Fuel retailers slam oil companies

SA’s current fuel-pricing formula favours big oil companies by allowing them to erode retailers’ profits, says the Fuel Retailers’ Association.

Johannesburg - South Africa’s current fuel-pricing formula favours big oil companies by allowing them to erode retailers’ profits, the Fuel Retailers’ Association (FRA) has said.

The FRA, which represents thousands of fuel retailers across the country, said the current pricing regime allowed oil companies to access profits in retail businesses despite the Regulatory Accounting System (RAS). According to the Department of Energy, RAS intends to introduce transparency, root out inefficiencies, cross subsidisation and uncontrolled costs in the sector.

Read: Petrol price set to rise in May

The system is used to determine appropriate margins for petrol at wholesale, retail, storage and distribution levels.

FRA chief executive Reggie Sibiya said the association had complained that RAS, which was implemented in 2013, did not go far enough to protect jobs, promote small businesses and advance transformation in the liquid fuels sector.

“Oil companies can still get a share of retailers’ profits and asset returns. From the retail margin, 48c per litre is for return on assets, 90.3c per litre is for operating expenditure and 23.4 c a litre is meant for entrepreneurial compensation,” Sibiya said.

“In a company-owned service station, the whole share for capital expenditure plus some portions of the operating expenditure goes to the oil company. But it is split of entrepreneurial compensation. That is not sitting well with fuel retailers,” he said.

Sibiya said oil companies clawed back as much as 5c per litre in the entrepreneurial compensation. “So fuel station retailers are already not realising the full return. There is this assumption that the entire retail margin goes to the retailer. Because the split of the retail margin is not regulated, oil companies have unlimited access to the elements of the retail margin,” he said.

But the SA Petroleum Industry Association (Sapia) said the compensation for entrepreneurs was subject to commercial discussion between the companies and their dealers

Sapia said oil companies had the obligation to supply the public with quality fuel and lubricants and that in order to do that, the companies had to ensure that quality specifications and standards were adhered to, throughout the value chain.

“This also means that the retailers have an obligation to meet these standards,” the association said.

Operational costs

Richard Weissenberg, business leader for chemicals, materials and food at Frost & Sullivan, said vertical integration in the fuel business was not only about competition.

He said the business also had to take into account operational and funding matters.

He said fuel companies owned a lot of the assets on most retail sites, such as pumps and fuel tanks under the forecourt and these came with maintenance, environmental, health and safety liabilities.

“So if the industry were to become less vertically integrated, then the retailers would have to find a way of acquiring these expensive capital items, and find the skills to maintain them,” Weissenberg said.

“In addition, if there are incidents such as serious spillages and leaks, the large fuel companies have the scale and experience to deal with them. Smaller businesses with weaker cash flows and balance sheets may struggle to provide adequate response,” he said.

The Department of Energy did not respond to Business Report questions.

Sibiya insisted it was important to safeguard entrepreneurial compensation as failure to do so would put retailers, most of whom entered the sector heavily indebted, on the back foot.

He said the relationship between the oil companies and the retailers was not balanced.

“It is big brother, small brother relationship,” charged Sibiya. “In view of this imbalance, what is government’s role to ensure the sustainability of small businesses? No one is as stressed as the service station owner. It is a stressful operation. Most people have this perception that service stations make a lot of money. The majority of service stations are below or just at the border line of the benchmark in terms of volume throughput. After collecting monies for government, oil companies and paying expenses like wages and bank charges, the retailer is left with about 2 percent or less net profit before tax on fuel sales.”

Sibiya said there was also widespread displeasure with the vertical integration in the local liquid fuels sector as major oil companies owned assets across the entire value chain, from oil refineries to fuel depots and service stations.

He said in a company-owned and retailer-operated service station, the oil company was guaranteed the entire 48c per litre return on retail assets.

Little left

“No one takes that away from them. But the retailer does not get the entire 23.4c per litre entrepreneurial compensation. If the oil companies can claw back 5c per litre from the entrepreneurial compensation without consequences, what will stop them from increasing that to 20c per litre? Entrepreneurial compensation is not protected,” Sibiya said.

“These retailers do not have loans to repay. But what about the historically disadvantaged South Africans. These previously disadvantaged retailers only have three to five-year leases, which is not enough time to make profit as the bulk of entrepreneurial compensation after claw backs goes towards paying bank loans,” he said.

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