Top 10 OPIS Newsletter                                                 and Oil Express Stories of 2017

Wawa Buys Jones Act Barge                                                            to Feed Rapid Florida Fuel Expansion

OPIS Newsletter, January 2017

The booming Florida retail fuel market has prompted a major retailer to make the extraordinary move to buy a U.S. Jones Act oil products tank barge for Gulf Coast-Florida and coastal Florida deliveries.

Wawa Inc., a large East Coast convenience store chain, will spend an estimated $80 million to take delivery of an articulated tug barge (ATB) from Fincantieri Bay Shipbuilding at Sturgeon Bay, Wis., in the third quarter of 2017. This ocean-going tank barge has a storage capacity of about 185,000 bbl.

The initiative could provide a big competitive edge for Wawa, which already has caused a stir in Florida with its below-market street prices. The move also demonstrates the advantage size affords for an exclusive group of super retailers.

Only a handful of high-volume retailers are large enough to make waterborne deliveries. Besides RaceTrac and Wawa, Marathon Petroleum delivers waterborne fuel cargoes for its Speedway retail fuel chain.

While other fuel retailers have chartered a U.S. Jones Act tanker or ATB for U.S. coastal fuel deliveries to achieve economies of scale, this could be the first time a c-store chain has purchased an ocean-going vessel. An ATB is a tank barge propelled at the stern by a tugboat. ATBs compete with tankers in the Jones Act market.

***Going Waterborne***

Wawa is expected to use the ATB to deliver fuel from the Gulf Coast to Florida, which is not served by pipelines or fuel deliveries via rail. Also, the new ATB is to deliver fuel along the Florida coast, including Port Everglades and Tampa.

The ATB is expected to optimize Wawa's fuel supply strategy for Florida, providing options for waterborne and rack supplies. Wawa dabbles in the waterborne fuel deliveries via Jones Act ships, but it is not considered a regular market participant in the U.S.-flagged shipping market. Following the delivery of the new ATB, Wawa will have guaranteed, stable waterborne fuel delivery to Florida. With increasing waterborne delivery, Wawa is expected to cut back on its fuel volumes purchased at Florida racks.    

The c-store chain had ordered the barge to facilitate the company's rapid expansion in the Sunshine State. Strong growth in Florida has helped Wawa's barge purchase in the long run, even though the Jones Act market has been softening due to weak crude prices and a slowdown in U.S. coastal crude deliveries.

It may be more economical to charter spot Jones Act ships for coastal deliveries right now than to buy due to the soft market, but Wawa could save on chartering cost in the long run if it owns the vessel. The cost of operating a Jones Act ship is pegged at about $23,000 per day, significantly lower than the spot charter rate of about $40,000 per day.    

RaceTrac, another major retailer in the Southeast, chartered the 330,000-bbl capacity Jones Act tanker, Independence, for two years, at around $40,000 per day for Gulf Coast-Florida and Florida coastal deliveries. Independence made its maiden voyage from General Dynamics NASSCO's San Diego Shipyard in December 2015.

Besides savings on chartering rates, vessel ownership could ensure stable operational costs for Wawa in the long term. Wawa could be shielded from potential Jones Act rate hikes in the future. The Jones Act market could rebound and ship supply may tighten if U.S. oil prices bounce from the lows in the coming years.

***Sunshine Beckons***

Florida has become a key market for large retailers in recent years. Between Wawa and RaceTrac, both companies own more than 300 c-stores in in the state.

Florida currently has more than 10,000 c-stores, over 6,000 of them selling gasoline, according to the Florida Retail Federation.

The fuel market is expected to grow, backed by a strong local economy and rising population. The larger presence of retailers like Wawa and RaceTrac could increase pressure on the state's many mom-and-pop gas stations.

Wawa said on Jan. 17 that it plans to open 25-30 new stores per year throughout the state of Florida for the next several years. It opened its first store in the Sunshine State in 2012 and its 100th store late last year. Wawa sells fuel at 500 of its more than 730 stores across its six-state operating area of Pennsylvania, New Jersey, Delaware, Maryland, Virginia and Florida.

The company sells over 2% of all the fuel sold in the country, Wawa said. Wawa sells diesel in over 400 of its fuel stores and earlier in 2016 opened its first store to sell compressed natural gas as a motor fuel, it said.

RaceTrac, with big building and remodeling plans for Florida, said it intends to open nearly 50 more new stores in the Sunshine State over the next two years. In 2016, RaceTrac cut the ribbon on 24 new stores in Florida, putting its total count there at 207, the company said. Its Florida stores make up nearly half of RaceTrac's entire 435-plus network, which spans Georgia, Florida, Louisiana and Texas.

"Florida is an important market for RaceTrac," said Robby Posener, vice president of marketing, merchandising, construction and architecture and design at RaceTrac. "By the start of 2017, we will have in excess of 200 stores throughout the state, many of which are strategically positioned along commuting routes and interstates, leaving us ever more confident of our ability to double our store count in Florida in the coming years."

Edgar Ang,

Tom Kloza,

Ben Brockwell,


MW Refs May Gain Up to 100,000 B/d Mkt Share                      on Laurel Reversal

OPIS Newsletter, May 2017

U.S. Midwest refiners could gain a new gasoline market outlet worth as much as 100,000 b/d at the expense of East Coast refiners in 2018 if the potential partial reversal of Laurel pipeline goes ahead as planned.

This OPIS market assessment is based on shipping volume estimates on Laurel pipeline provided by Buckeye Partners, shippers and refiners.

The estimated 100,000-b/d swing volume is based on a seasonal high shipping volume of about 50,000-60,000 b/d for summer gasoline flowing west to Pittsburgh from Philadelphia via Laurel pipeline in summer. The estimate was provided by some shippers.

The potentially huge volume impact is without a doubt significant, but the actual market impact on East Coast refiners could be toned down due to the recent opening of new markets in New York Harbor and Rochester, N.Y., via reversed pipelines for Philly refiners.

Bill Hollis, president of Buckeye Services, told OPIS in an interview that Laurel pipeline is expected to ship up to 40,000 b/d, or 1.7 million gal/day, of products to Altoona from the Midwest. He also said that gasoline deliveries from the East into Pittsburgh have fallen in a gradual trend over the past 10 years, falling from 100,000 b/d in 2006 to only 20,000 b/d as of early 2017.

It is noted that the 20,000-b/d volume reflected only the seasonal delivery low on Laurel pipeline because the surplus Midwest supplies typically dominate the Pittsburgh market share in the winter.

In theory, the impact of a partially reversed Laurel pipeline for East Coast refiners in winter would be less than in summer. For winter, East Coast refiners would lose up to 60,000 b/d of market outlet, taking into consideration the 20,000 b/d into Pittsburgh and the Midwest's target for Altoona at up to 40,000 b/d.

Buckeye is eyeing a partial reversal of Laurel pipeline to allow products flow from Pittsburgh to Altoona. This would take away East Coast refiners' access to the Pittsburgh market, and Altoona, albeit a smaller market than Pittsburgh, would become the new battleground between East and Midwest refiners.

Based on the estimate of up to 100,000 b/d for potential Midwest supplies into western Pennsylvania, the proposed partial reversal of Laurel pipeline would have a drastic impact on refiners in the Mid-Atlantic, especially Philadelphia Energy Solutions (PES) and Monroe Energy.

The combined refining capacity of the Philadelphia and Trainer refineries is close to 520,000 b/d. A loss of up to 100,000 b/d of gasoline demand for both refineries could translate to refining rate cuts and tighter margins and, in a worst-case scenario, a forced shutdown of an East Coast refinery.

However, Hollis said that the planned partial reversal of Laurel pipeline will have no impact on Philadelphia refiners as Buckeye recently reversed two lines for additional delivery of products from Philadelphia to New York Harbor and Rochester, N.Y., via Sinking Spring, Pa.

Both new outlets should help mitigate the expected loss of delivery volume into Pittsburgh for the Philly refiners, he said.

Some industry sources said that the combined volume of the two newly reversed lines does not make up for the potential volume loss on Laurel pipeline for East Coast refiners.

***Shipping Econs***

Hollis said that the pipeline tariffs for the Pittsburgh-Altoona reversal will be higher than the tariffs for shipping products from Philly.

While a higher tariff could eat into arbitrage economics for delivering Midwest barrels to western Pennsylvania, he said that the growing refining margin advantage in the Midwest is expected to more than make up for the higher delivery cost.

Midwest refiners are benefiting from more access to Bakken crude via new pipelines, he said. Hollis said that Midwest refiners have invested heavily in upgrading projects, while the East Coast's refinery upgrading projects were limited. The upgrades would give Midwest processors an edge in refining economics, translating to comparatively cheaper fuel for western Pennsylvania.

Also, he said that Midwest suppliers or refiners who have committed to a long-term shipping agreement with Buckeye for the pipeline reversal would see the higher tariff as a sunken cost due to a ship-or-pay clause. Therefore, the higher tariff may not factor into the arbitrage economics.

However, OPIS notes that an actual physical shipment would depend on the price gap between the two markets. As seen in other pipeline systems in the U.S., some long-term shippers may opt to eat the tariffs rather than ship physical barrels at a greater loss due to a significantly lower price in the destination market.

Hollis was not able to reveal the actual tariff for the planned pipeline reversal due to a confidentiality agreement with its potential shippers.

Based on a regional gasoline price differential chart provided by Buckeye, the average Chicago gasoline price versus New York Harbor was 2cts/gal cheaper in 2016.

"Over the past 10 years, gasoline sourced from Midwest refineries has dropped in price by 7cts/gal relative to East Coast supplied gasoline. This is consistent with a trend that's expected to continue," Buckeye said.

In the Buckeye chart, the Chicago average price in 2015 was 4cts/gal higher than New York Harbor. From 2007 to 2016, Chicago was cheaper for six years but more expensive than New York Harbor for four years.

OPIS notes that the Chicago gasoline market is more susceptible to sudden and steep price moves due to thin liquidity and its niche market status. On the other hand, New York Harbor has options to source supplies from local refineries, east coast Canada, imports from Europe, as well as supplies from the Gulf Coast via Colonial Pipeline.

***Midwest Overload***

While both the East Coast and Midwest are pushing barrels into western Pennsylvania, the push from the Midwest appears to be winning, according to Hollis. Also, the Midwest has increased the amount of pipeline access into western Pennsylvania markets, making Pittsburgh the battleground for Midwest and East Coast refiners.

Midwest refining capacity grew by 63,000 b/d in 2016, creating larger surplus gasoline supply especially in winter. Also, the Midwest refiners are expected to receive a rush of Bakken crude via the new Dakota Access pipeline, which should begin first flow later this year, likely enhancing the competitiveness of Midwest refiners.

The Allegany Access pipeline is now on line, connecting the Midwest markets to eastern Ohio and western Pennsylvania. The up-to-110,000-b/d capacity Allegany Access pipeline could bring maximum capacity into eastern Ohio and Pittsburgh due to long-term ship-or-pay commitments signed by Midwest shippers. Allegany Access has an initial shipping volume of 85,000 b/d.

Husky's Lima refinery in Ohio is going to be back at full capacity this summer. Buckeye's 50,000-b/d Ohio-Michigan pipeline project and Wolverine's expansion/connectivity project, to move barrels east, will be fully on line into Pittsburgh this summer for the first time, Hollis said.

In addition, Marathon has its own pipeline for delivering products into Midland, Pa.

***"All Winners, No Losers"***

On May 16, a lawyer representing Laurel Pipeline, owned by Buckeye Partners, at a meeting held at the Pennsylvania Public Utility Commission to discuss the proposed partial reversal of Laurel pipeline said that the reversed products flow from Pittsburgh to Altoona will result in all winners and no losers.

David MacGregor said that the benefits of the partial reversal plan is "not a win-win for Pennsylvania, but it is a win-win-win-win." This application proceeding is the "most in the public interest" in all applications he had done.

However, opponents of the partial Laurel pipeline argued that Pittsburgh would lose the optionality to buy from both Midwest and East Coast, securing the cheaper supply. Alan Seltzer, representing PES, said that Pittsburgh customers would have few choices if the pipeline were to be reversed. PES' analysis says that Pittsburgh residents will face fuel price increases and supply shortages, he said.

Seltzer said that PES currently moves a significant and large volume of its products to Pittsburgh. Other companies have also bought barrels from PES to ship to Pittsburgh.

The formal meeting at the Pennsylvania Utility Commission to discuss the planned partial reversal on Laurel is set for Oct. 26, and an approval on this project is expected in the first quarter of 2018, according to Hollis. Buckeye hopes to complete this partial reversal in late 2018.

Edgar Ang,


Ship Owners Brace for Steep Fuel Price Hike in 2020          on Sulfur Cut

OPIS Newsletter, June 2017

The popular and go-to solution for meeting the International Maritime Organization 2020 bunker mandate requiring a drastic sulfur content reduction is to rely on blending down high-sulfur residual fuel with ultra-low-sulfur diesel.

While diesel players welcome the expected growth in the distillates market pie in three years' time, the shipping and bunker industries are grappling with the reality of optimal blending economics to make bunker with a maximum sulfur content of 0.5% or 5,000 ppm from residual fuel and ULSD. The current bunker sulfur content is pegged at 3.5%, and U.S. ULSD has a maximum sulfur content of 10 ppm.

The general consensus in the bunker market is that ship owners will have to pay a lot more for their bunker fuel in 2020, and actual compliance, and not verbal compliance, with the new stricter fuel mandate is very doubtful, especially in the open sea.

A hypothetical price calculation for blending 0.5% bunker fuel, which is non-existent so far because there is no need for it, pegs the cleaner burning marine fuel at least 33% more expensive than the current 3.5% sulfur shipping fuel. This hypothetical price increase could have a significant impact on shipping rates and shipping companies' profit margins.

Sources said that the 0.5% sulfur bunker "will look more like ULSD than residual fuel," with that new product requiring 87% ULSD and only 13% of fuel oil for blending.

This is compared with 98% ULSD and only 2% of 3.5% sulfur fuel oil to blend 0.1% sulfur bunker, which is needed by ships sailing within 200 nautical miles of the U.S. shore due to the Emission Control Area requirements. Alternatively, blenders could use 50% ULSD with 50% of 2,000-ppm diesel to make 0.1% sulfur bunker, whichever offers the biggest netback for the blenders.

As with premium gasoline commanding a higher price than regular grade in the retail market, ULSD costs significantly more than fuel oil in the oil market. Based on last week's prices, ULSD supply would be around $405/ton in New York Harbor, without any margin. Fuel oil in that same market cost about $273/ton, and marine gasoil was at about $287/ton.

It is noted that these price spreads could fluctuate slightly, based on demand, supply and seasonality.

"With a price difference of about $120/ton (for the higher-priced 0.5% sulfur bunker), a ship owner could end up paying $5,000-$15,000 per day, depending on the size of the ship and sailing speed," a source said.

Some bunker players told OPIS that some ship owners have pledged publicly or privately to comply with the sulfur cut mandate, opting to use the low-sulfur bunker instead of other possible options such as scrubbers and liquefied natural gas, at least for the near term.

The choice of using ULSD as a solution to cutting sulfur in bunker may not be a planned maneuver in the oil industry.

Refiners around the world could have opted to install new coking units to crack or convert fuel oil to lighter oil products, but sources noted a lack of announcements for new coker projects. A coker project would take about two to three years to complete, they said.

"Even if a coker project starts up now, it will not come onstream in time for 2020," a source said.

Besides expected higher fuel costs, the main concern among bunker and shipping sources is the compatibility of 0.5% sulfur bunker with the existing ship's engines. Ship owners are worried about the impact on ships' engine performance and durability.

"There is a big concern about the fuel (0.5% sulfur bunker) not staying in its blended form," another source said.

Unlike a hypothetically quantifiable price hike for the new fuel grade, the potential impact of the introduction of a new fuel on a ship is unknown, at least for now.

Meanwhile, bunker and distillates players in the U.S. and Asia told OPIS that the early market expectation of the 2020 IMO mandate impact on the shipping industry is significant non-compliance, especially in the open sea.

This could be attributed to higher fuel costs and concerns about ship's performance.

A ship owner would possibly weigh the risk and reward when it comes to non-compliance for the new fuel requirement. A one-third hike in fuel cost, based on the current prices, would eat into ship chartering margin in a very competitive market.

While out in the open sea, enforcement on burning the lower-sulfur bunker would be impossible. However, sources said that authorities could carry out auditing on fuel volumes between ports. This may open another can of worms for fuel surveyors and inspectors, which have faced scrutiny in some markets around the world.

Edgar Ang,


U.S. Mulls Options to Address Octane Shortage Issue

OPIS Newsletter, July 2017

The U.S. will see a growing need for more octane in gasoline to meet the Corporate Average Fuel Economy (CAFE) Standards, several industry experts concluded at the 2017 Energy Information Administration Energy Conference held June 26-27.

Tom Kloza, global head of energy analysis at OPIS, said that turbocharging an engine could be an option to meet the need for higher octane, and Blake Eskew, vice president at IHS Markit, said that a higher ethanol blend in gasoline could be a potential route to higher octane pool, but the impacts are non-linear.

IHS Markit is the parent company of OPIS.

A panel of three speakers - Kloza, Eskew and Max Pyziur, director of downstream projects at Energy Policy Research Foundation Inc. - discussed the looming octane shortage in the gasoline market.

The EIA said that to comply with more stringent fuel economy standards, one of the major automotive industry strategies relies on engine designs that require higher compression ratios. Higher compression ratios, in turn, require gasoline with a higher octane rating.

In the past five years, this design shift has resulted in increasing shares of premium gasoline sales and an almost doubling of the retail price difference between regular and premium gasoline.

The panel explored future limitations on gasoline octane that stem from limited ethanol blending, low-quality refinery feedstocks and new Tier 3 regulations and potential refinery investments.

Kloza said that "we will need more octane for U.S. gasoline pool if fossil fuel remains dominant."

He pointed out that the irony in this market development is the CAFE standards decrease overall fuel demand but increase octane needs.

To reach CAFE standards, engine manufacturers will need more octane going forward, Kloza said, but the OEMs (automakers) need to know soon, and not in 2025 or later, in order to move the research and development production cycle forward.

"No one really knows when that tipping point comes for electric cars. Certainly not 2023," Kloza said. "In the meantime, turbocharging is an option and a popular one at that," he added.

He said that consumers will need to be educated on measuring that octane, noting that consumer preferences are fickle.

"Gasoline prices are a hot button that won't cool in the next decade," Kloza said.

"Billions of dollars are involved given the stakeholder interests. It is getting late early for OEMS if CAFE standards aren't altered," he added.

Ultimately, it will need to be a team effort; regulators, refiners, agricultural interests and automakers need to come together, Kloza said.

While Kloza focused on the turbocharging option, Eskew said that ethanol boosts gasoline blends' Reid Vapor Pressure (RVP) by roughly 1 PSI at 2%-3% (by volume), which is also the driver for the 1 PSI RVP waiver.

In lower-concentration (up to 10%) ethanol blends, blending octane is in the 112-118 range for the blending octane number (RM2), he said.

Eskew said that ethanol's octane improvement declines as concentration increases. The E85 blended gasoline or gasoline with 85% ethanol blend is typically in the 100-105 RM2 range, he said.

Ethanol research octane number (RON) impact is much higher than the anti-knock index (AKI), Eskew said. Despite the non-linearities and blending issues, high-ethanol blends could be one way to raise the octane pool.

However, Eskew said that high-volume ethanol blends face a number of potential roadblocks. The barriers to higher ethanol-blends include the E10 blend wall with potential product liability issues, he said.

He also noted the unchanged Renewable Fuel Standard for 15 billion gal corn ethanol limit despite significant improvement in carbon footprint.

The RVP waiver is not fully available in excess of 10% blends, he said.

Eskew said that there would be a need for significant investments to upgrade the gasoline retail infrastructure to accommodate higher-ethanol blends of gasoline.

Edgar Ang,


Retail Brand Expansion in Mexico                                      Rolling Faster Than Expected: Source 

OPIS Newsletter, September 2017

While not the only international fuel marketer to launch branded retail fuel stations in Mexico in recent months, BP Plc's longer presence in the country's deregulating downstream sector appears to be aiding the company's footprint expansion.

After opening its first BP-branded station in the Satelite area of Mexico City in March, the oil major had more than 120 signed contracts to rebrand stations in nine states as of early September, OPIS understands from a person familiar with the effort. The expansion is proceeding more quickly than BP expected, the person added.

BP was not immediately available for comment.

Fuel supply for the expansion continues to be provided by state-owned oil company Pemex, industry sources in Mexico tell OPIS. BP's proprietary ACTIVE lubricant additives package is added to fuel at the Pemex-supplied station.

Meanwhile, in just the last two weeks, Andeavor, Shell and Chevron have announced station openings, and plans for more, in Mexico.

Aug. 29 saw Andeavor open its first ARCO station in Tijuana, Baja California. Over the next several years, the company anticipates launching 200 to 400 ARCO stations in Baja California and Sonora.

Andeavor's wholesale marketing partner ProFuels also intends to grow the ARCO brand through supply contracts with independent owners and operators of existing and new gas stations that are interested in marketing fuel under the ARCO brand, the company said. All ARCO fueling stations in Mexico will offer consumers TOP TIER gasoline, it said.

On Sept. 5, Shell opened its first retail fuel service station in Mexico, in Tlalnepantla on the outskirts of Mexico City.

Over the next 10 years, if market conditions continue to develop at their current rates, Shell said, it plans to invest around $1 billion in Mexico. Investments will be channeled into expanding and improving the retail network, improving fuel logistics infrastructure and developing partnerships to deliver "world-class products and services" to Mexican consumers and businesses, according to Shell.

On Sept. 11, Chevron told OPIS it would open 10 Chevron-branded retail fuel stations in Northwest Mexico before the end of this year, and up to 250 in the next three years in the states of Sonora, Sinaloa, Baja California and Baja California Sur.

Chevron opened its first gas retail station in Mexico on Aug. 27, at Hermosillo, Sonora.

The new Chevron-branded retail fuel stations in Mexico will receive fuel supplies from Pemex during the first few months of store operations, the spokesman said.

"We're still working on building a supply chain to bring in fuel - Pemex has the infrastructure now. But the fuel will have Techron (proprietary additive) added, so (it) will be Chevron gasoline," the spokesman said. Chevron owns three refineries in the U.S., two of which are located in California - El Segundo and Richmond. The third refinery is in Pascagoula, Miss.

Chevron's retail expansion is headed by its subsidiary, Chevron Combustibles de Mexico. Chevron plans to work with local partners to participate in the importation, distribution and commercialization of refined products in the country.

In May of this year, ExxonMobil Corp. said it planned to open a Mobil-branded retail station in the second half of 2017, and to invest $300 million over the next 10 years in fuel logistics, product inventories and marketing.

OPIS notes that the growing presence of international oil companies in the Mexican midstream and downstream markets should give Pemex a run for its money.

Prior to market liberalization, Pemex had the monopoly of the Mexican market from upstream to downstream. As of today, Pemex still controls a majority of the retail and wholesale markets in Mexico, but this may change in the longer term.

Beth Heinsohn,


C-Store Giants Prop Up Price of Deals

Oil Express, April 2017 

In the wake of Sunoco LP's announced sale of more than 1,100 company-operated stores to 7-Eleven Inc., EBITDA multiples on prime retail sites remain high and industry valuations of dealer supply contracts could go higher.

C-store giants 7-Eleven Inc. and Alimentation Couche-Tard Inc. have yet to quench their thirst for retail acquisitions and they have the funds to outbid smaller competitors.

With its narrower focus on petroleum distribution, Sunoco also stated its intent to aggressively pursue wholesale business and is orchestrating plans to expand organically and through acquisitions.

The feeding frenzy could continue to keep transaction prices high for the choice deals.

Though the dust has yet to settle, analysts have estimated 7-Eleven is paying 10x-12x EBITDA multiples or possibly more for the Sunoco sites, in line with the pricy deals involving public companies, master limited partnerships and large, privately held consolidators over the last few years.

Sunoco's divestiture of most of its direct retail sites takes a highly acquisitive player out of the running for stores, but at the same time 7-Eleven plans to aggressively buy sites.

Last year, 7-Eleven's Japanese parent, Seven & I Holdings Co., said in published reports that it intended to more than double its U.S. network of c-stores to 20,000 from about 8,500. An internal document also reveals the holding company has restructured in order to prepare its global network of convenience stores for growth. The document refers to c-stores as a "growth pillar."

Some experts still think the effect of Sunoco's exit from the retail arena and of the recent series of transactions involving 1,000-plus sites will result in lower multiples and more sites available to mid-sized markets. Even the large, well-heeled players require time to digest deals.

Andy Weber, principal at Corner Capital Partners LLC, financial advisers specializing in the downstream petroleum space, notes that Sunoco's move indicates MLPs are going "asset light" and avoiding burying capital in real estate.

"That's left consolidation of retail in the hands of Circle K, 7-Eleven, Casey's General Stores and a few other large retailers," said Weber. "I think you'll see less acquisitive activity from the big retailers in the next few years, except for tuck-ins and bolt-ons."

But there's no consensus due to the rapid succession of large, pricy and somewhat unexpected transactions, particularly from the c-store titans. Some note that big, foreign companies also could invest in blocks of retail sites such as the Chilean company Copec Inc. that recently acquired Mapco Express Inc. from Delek U.S. Holdings Inc. And then in the Western half of the country,

Tesoro Corp. notably has indicated its desire to continue to expand its network of c-stores.

"The take away is that if I'm a jobber (seeking to expand) and a (retail) deal comes my way it means the big guys have passed on it," said financial adviser Mark Radosevich, president of PetroActive Real Estate Services LLC. "I'd better look at the deal. It may not be pristine but it's better than no deal."

In the meantime, don't expect prices to soften for wholesale deals, as Sunoco turns its attention to expanding its distribution business.

Both 7-Eleven and Couche-Tard also continue to crave more dealer business, and so do other large consolidators.

As part of its $3.7 billion purchase of CST Brands Inc., Couche-Tard inherits a significant stake in CrossAmerica Partners LP, a leading wholesale distributor and MLP. With its already sizable wholesale arm National Wholesale Fuels, Couche-Tard will control one of the nation's biggest fuel distributors.

Only last year, publicly held World Fuel Services Corp. acquired two large fuel distributors, PAPCO Inc. in the Mid-Atlantic region and Associated Petroleum Products Inc. in the Pacific Northwest. Though Empire Petroleum Partners LLC recently withdrew its plan to go public as an MLP, it also continues to aggressively expand its dealer business.

 7-Eleven has agreed to retain the Sunoco brand at the sites it's acquiring. Sunoco secured a 15-year, fixed-fee take-or-pay fuel agreement with 7-Eleven to supply these stores with about 2.2 billion gallons of fuel per year.

Bonnie Herzog, managing director of equity research for the convenience store segment at Wells Fargo Securities LLC, said that assuming a wholesale fuel gross margin of $0.06 per gallon, this would generate $132 million of incremental cash flow, enhancing the economics of the deal.

Sunoco officials said the partnership will grow its wholesale business with 7-Eleven by another 500 million gallons over the next four years.

In its recent call with analysts, the partnership stated that it wanted to divest direct retail sites because the retail profits are ineligible for tax-favored treatment under its MLP business model and because store operations are labor-intensive.

Distributorships are less labor-intensive than the retail end of the business. To boost profitability, gas stations have relied much less on fuel and turned to c-stores with food service, which adds even more personnel as well as spoilage costs, industry observers said.

The simplified business model reduces costs beyond Sunoco's stated goal of $75 million, the partnership said in its recent presentation. The "capital-light" distributorship, compared to retail, reduces capital needs overall by about 50% of 2017 guidance of $290 million.

As the finished product distribution arm of Energy Transfer Equity, Sunoco officials assured the investment community: "There's lots of room to grow."

Donna Harris,


Driver Shortage Still Haunts Transportation Biz 

Oil Express, May 2017

Dean DeSantis bristles when he hears recent national statistics showing a dip in trucker turnover. DeSantis, president of Heritage Transport, in Indianapolis, said driver turnover is still high and could get worse as the economy improves.

DeSantis and colleague Matt Wise, director of Department of Transportation compliance for Heritage Transport, offered attendees of the Midwest Petroleum and Convenience Tradeshow (M-PACT) an overview of the nation's driver shortage and tactics for attracting younger drivers as a growing number of veteran truckers retire.

The dearth of commercial drivers increases labor costs for both petroleum distributors and their fleet customers.

"The trucking industry continues to fight record turnover rates, leaving companies scrambling to cover lost productivity while you are trying to recruit and retrain new drivers as fast as they leave," said DeSantis. "This has become a revolving door effect."

Heritage officials pointed out that in 2015 driver turnover was at 102% for large truckload fleets and in the fourth quarter of 2016 it had dropped to 79%, according to the American Trucking Associations.

"Why are we celebrating?" DeSantis asked.

Based on ATA figures in the presentation, there was a shortage of about 35,000 drivers in 2014 and that figure was expected to rise to about 100,000 this year and to about 200,000 by 2020.

Though pay needs to be competitive, drivers leave companies because of the perception they are not respected or valued. Trucking companies that increase pay often discover that drivers still leave, DeSantis pointed out. Other primary issues have to do with lifestyle - such as minimal home time, the quality or type of trucks, the lack of wages for loading or offloading, or the fact that trucks are not assigned. They may want to own their truck, he said.

Waste hauler Heritage Transport, with six U.S. terminals and a 400-truck fleet, is a subsidiary of Heritage Environmental Services. HES is a business unit of the Heritage Group, which is also in the construction business, as well as oil production and refining.

Heritage Transport has introduced more perks to lure and retain drivers, such as competitive daily per diems, assigned trucks, replacement plans for equipment, satellite radio, wifi hot spots, recognition decals and stickers, and in-cab refrigerators.

Wise, who is part of the millennial generation, said providing the Facetime app - which lets drivers keep in touch with family through video and audio calls from their iPhones, iPads and iPods - appeals to younger truckers. An upgraded driver seat is also an attractive perk.

"We'll change out driver seats and spend $1,500 on a seat," he said. "It's all about comfort."

That expense pales in comparison to the estimated $8,200 to $9,500 cost of recruiting, testing and training a new driver, Wise said, adding that some trucking firms pay signing bonuses of $10,000 just to lure truckers.

He notes that the trucking industry has had little success creating a career path for drivers, and truckers have been motivated primarily by a desire for independence, a lifestyle rather than a career choice. Wise started as a trucker and was motivated by the opportunity to move up within the organization to become a compliance officer. He said he still does some driving for the company on occasion.

Heritage also is employing marketing expertise to recruit drivers and devoting the same effort to recruiting as it would to making a sale to a new client. "It's about closing the deal," said Wise.

He pointed out that especially with younger drivers, the time it takes to recruit and onboard is often perceived as too long. Three to four weeks is too much time to orient new hires to the position. And if the hiring process is more than a week, candidates will "walk out on you," he said.

The hiring process can be reduced through the use of technology - posting qualifications online, offering mobile phone job application and texting or emailing updates on hiring status.

Assigning one person to shepherd each new hire also can be helpful. Heritage has a mentoring program in which veteran drivers in the fleet are assigned to new drivers. Under the company's "ride-along" program, the younger driver rides with the experienced driver to acclimate to the position. Older and younger generations are encouraged to work together to benefit the organization.

In its most drastic approach to dealing with the trucker shortage, Heritage streamlined its workforce and eliminated the need for long-haul drivers by introducing intermodal containers that can be transferred from truck to rail. Rail transport is the longest segment of the overall trip and the drivers - just five or six at either end of the line - make relatively short trips carrying freight back and forth to the rail terminal. Truckers, especially those with young families, don't like to be on the road overnight.

Data from the Association of American Railroads shows that rail intermodal - transporting shipping containers and truck trailers on railroad flat cars - has been growing rapidly for many years. Though intermodal declined during the recession in 2009, it has been on the rise since then. One of the primary reasons the association cites for the growth in rail intermodal is the driver shortage. Reduced fuel costs is also named as a major benefit, as rail is estimated to be four times more fuel efficient as truck transport.

Transportation experts note that ultimately the driver shortage has the potential to hit petroleum marketers with a one-two punch - in higher personnel costs, as well as lower fuel demand.

Donna Harris, 


Shell Debuts First Major Tiered Rewards Program

Oil Express, June 2017

Shell is rolling out a two-tier rewards program in a bid not only to broaden membership but to encourage greater involvement from existing members.

The Fuel Rewards Program is owned and administered by Dallas marketing firm Excentus, but Shell is the sole redeemer of rewards.

The initiative, introduced as part of Shell's summer drive season promotion, is the only multi-tier reward program among the major oil companies, aside from some rewards credit cards and fleet cards. Large retail chains such as Sheetz, RaceTrac and Thorntons have introduced separate rewards classes.

As of June 5, all new and existing Fuel Rewards Program members will be granted instant Gold status for six months through the end of 2017. In 2018, Shell will introduce Silver status as the base level for rewards.

Experts say that brands within all industries introduce multiple classes of rewards to provide better benefits with greater levels of spending, which is designed to boost brand loyalty and to encourage involvement. Loyalty consultancy Colloquy found that though loyalty club memberships were increasing, active membership was on the decline.

A recent study on the impact of tier levels on loyalty in hotel reward programs indicated that base-level members spent 53% of hotel nights at a preferred hotel; middle-level members spent 66% of hotel nights at a preferred hotel; and elite members spent 78% of their hotel nights at a preferred hotel.

The Fuel Rewards Program eventually will have two tiers - Gold and Silver - but for a six-month period beginning June 5 and ending Dec. 31, all new and existing members in the Fuel Rewards Program (formerly known as the Fuel Rewards Network), will have instant Gold status, Shell told Oil Express.

If they meet the minimum of six fill-ups within three months during the final three months of the introductory period, members will continue on Gold status for another three months. If they fail to fill up six times in the last three months, the member drops to Silver level.

The Gold members receive a minimum 5ct/gal discount on every purchase of all grades of fuel at participating Shell stations, whereas the Silver members continue to receive the minimum 3cts/gal discount on every fuel purchase that has been part of the Fuel Rewards Program in recent years.

Gold members will receive other benefits such as anniversary and milestone rewards as well as exclusive promotional offers, Shell said.

All members continue to earn fuel discounts by making purchases from merchants involved in the Fuel Rewards coalition.

"We tested various rewards structures through research as well as in key markets prior to arriving at the two benefit levels for Fuel Rewards," the major told Oil Express. "The results clearly indicated that members wanted to be rewarded for their loyalty to Shell by receiving cents-per-gallon savings. The average new member increased fuel purchases at Shell by 38% and convenience store purchases by 14%."

Shell said there are currently more than 9 million members in the Fuel Rewards Program. Since 2015, the program has grown by almost 5 million members. "We are focused on growing more loyal customers and we plan to more than double our members by 2018," the major said.

The company refused to disclose key metrics on overall activity rates but said that consumers often prefer to register for Fuel Rewards at the Shell station and of that channel alone about 70% of customers become active in the program. Shell defines "active" as having made at least one transaction within 30 days of registration.

According to a program guide distributed to branded wholesalers, gas stations will need to invest in a Samsung tablet to regularly enroll and activate new members on site. Cashiers will wear a sticker on their uniforms that says: "Ask me how you can save at least 5cts/gal every fill." Retailers also will make available Fuel Rewards brochures with instant 5cts/gal savings cards.

Shell recommends appointing an employee to be in charge of on-site membership activations but to alternate employees in this position at different sites and shifts. Station managers should identify the highest-traffic day parts for signing up members. Three hours is the optimal number of hours to perform membership activations on site, Shell's guide says.

The major encourages retailers to attend community events such as fairs to set up a table for registrations and to have contests for employees and/or competitions between multiple sites.

Shell told branded wholesalers that from June 1-Aug. 31, it will pay a Fuel Rewards registration incentive of $1 per registration once the site hits a monthly minimum of 100 registrations. The maximum payout per month is $500 per site.

Donna Harris,


High-Risk Sites Face Early Liability for Card Fraud

Oil Express, June 2017

So you think the costly switch to chip payment cards at the pump is optional?

Not if your site hits certain fraud metrics that will place you in "remediation" status with the card payment networks, according to Gray Taylor, executive director of Conexxus, a nonprofit affiliated with NACS that sets technology standards.

Gas station operators with excessive card fraud at the pump islands can be liable for chargebacks and even lose the ability to accept payment cards, Taylor warned, speaking at a workshop on data security during the recent Southwest Fuel & Convenience Expo.

Those fraud ceilings are less than a month away, beginning July 1, he said. After that time, the Europay MasterCard Visa technology standards for chip cards can be forced on "high-fraud" retailers, he said.

The fraud metrics are being collected right now during the month of June for enforcement next month, according to Visa in a document introducing its new "Visa Monitoring Program for Automated Fuel Dispensers (AFDs)." 

"It's either turn off the card reader or turn on EMV," Taylor said.

Though payment card networks have insisted all along that EMV is voluntary, they have set deadlines for retailers to accept chip cards. Those merchants missing the deadline assume liability for certain fraudulent transactions.

Retailers of all types - not just gas stations - already are paying thousands of dollars in fraud chargebacks for being past due on in-store EMV.

Gas stations got a reprieve when the credit card networks delayed the liability shift at the pump islands three years to 2020. But that delay is essentially meaningless to sites that bump up against those newly instituted fraud limits.

"This three-year delay of EMV is not a holiday," said Taylor. "It gives you the chance to do it right."

Visa introduced its fraud-monitoring program for fuel dispensers in a good-news, bad-news introduction of the three-year postponement of the liability shift.

"To help mitigate any increases in counterfeit fraud at AFDs in the interim, Visa will expand its existing Visa Fraud Monitoring Program to include a new U.S. AFD-specific fraud-monitoring program," Visa said. "The expanded program will have unique thresholds based on U.S. AFD counterfeit fraud trends. For AFD locations that exceed the defined thresholds and reach enforcement status, issuers will receive chargeback recovery rights for reported counterfeit fraud."

Visa intends to notify all U.S. acquirers of the gas stations in their portfolios that are identified in its risk-tracking tool - Visa Risk Performance Tracking - which is available on Visa Online. The card network will review the previous calendar month's domestic counterfeit fraud dollar totals and domestic counterfeit fraud-to-sales ratio.

Visa outlined two tiers of fraud, "standard" and "excessive:"

  • U.S. gas stations hit the "standard" threshold for monthly counterfeit fraud activity if the site experiences $10,000 in domestic counterfeit fraud and a 0.20% ratio of U.S. domestic counterfeit fraud in dollars to domestic dollar sales. In the first month, the site is notified it exceeded the program thresholds for fraud in the prior month. In months two through four, acquirers work with the gas station to reduce fraud below at least one of the thresholds. In the fifth month, if the site is below at least one of the fraud thresholds in the prior month, it will not be liable. But if it remains at or above both thresholds, the gas station will be liable for chargebacks.
  • U.S. gas stations meet the "excessive" threshold for monthly counterfeit fraud activity if the site sees $10,000 in domestic counterfeit fraud and a 2.00% ratio of U.S. domestic counterfeit fraud in dollars to domestic dollar sales. Unlike "standard" status, there is no grace period. The station is immediately liable for chargebacks for fraud in the previous month. The acquirer will not be assessed for non-compliance. The Excessive Fraud Program begins Nov. 1 for fraud identified in October. The site remains in "excessive" status until it "remediates" out of the program, Visa said.

In addition, Visa said that it can escalate a U.S. gas station from "standard" to "excessive" status if it determines the site is too risky. Also, any U.S. gas station that reenters the program within 12 months of completing remediation will automatically go back to "excessive" status.

The monitoring program ends Oct. 1, 2020, when the official liability shift occurs for all U.S. gas stations that still don't accept chip cards at the pump, Visa said.

Although EMV compliance is expected to cost about $30,000 per site - unaffordable for about a third of the gas stations nationwide - Taylor said it could be cheaper to invest in EMV than to do nothing. He repeated what many security experts have said, supported with statistics: that the fraud will migrate to the sites that fail to accept chip cards at the pump. 

And by the way, "if you're waiting for mobile payment to make EMV irrelevant, it will be a long time," he added.

Donna Harris,


More Data Suggest Skimmers Targeting Gas Pumps

Oil Express, July 2017

The number of incidents involving skimmers at gas pumps increased threefold in 2016, according to the 2017 Verizon Data Breach Investigations Report, an annual study on cybercrime.

At the same time there was a 25% decrease from the prior year in the number of incidents in which skimmers were found at ATMs, Verizon said in the report, which covers 2016 data.

The research suggests that data thieves are targeting gas pumps as more in-store point-of-sale devices and ATM networks transition to chip card acceptance. Chip payment cards are harder to counterfeit than the old magnetic stripe cards.

The card networks shifted fraud liability to merchants that failed to accept chip cards at in-store POS terminals by Oct. 1, 2015. The deadline for ATMs to comply with the Europay, MasterCard and Visa (EMV) chip card technology standards was Oct. 1, 2016, for MasterCard-branded credit and debit cards.

Visa's EMV deadline for ATMs is Oct. 1, 2017.

The liability shift at the gas pump, initially scheduled to occur on Oct. 1, 2017, was postponed until Oct. 1, 2020, to give gas stations and POS vendors more time to comply with the costly initiative.

However, the delay also gives thieves even more time to employ skimmers at the fuel islands. Industry experts and major oil companies are urging gas station operators to adopt EMV-compliant POS at the pump as quickly as possible.

Verizon cautions that the data may not be definitive, because EMV adoption has been slow. EMV equipment, particularly software, was only widely available in the second half of last year.

"The jury is still out," Verizon said. "However, chip readers are slowly becoming more prevalent, and it will be interesting to see how the tactics used by criminals change when that happens."

The Verizon data support often-quoted statistics on Europe's much earlier move to chip card acceptance showing that once POS devices and ATMs install chip card technology, theft migrates to merchants or financial institutions using the old technology or to online retailers.

Verizon does not offer a detailed breakdown of where skimming occurred. However, it said that skimmers inside gas pump terminals and ATMs represent almost 60% of attacks at traditional bricks-and-mortar retailers. Though the retail and financial industries were most often targeted, all respondents reported a total of 118 skimming incidents, 89 with confirmed data disclosure.

As in the past, the biggest skimming losses are linked to organized crime. 

"Eastern Europe continues to loom large when it comes to payment card skimming, with 60% of attacks attributed to actors from Romania when the criminal's origin could be definitively determined," the Verizon report said. "Cuba is making an appearance this year (in 2016), with approximately 16% of skimming cases."

At the recent Southeast Petro-Food Marketing Expo, Gray Taylor, executive director of NACS affiliate Conexxus, an IT standards nonprofit, showed a graph suggesting the average non-EMV store would see more than $30,000 in fraud per year by 2021, up from about $5,000 in 2017. More than $10,000 of the 2021 amount is linked to fraud that migrated from sites accepting chip cards.

Another key survey - the 2017 Ponemon Cost of Data Breach Study - noted that the cost of a data breach for U.S. organizations reached an all-time high, up nearly 5% from 2016. The average cost was $7.35 million, based on 63 companies of all types covered in the survey, which was sponsored by IBM and conducted by the Ponemon Institute, of Traverse City, Mich., in June. The average cost per stolen record rose 2% from last year to $225, and the part of the loss associated with customer defections rose 5%.

Detection and escalation costs also hit a record high, the study said. These costs include forensic and investigative activities, assessment and audit services, crisis team management, and communications to executive management and board of directors. The study said the dramatic rise year-over-year to an average of $1.07 million from $0.73 million likely means companies are investing more heavily in these efforts.

Donna Harris,

Copyright, Oil Price Information Service