit margins but the corporate tax has decreased which implies that the pfs businesses that make low profits have to pay less profit rate (study of the uk petroleum retail market, 2012). The vat was lowered to 15% in the year 2009 but was increased to 20% in the year 2011. The second fiscal driver is the environmental and safety standards which include the e10 introduction which increases the share of renewable sources of energy that must be consumed by the transport sector and the vapor recovery which aims to reduce the volatile organic compounds. The policies must also cover other environmental concern that affect pfs business. It has been proved that the reductions in emission have been achieved by the after-treatment technologies. It has been proved that 90% of the emissions in 2012 were lower than the emissions in 1989 in which were reported to be at its peak. As such there is no restriction on the pollution level as whole at the pfs sites which hampers the environment. The vehicular emission and the pollution level has been depicted in the following charts which proves that both the mission and pollution has declined over the years (ukpia statistical review 2014, 2014).

Competition level

 The other regulatory policies are also important within the petroleum retail sector as it affects the pfs status directly (johnson, curtright and willis, 2013). The other regulatory policies include national emergency plan for fuel, planning system and the measuring instruments directive which support the pfs in an improved way. The government must also focus on the extra cost of storing and refining the fuel so that the price of the fuel can be regulated by the government and should not be very high.

Implications- the retail price of the fuel is the most important driver of the market which the consumers are highly concerned. The consumers have slightly emphasized the convenience factor. The relationship with the suppliers is important as they identify the different types of association between the pfs and the suppliers. The next section is crucial for the petroleum retail market which is the competition. The competition has increased due to the hypermarkets who offer different non-fuel services which attract a lot of consumers (study of the uk petroleum retail market, 2012). The different government regulation and policies either benefit or affect the pfs business. The negative impact of the government regulation includes the vat and fuel duty, the environmental regulations and safety standards. On other hand the decrease in the corporation tax has benefitted pfs business (mineev, 2010).

The size of the oil and the gas sector is influenced by the increased competition from the entry of hypermarkets. The hypermarkets have the ability to invest more in the non-fuel services to attract more customers. Thus, the size of the pfs has declined drastically from 13258 to 9000 from the year 2001 to 2011 (tordo et al., n.d.) Which is depicted below (ukpia statistical review 2014, 2014):

The other factor that affects the size of the oil and gas sector is the traditional business model of the independent dealers to which they face pressure and some of them have closed down their pfs.

The technological change is directed towards the generation of the energy from the fuels which is in the form of gases instead of the solid fuels. The new technologies support the pfs and the oil sector as they help to identify, develop and produce the reserves which increase the supply within the sector (study of the uk petroleum retail market, 2012). The production and the drilling process in the oil and gas industry have changed drastically owing to the technological change. In this regard the 4d seismic or time lapse monitoring which are important for the mapping of the production. Thus, it can be said that the technological change in the oil and gas retail sector has not only increased the profitability but also enhanced the sustainability within the sector (uk oil and gas development potential assessed, 2000).

Government policies

Conclusion:

The key drivers of the business in the uk petroleum retail market have been discussed in this paper. The key drivers have been segregated in four groups which are the consumers, suppliers, competition and the government policies. All the factors affect the retail sector differently. It can be concluded that the hypermarkets have been influencing the market negatively to which the pfs must formulate strategies to overcome the competition by offering non fuel sales at the pfs and provision of other benefits at the pfs site as this would attract customers and thus increase the sales of the pfs. The government also can play important roles to benefit the pfs as well as the environment. The policies on environmental standards are crucial as it will enhance the environment. The government must incorporate policies to decrease the air pollution at the pfs site (uk panics over gas, 2005)s. The size of the pfs has decreased which must be fostered only when the government and the pfs themselves can reduce the competition from the hypermarkets by different strategies. Once the competition is reduced, the pfs would also attract customer and increase the sale and restructure the pfs closure. This will increase the availability of the fuel service within a locality.

References 

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Mineev, a. (2010). Development of russian oil and gas regimes focusing on the shtokman field: institutional drivers. Journal of east-west business, 16(4), pp.303-339.

Study of the uk petroleum retail market. (2012). 1st ed. [ebook] deloitte. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/69760/7322-study-of-the-uk-petroleum-retail-market.pdf [accessed 3 aug. 2015].

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