Last several months have seen the best oil analysts getting caught wrong-footed. Oil prices have risen when expected to stay low and have continued to dip when expected to rise.
The prices today, of benchmark crudes hover in the $28-30 / barrel range giving rise to the analogy of bottle of water being cheaper than oil. While Oil majors, upstream operators and exploration companies brace themselves for a period of downsizing, layoffs and project shelving there is another side of the story - Downstream.
For the last several decades downstream was always viewed as the poorer cousin. Margin caps, size and scale, complexity, regulatory and compliance risks had made it the favourite pick for spin-offs during Business unit portfolio analyses.
Oil majors have shed downstream operations aggressively during the last decade walking out of growing economies, regions and continents. Today there's likely a revisit of the strategy.
It is equally not true that downstream has suddenly become attractive. To make it attractive it is imperative to maximise the profitability and revenue along each element of its value chain as the unpredictability of prices continues to trend downward.
Cost Advantage at Sourcing& Refining:
Starting with sourcing (or popularly "supply") the downstream operator needs to be looking at sourcing on spot and / or shorter term contracts. The Company needs to extricate itself from contracts that disallow it from benefiting from the downtrend. Timing purchases and import parcels make it extremely critical to success of the operator.
Larger Oil Companies tend to operate with their own trading arms / desks. Traders pass the savings to their downstream operator. In regulated markets refining margins tend to go up temporarily so the focus should be maximising throughput during the period and price-off offers need to be reviewed seriously.Retail and Marketing Offerings:
For marketing businesses the strategies need to be value driven both from the perspective of Brand and Site equity.
Retail businesses need to augment fuelling with a wider array of goods offerings; these make outlets a destination rather than a short stop for a grudge purchase. Examples of these:
-- Food outlets (own or specialised franchises)
-- Grocery (marts, convenience stores etc)
-- Lubricants and speciality automotive Retail Businesses can augment fuelling with further services. The addition of new services tend to attract new clientele and make sites generate greater footfall.
-- Service standards and quality lock customers into the site, increasing each site's equity
-- Financial (Banking, ATM, remittances etc)
-- Service bays,
-- Tyre sales and repair
-- LPG cylinder sale / rent
-- Courier, or postal services
-- Freight cargo booking
-- Car rental services
-- Supplies on credit at premium
Standardised, bright, large, lively sites, longer operating hours, quicker service turnaround, plastics acceptance these have become hygiene factors for customer retention and complement other brand building activities.
Product Branding as a Strategy:
A major area to look at is in the arena of differentiated products. Unfortunately all initiatives on differentiation in Pakistan have not resulted in a premium for the marketer.
The sole objective of differentiation strategy is to address the unique needs of a customer segment and to be able to charge a premium for those services or offerings.
We see effort in this area in lubricant business segments but most likely regulatory restrictions or the lack of motivation has kept Oil Marketing Companies from commanding a higher margin on motor fuels.
Variants of Motor gasoline can include:
-- higher RON (Research Octane Number),
-- greater outputs,
-- fuel efficiency,
These can be generated via additization.
Similarly variants for high speed diesel that have not been promoted enough can play in the environmentally friendly forms,
-- lower lead,
-- lower sulphur
-- bio diesel,
-- Fuelsadditized with injector cleaning technology etc successful product differentiation and branding provides Oil Marketing Companies a sustainable competitive advantage that insulates it during time of price wars.
Mergers as a Strategy: The downstream sector has seen a burgeoning of Oil Marketing Companies with licenses issued to more than twenty two (22 +) of these only thirteen (13) are doing regular business with others looking to start sales. The next 5 years will see merger and consolidations in progress. Merger and consolidation strategy works best where the two or more partners bring different skills / strengths to the merger.
Ideal combinations are for example retail presence by one partner and operations infrastructure by another. Alternately, financial strength and infrastructure. There can be a number of permutations and combinations but the strategy requires the business leaders to start identify and selecting the merger partner they want to engage down the line. A confidence builder between the parties can be hospitalities, product loan, product swap arrangements, joint imports etc. A flip side to it is predatory sales to corner and target an operator.
The Pakistan market has recently seen an exit of an oil major and it would not be a surprise to see similar exits. It is easy to project these by seeing similar actions in other markets. The Pakistan market while competitive remains vibrant and profitable for higher throughput operators while some higher cost operators leave others enter. This has happened pre-dominantly in Africa and East Asia.
Organization Capability & Technology:
Though not a strategy but more a platform for success in implementing strategy, Organisational capability (OC)& Technology merit mention here as all strategy implementation are dependent on these. It's fair to say that OC determines the success of any organisation.
Its availability of resources (men, material and money) vs the optimum utilisation of these, via:
-- the right organisation structures
-- presence in markets / niches where business is located
-- quality vs quantity of staff
-- skill sets retention
-- quality of customer base
-- processes, systems, technology that supporting decision making and implementation
-- organisation culture
Q8 OILS
Kuwait Petroleum International Lubricants, operating under the Q8Oils brand, it's become a major player in the global lubricants market. Q8 success is founded on significant corporate resources, a commitment to product development and uncompromising standards of quality and service.
Q8 organisation combines a flexible, dynamic structure with a culture that encourages innovation, whilst its employees share the vision and confidence to exceed customers' expectations by offering products of the highest quality with a professional, personal service and superior levels of technical support.
The Q8Oils product portfolio consists of over 1000 grades of finished lubricants, base oils, process oils, extracts and waxes. This comprehensive range makes KPIL one of the most complete suppliers of lubricants and petroleum based products in the industry.
In the automotive sector it monitors the demands of all the original equipment manufacturers in markets as diverse as passenger cars, commercial vehicles, public transport, agriculture, construction and two-wheels, working closely with all of them to exploit the potential of its product quality and development expertise.
The industrial and manufacturing sectors have also experienced dramatic changes in recent years due to the increasing demand for quality and productivity. Recognising these often conflicting issues, we have made it our goal to help customers achieve their objectives by supplying quality products and technical expertise.
In the base and process oil markets the superior performance of its refined products is world renowned and its special blend technology second to none. The combined features of quality, consistency and color have led to a demand for those products from a diverse range of customers.
Lubricant base oils come in three main types: mineral, synthetic or synthetic based. These base oils are blended with additives and the combination determines the type, quality and properties of the finished lubricant.
The range of lubricant oils in Q8Oils comprises of:
Engine Oils, ATF fluids, Universal Transmission & Engine Oils, Hydraulic Fluids, Turbine oils, Compressor Oils. Further, to add to it Q8 has Quenching oils, Wire & Tube Drawing Oils, Circulation Oils for paper mills, Greases and Ancillary Products.
In the engine Oils the range is of Passenger Car Engine oils, Commercial Vehicle Engine Oils, Scooter Engine Oils, Gas engine oils (Bio-Landfill-Sewage & other Gases).
Now, Q8 is launching Q8 Oils in Pakistan starting with PEO & DEO engine oils. In the industrial sector our markets will be of Gas Engine Oils and Marine lubricants. Future plans of Q8 are to look into Aviation Oils and waxes.
Q8 as a strategic partner of Bakri Pakistan views the Pakistani market with optimism and having immense growth potential.
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