There is so much focus on developing the shop side of the service station business these days, that the fuel element has become almost secondary – except where prices and margins are concerned of course.
Oil companies have spent probably as much in recent years advertising their shop offers and friendly service as they have on distinguishing themselves with their fuels. Since the early ‘90s, once people got used to the idea of buying fuel from supermarkets, they mostly stopped thinking about the quality or brand of the fuel and focused on price and convenience.
Recent attempts by oil companies – such as Shell with Optimax and BP with Ultimate – to push the idea of a premium fuel, have found a small but growing and receptive audience, which has given some retailers the chance to make extra fuel margins they could only dream of on mainstream fuel.
Steadily churning away in the background, is the huge environmental movement which is leading the legislatory changes of fuel specifications, as well as pricking the awareness and consciousness of motorists. Thus the market – again, very small – for alternative fuels such as bio-fuels and LPG has been born. And the continuing development of electric vehicles and the launch of experimental hybrid cars running on hydrogen-fuel-cell technology,
have become a reality.
Around 133 million litres of petrol and diesel are sold in the UK each day to an estimated four million customers. A lack of economic alternatives means that these fuels will remain the major transport fuel for at least the next 25 years, according to the latest Statistical Review from the UK Petroleum Industry Association (UKPIA). Oil is not running out yet – and experts suggest it could last for another 40 years at least. Therefore, says UKPIA, the move to alternative fuels will not be driven by a lack of oil supplies, but by different environmental, economic and social goals.
Oil remains a cheap source of energy – in 2004 the pre-tax pump price of gasoline and diesel in the UK was once again the cheapest in Western Europe. Alternative fuels such as bio-fuels or gases require large duty differentials to compete. Meanwhile the price of crude oil has ranged from $10 to $50 a barrel in the past eight years, with increased volatility due to international tensions and rising global demand. However, due to the high level of competition between UK retailers, the pre-tax pump price is currently the same in real terms as it was in 1990.
Fuel duty is also an important source of revenue for the government – in 2004/2005, £23.5bn in fuel duty was collected by fuel retailers in the UK. Add in the VAT paid on road fuel – about £6bn – and that’s a total of £30bn revenue for the government.
In terms of the environmental aspect, many improvements in fuel quality have been made over recent years, such as the removal of lead from petrol, and reductions in benzene and sulphur levels. These have reduced the emissions of air quality pollutants from vehicles and have also enabled new vehicle technologies.
However, reducing C02 emissions in future will be a major challenge. UKPIA’s report states that road transport C02 emissions have been fairly static for the past eight years, but the downstream oil industry is committed to playing a pro-active role in assisting the government to identify the best ways to achieve the targets. A renewable transport fuels obligation is likely, which will present some new challenges for suppliers, says UKPIA. Meanwhile, a switch to sulphur-free petrol and diesel is set to start in 2006.
PETROL AND DIESEL
Overall the road fuels market is still fairly flat, reflecting increased fuel efficiency of vehicles and the switch to diesel road cars. The higher fuel prices – nearly £1-a-litre for diesel – has not affected demand, according to UKPIA. Sales of petrol have been falling since reaching a peak of 33bn litres in 1990, and currently represent 53% of road transport demand. Deliveries were about 1.5% lower this summer compared with last year.
During the same period diesel demand was up 1.9%, so the market is heading for a 50/50 split on diesel and petrol. Sales of diesel have been steadily increasing for the past 20 years due to the appeal of diesel vehicles because of their lower running costs – although the one-time cheaper price differential of diesel fuel has reversed in recent times, due to the shortage of supply.
In terms of product development there have been a rash of new product launches from the oil companies in recent times. Shell launched Optimax in 2001 and is apparently delighted with sales and customer feedback. “In addition to enhanced margins we are finding that many dealers are converting this forecourt attraction into additional shop footfall and sales,” said a spokesman. The company claims Optimax has the highest octane rating of any petrol available on UK forecourts, and is designed to enhance a vehicle’s responsiveness and improve engine performance. Intermittent advertising campaigns have helped push the message about its enhanced properties, and certain drivers – such as motoring enthusiasts or those with expensive cars – seem prepared to pay the extra premium of between 3-5ppl. Meanwhile the launch of Shell Diesel Extra in 2003 has helped deliver additional levels of customer satisfaction “at no extra cost at the pump”, according to a Shell spokesman. “We remain committed to developing our diesel offer even further,” he said.
BP’s launch of Ultimate, a new range of fuels offering “more performance and less pollution” in 2003 momentarily took the lead over Shell because it featured both a diesel and petrol version.
But the Ultimate range has now “just got better”, according to BP’s brand manager for Ultimate, Nicola Beckett, following an overhaul of its formulae which has boosted the performance of both fuels. BP claims the diesel version has more than three times the engine cleaning performance than before, up to 22 extra miles per tank, and further reductions in diesel exhaust emissions. The unleaded version offers “significant” improvements in engine cleaning performance with 33% faster engine cleaning capability, and an extra 28 miles per tank.
“The new BP Ultimate formulae were developed following intensive research which showed that customers remained concerned about exhaust emissions but still wanted more out of their car,” says Beckett. “New BP Ultimate addresses this by further improving engine cleaning capability, fuel economy and by reducing emissions.”
BP claims that more than a billion litres of Ultimate have been sold since its launch in October 2003. One in eight BP customers uses it on a regular basis, says Beckett. “The core group of users is what we describe as ‘benefit seekers’. They have a keen interest in motorsport, and enjoy cars technically. However, Ultimate also appeals to a broader audience of people who generally love their cars, are aware of environmental issues and are not necessarily motor enthusiasts.
“We believe the market for motor fuel is changing from a commodity to a lifestyle choice. People’s cars are generally their second biggest purchase, and just as in the supermarket there is the choice of premium or value lines, so they want the choice of fuel quality on the forecourt.”
Esso launched its ‘Energy’ range of motor fuels in November 2004. It included petrol and diesel versions, both offering such features as improved engine cleaning and fuel economy, and in the case of the petrol, more power. “With on-site promotional leaflets and posters, TV and print advertising and new branding on delivery tankers there is high consumer recognition of the reformulated product range,” said an Esso spokesman. “We are pleased with the sales performance to date. Retailers report that the higher octane Energy Supreme grade is particularly popular with customers who take pride in their vehicles and wish to use a fuel with superior performance.”
Total launched Excellium (both unleaded 97 and diesel) – also offering more fuel economy, more care for the engine and less pollution – in April this year and is “very pleased with its performance in the marketplace”. It will be regionally available across 50% of the network by the end of the year, while the diesel version is expected to be available on up to 10% of sites by the end of the year. “We are continuing to evaluate this second grade of diesel,” said a spokesman. “If it proves successful, then Excellium diesel should continue to increase.”
Demand for Liquid Petroleum Gas has levelled off, according to UKPIA. LPG offers environmental benefits, and had a short-term excise duty incentive, which gave it a large duty differential over petrol and diesel. Worldwide there are over 4 million LPG-powered vehicles in use. According to UKPIA until cleaner petrol and diesel fuels were developed, in comparison LPG offered significant emissions benefits. With the introduction of ultra-low sulphur fuels and now the move to sulphur-free, this advantage has been substantially eroded. The Chancellor announced in his March 2004 Budget that the duty on autogas would be increased by 1ppl in each year up to March 2007, bringing the duty rate more into line with that applied to bio-fuels. It is available at around 750 filling stations across the UK, with BP being the market leader, offering it at more than 200 sites.
Demand for bio-fuels continues to grow. Bio-fuels are liquid or gas fuels that are not derived from petroleum-based fossil fuels or they contain a proportion of non-fossil fuel. Mostly they are blended with conventional petrol or diesel fuel to a limit of 5%.
In 2002, Roger Budgeon of Holbrook Garage, became the first garage in the UK to sell bio-diesel, which was supplied by Greenergy. He started selling bio-ethanol last month. “At first the take-up of bio-diesel was 25-30% of diesel sales. Now it is the same price as normal diesel it’s 60% of sales. People are more aware of the fuel, and more aware of green issues generally."