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Consultancy Solutions for the Oil Industry

Fuel Farm, La Collette, St Helier, Jersey

FINAL REPORT

Review of the Current Arrangements for the Importation, Storage and Supply of Petroleum Products to the

Distribution and Retail System in Jersey


7 Cavendish Court, London Road, Apsley, Hemel Hempstead, HP3 9FH

Telephone : +44 (0) 7974 251467

http://www.oilconsultancy.com

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Table of Contents

Table of Contents.....................................................................................................................................................2 Executive Summary.................................................................................................................................................3 Terms of Reference..................................................................................................................................................4 Background..............................................................................................................................................................5 1 Petroleum Market Structure on Jersey........................................................................................................6

1.1 Current Market Structure on Jersey ..................................................................................................6 1.2 Size of the Jersey Petroleum Market ..................................................................................................8

2 Differences to UK Mainland Market Structure ........................................................................................10 2.1 Primary Distribution..........................................................................................................................10 2.2 Terminals, Storage and Throughput ................................................................................................11 2.3 Distributor Structure .........................................................................................................................12 2.4 Secondary Distribution Logistics ......................................................................................................13

3 Jersey Supply Chain Costs ..........................................................................................................................15 3.1 Cost Elements of the Supply Chain...................................................................................................15 3.2 Primary Distribution Costs................................................................................................................16 3.3 Port and Harbour Dues......................................................................................................................16 3.4 Terminal Costs ....................................................................................................................................17 3.5 Secondary Distribution Costs ............................................................................................................18 3.6 Summary .............................................................................................................................................19

4 Comparative prices for Domestic Heating Oil ..........................................................................................20 4.1 Historical Data....................................................................................................................................20 4.2 The OXERA Report – October 2001 ................................................................................................20 4.3 Consultancy Solutions for the Oil Industry’s own Modelling and Conclusions............................21

5 Jersey’s Retail Petrol Market - Structure..................................................................................................22 5.1 Market Infrastructure........................................................................................................................22 5.2 Retailers Market Share......................................................................................................................23 5.3 Density of Service Stations on Jersey................................................................................................23 5.4 Retail Site Throughputs .....................................................................................................................24 5.5 Break-even Fuel Margin and Site Throughput................................................................................24 5.6 Site Operating Costs...........................................................................................................................25 5.7 Length of Contract between Retailers and Oil Companies ............................................................25 5.8 Planning Constraints..........................................................................................................................26

6 Jersey’s Retail Petrol Market - Pricing......................................................................................................27 6.1 Comparison of Jersey Pump Prices ..................................................................................................27 6.2 Netback Analysis ................................................................................................................................29 6.3 Why are Retail Margins so high on Jersey?.....................................................................................30 6.4 The Effect of Impôt Duty on Pump Prices .......................................................................................31 6.5 Who pays pump prices? The Jersey “discounting” eccentricity ....................................................33 6.6 Petrol Price Transparency and Informed Consumer Choice .........................................................35 6.7 Are Petrol Prices Important to Jersey’s Inhabitants?.....................................................................36 6.8 Retail Pricing Decisions .....................................................................................................................36 6.9 Oil Company Schedule Pricing and Rebates....................................................................................37

7 Issues Relevant to the Lease at La Collette................................................................................................38 7.1 Security of Supply ..............................................................................................................................38 7.2 Environmental Risks & Attitude.......................................................................................................38 7.3 Compulsory Stockholding..................................................................................................................39 7.4 Term of New Lease.............................................................................................................................39 7.5 Development Area ..............................................................................................................................39 7.6 Collection Methodology for Impôt Duty...........................................................................................40

8 Recommendation..........................................................................................................................................41 9 Glossary ........................................................................................................................................................42 10 Acknowledgements..................................................................................................................................44

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Executive Summary

Jersey has a static market for petroleum products, worth only 0.2 % of the total UK

market

Consortium Agreement requires equity participation at percentage share of current

market value of fuel farm – this provides a significant barrier of entry to market

Introduction of another fuel competitor would accrue no further consumer benefits

Additional costs of getting fuel to, and distributing on Jersey calculated to be in

order of 3 pence per litre

No evidence of oil company profiteering at islanders’ expense

Ten year length of contract on retail service stations hinders competition

Too severe planning restrictions on development of new and disposal of old service

stations

Jersey retailers have maintained 20+ % gross margins on pump prices

Retail petrol margins on Jersey c. 5 times higher in pence per litre terms than UK

Discounting of pump prices to loyalty card holders and user-groups widespread on

Jersey, but impossible to verify levels of issuance rates

Lack of pump price transparency prevents informed consumer choice

Fuel expenditure lower as % of Household Income on Jersey than UK

Non renewal of La Collette lease a high risk strategy for Jersey as security of fuel

supplies is put at undue risk through low barrier to exit market for oil companies

No legal obligation in old lease for compulsory stockholding

Our unreserved recommendation to the States is to renew the lease at La Collette,

giving a clear 10-year term of occupancy from 2005 and incorporating new

conditions on environmental protection and compulsory stock-cover. Exclusive

rights granted in old lease to Consortium should be removed.

Greater retail marketplace competition required through harnessing of consumer

power, reduction of length of retail contracts and compulsory price transparency of

pump prices

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Terms of Reference

To review the current arrangements for the importation of distillate to Jersey, its storage and supply to the distribution and retail system in Jersey and to make suggestions for improvements or alternatives to meet consumer and strategic interests. Relevant documents include: -

the Lease issued to the Fuel Consortium for the Fuel Farm, which commenced on the 14th December 1979, and terminated on the 13th December 2000;

the proposed Lease as put forward by the H&A Committee in Proposition P.60/2003;

the OXERA Reports of 2001 and 2002 on the Price of Fuel in Jersey and all previous Committee of Inquiry reports;

Reports from other comparable jurisdictions on the operation of fuel markets in small islands;

Copy of the Competition (Jersey) Law 200-

Evaluate the access, safety, environmental and operational issues.

To review and clarify the ownership rights of the Fuel Farm installation and the re-instatement requirements on the Fuel Consortium.

Evaluate the advantages and disadvantages of the following three options, and alternatives if considered appropriate, and to advise as to the best way forward for the States of Jersey to ensure the best interests of consumers in Jersey and to secure the best interests of the States: -

Continue with the Fuel Consortium operating the Fuel Farm on a new Lease, with either the Lease or an Operating Licence setting out the conditions under which the Fuel Consortium would operate, including an agreement to the arrangement for linking the price of fuel downstream from the Fuel Farm.

Open the fuel market to competition via a tendering procedure such that the successful tendering company would have access to operate the current Fuel Farm but with appropriate arrangements to ensure competition upstream of the Fuel Farm, operation of the Fuel Farm in the best interests of Jersey, and an agreed pricing arrangement for fuel downstream of the Fuel Farm.

Open the fuel market to competition via an appropriate tendering procedure so that the successful tendering company would establish a new Fuel Farm on La Collette II Reclamation Site, overcoming the current Health and Safety issues at the current site, with appropriate arrangements to ensure competition upstream of the Fuel Farm, operation of the Fuel Farm in the best interests of Jersey, and an agreed pricing arrangement for fuel downstream of the Fuel Farm.

To provide alternative and or better options to those put forward.

The report should provide recommendations as to the best use of current land and also how the provision of a Fuel Farm can be arranged in the best interests of the Island.

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Background

This investigative report was commissioned by the States of Jersey Economic Development Committee and the Finance and Economics Committee to review the leasing arrangement of public land to the Jersey Fuel Consortium for the importation, storage and distribution of fuel oils within the island of Jersey.

The original 21-year lease of the land at La Collette, on which the fuel storage tanks, equipment and offices are situated, terminated in December 2000. The proposal of the Harbours and Airport Committee to offer a new lease to the Fuel Consortium has met with resistance from some States Members and its approval has been delayed over the course of the last four years. In this time two other reports from Oxera Consulting Limited were commissioned to investigate the structure and pricing of Jersey’s petroleum product markets. Despite the conclusions in the Oxera reports, States Members still felt that they did not receive sufficient information with which to approve the granting of a new lease. Most of the resistance amongst States Members comes from their concern over retail fuel prices and what is seen as the monopoly situation in respect of the importation, storage and distribution of fuel oils within the Island’s situation.

The Fuel Consortium continues to occupy and use the site on the basis of the previous lease agreement.

In August 2004, Consultancy Solutions for the Oil Industry was given detailed information on which to make a presentation to the Sub Committee regarding its proposals to carry out this study and analysis and to reach conclusions and recommendations commensurate with the Terms of Reference.

Following a presentation to the Sub Committee on 20th September 2004, Consultancy Solutions for the Oil Industry were both pleased and honoured to receive the appointment as Consultants to deliver this report.

The investigatory work was carried out by interviews and visits with interested parties on Jersey, together with forensic analysis assisted by benchmarking with industry colleagues on mainland UK. The senior partner’s own 30-years experience in the downstream UK petroleum market has enabled the issues pertaining to Jersey and its petrol prices to be readily identified. The subsequent financial analysis has therefore been both accurate and incisive.

We trust that the narrative and analysis of this report will assuage all desire for further understanding of the workings and costs of the Jersey market. The recommendations contained in this report are made with conviction and assurance.

Text highlighted and boxed in this manner throughout the report contains our recommendations and conclusions from the studies carried out in October and November 2004.

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1 Petroleum Market Structure on Jersey

1.1 Current Market Structure on Jersey

With no refining capacity, Jersey must import finished petroleum products into the island to meet indigenous demand. These imports are sourced by two major international oil companies – Esso and Shell Oil – from south coast English and southern Welsh refineries.

Refined products are brought over to Jersey in relatively small ships [up to 3,000 dwt], and with mixed product cargoes. This arrangement is predicated by the level of demand in Jersey and the physical constraints of both the harbour berth for fuel oils and the size of the La Collette fuel farm tankage.

The fuel farm at La Collette, which handles all of Jersey’s imports of petroleum products, is a combination of operations. The fuel storage tanks, or fuel farm itself, is operated by Esso and Shell together under a joint-venture arrangement known as the Jersey Consortium Agreement. Esso and Shell have separate office facilities, loading racks and tanker parking areas. Total Oil has just an office and tanker parking area.

The Consortium does not take equity title to any of the fuel imported to Jersey; it merely operates the fuel farm of a full cost-recovery basis on behalf of the importers of fuel and the local distribution companies. The current equity participation in the Consortium is 60% Shell and 40% Esso. This unequal share arose from the historical fact that Shell throughput fuels for BP when that company was present on Jersey some years ago.

Three marketing companies distribute petroleum products in Jersey. Petroleum Distributors Jersey [PDJ] is a locally based organisation that buys fuels from Esso under a 5-year exclusive purchase agreement. Fuel Supplies (Channel Islands) [FSCI] is a wholly owned subsidiary company of Shell UK Oil and has an arms-length trading relationship with its parent company. Total Channel Islands [TCI] is also a wholly owned subsidiary company; belonging to Total Oil, an international, French-based integrated oil company formed by the merger of Total and Elf of France and Petrofina of Belgium.

Total does not import product direct into Jersey. Having been present for a considerable number of years on Guernsey, Total acquired the business assets and customer base of BP on Jersey in 1996. Until earlier in 2004, Total purchased its requirements from Shell on the then extant BP throughput agreement. Total had expressed interest in joining the Jersey operating Consortium in order to avoid paying what it considered a premium throughput rate to Shell, thereby disadvantaging itself in the marketplace. Total’s current arrangement to acquire fuel is through Esso, based on monthly pricing and invoicing between Esso and Total in the UK [i.e. not at local, Jersey levels].

The delay in the renewal of the land lease between the States of Jersey and the Consortium has prevented Total from becoming a more aggressive marketer on Jersey. Instead of minimising their supply costs by potentially importing direct as a Consortium participant, they are paying a premium to Esso buying on an ex-rack basis.

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The three petroleum distributors – PDJ, FSCI and TCI – each have their own office and truck parking areas at La Collette. Apart from Total, which has a “dry” depot, loading racks for tankers are situated within both Esso and Shell compounds.

Each distributor carries out its own marketing programmes and tries to establish brand loyalty through company and systems differentiation and in the case of Shell/FSCI through offering enhanced premium products. All three sell and supply domestic heating oils, commercial Gasoil and diesel and marine fuels.

In the case of Esso and PDJ, the distributor does not take title to, or invoice retail motor fuels to garages in Jersey. PDJ merely deliver the fuel on Esso’s behalf; Esso invoice the retailer direct from the UK1. Both FSCI and TCI are responsible for distributing and selling motor fuels to their own branded garages on Jersey.

A full range of petroleum products is marketed on Jersey, making the availability more comprehensive than can be found today in some UK geographical markets and on certain retail forecourt brands.

Four product grades are available to Jersey retail garages – Unleaded Gasoline, Super Unleaded Gasoline, Lead Replacement Petrol [which superseded the old 4* leaded petrol], and DERV. All products are low-sulphur grades2.

For commercial and business users DERV and Gasoil are available, with Light Fuel Oil [LFO] for agricultural growers. It should be noted that Gasoil is not imported to Jersey as a separate grade of fuel, but higher quality, lower sulphur content Ultra-Low Sulphur Diesel is downgraded at La Collette and dyed at the loading rack to produce this different grade. This unnecessary cost burden upon the oil importers is necessitated by the low demand on Jersey and the need to streamline the supply chain logistics wherever possible. On the other hand, the consumption of low sulphur Gasoil on Jersey cuts down on noxious emissions and is an undoubted benefit in environmental terms.

Based on international product prices supplied by Platt’s, the cost of downgrading would have been in the order of 1.21 ppl, or some £ 250,000 per annum3. Spreading the cost over the whole of the throughput of La Collette would add about 0.20 ppl as a “cost of doing business” in Jersey.

Kerosine is imported for domestic heating fuel and to supply the aviation market.

In addition, Shell markets a premium grade of domestic heating oil known as “Shell Thermo Premium”. For a price premium of 2 pence per litre, it is claimed that this grade will give increased boiler efficiency and has a fragrant additive to “virtually eliminate” the odour of kerosine. This specialist product is not imported as a separate grade into Jersey, but a proportion of ordinary kerosine is segregated at La Collette and “dosed” with the additives required.

Shell is now the only marketer of aviation fuels on Jersey, and sells both Avgas4 and Avtur5. This is imported through La Collette, with new cargoes physically isolated upon arrival, subjected to a rigorous testing and sampling regime, and then moved to Jersey airport storage tanks by dedicated road vehicle.

1 This arrangement is common with UK mainland practice between Esso and its distributors – the business case model has been developed for a long time, and should therefore NOT be regarded as unusual to Jersey 2 Jersey products already meet the 2005 specification under the EU Auto-Oil Directive, in line with mainland UK supplies. It would be expected that when the UK moves to “no-sulphur” fuels then Jersey’s supplies would naturally follow. For more information visit Auto-Oil Directive at www.europa.eu.int 3 Based on differential between Platt’s quotes for period October 2003 through September 2004 – Cargo Prices NWE CIF basis – for ULSD and Gasoil, and multiplied by an estimated annual Gasoil consumption on Jersey of 21 million litres 4 Av[iation] Gas[oline] – high octane petrol for small propeller aircraft 5 Av[iation] Tur{bine] fuel – also known as Jet-A1; used for commercial jets and turbo-prop aircraft

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1.2 Size of the Jersey Petroleum Market

Demand in 2003 within Jersey amounted to some 133,547,000 litres. Compared with demand in the whole of the United Kingdom for only those products marketed on Jersey, then the island’s demand represented less than 0.2 % of the total6.

The following table shows the product mix and relativity for Jersey in 2003:

Table 1-1 : Jersey’s Product Volume and Percentage Shares

VOLUME PROPORTION

(thousand litres) (%) Aviation Gasoline 1,081 0.8 %

Ultra Low Sulphur Petrol 32,103 24.0 %

Super Unleaded Petrol 8,208 6.1 %

Aviation Turbine Fuel 14,146 10.6 %

Kerosine 37,846 28.3 %

Diesel and Gasoil 33,222 24.9 %

Fuel Oil 6,941 5.2 %

All Products 133,547 100.0 %

Source: States of Jersey

It is informative to compare the specific product mix for Jersey demand with that for the whole of the UK for those same products. The following graph illustrates the differences in the product mix to be found on the island.

Figure 1.1: Differences in Percentage Product Mix – Jersey vs. Mainland UK

Jersey Petroleum Products MarketDifferences in Product Mix to UK

0%

20%

40%

60%

80%

100%

Jersey UK

Avgas ULSP SUL Avtur Kero Diesel FO

6 Source: Digest of UK Energy Statistics [DUKES] 2003, DTi

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Aviation Gasoline demand commands a greater share in Jersey than the UK and is explained by both the island’s geographic and the wealthier population. This is the only petroleum product sold on Jersey that has a significant [in relative terms] share of the UK market. Jersey’s demand in 2003 represented 1.68% of total UK demand for aviation gasoline.

Unleaded Petrol demand in percentage share terms is down on the UK, as would be expected with a limited driving range available to motorists who stay on the island. Unleaded Petrol demand in Jersey in 2003 represented less than 0.15% of the total UK inland demand. Perversely, the share of Super Unleaded gasoline is significant up on UK’s share. This would reflect the higher proportion of performance cars found on Jersey compared with mainland UK. Jersey’s share in 2003 was 0.72% of the total UK market for Super Unleaded.

Aviation Turbine Fuel is expected to show a marked decrease relative to UK, as most demand for Avtur at Jersey airport will be sector fuel. Large consumers such as British Airways and FlyBe purchase most of their fuel under contract arrangements on the mainland.

Kerosine demand is a significantly higher proportion of the product mix than that seen in the UK. This would suggest the lack of alternate heating fuels such as natural gas, combined with the Island’s rural nature, give rise to greater reliance on kerosine for heating purposes. Despite this fact, Jersey demand represents just 0.88% of total UK market for kerosine.

Diesel fuel’s demand share is lower than mainland, reflecting the lack of long-haul truck routes utilizing HGV distribution, and once again, the small island area mitigates against the notable switch, seen on the mainland, to diesel-powered private cars to get better fuel economy.

To make a final point about relativity and context, Jersey’s retail motor fuel demand represents the equivalent throughput of about 5 large hypermarket petrol stations seen in the UK operated by the likes of Tesco, Sainsbury’s, Asda and Morrison/Safeway.

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2 Differences to UK Mainland Market Structure

Introduction This section will compare and contrast the structure of the petroleum products market on Jersey with that typically found on mainland UK. There are significant differences in the retail petrol market on Jersey that are worthy of separate discussion later in this report. Differences in the supply chain cost structure associated with the importation, storage and distribution of fuels in Jersey have been evaluated and these are discussed in the section hereunder.

2.1 Primary Distribution

Primary Distribution is defined as the movement of petroleum products from refineries to storage terminals for onward [secondary] distribution to end users and small distributors. End users will range from petrol filling stations through commercial and industrial consumers to agriculture and domestic heating oil. Petroleum products are often re-delivered to distributors’ own small depots, before final end-user distribution. This specific movement to depot locations is often referred to as “bridging”.

It should be noted that all UK refineries also have road-tanker loading facilities that supply secondary distribution facilities for fuels to be delivered to end-users. These will often distribute one-third of the refinery’s total output.

On mainland UK, petroleum products not distributed directly from refineries, are moved to inland distribution terminals by either pipeline or trainload movements. Both these methodologies provide greatest economies of scale and are highly cost efficient. Pipeline transfers are unobtrusive in operation and there is a comprehensive network of pipelines that link refineries in England to the major demand centres in the North West, Midlands, London and the major airports at Heathrow, Gatwick and Stansted.

It is believed that some 30,000 thousand tonnes of finished petroleum products are distributed on the mainland from refinery to primary inland terminal locations each year – this is over 50% of total UK market demand not delivered direct from refineries. About one-quarter of this volume will be supplied direct to airport locations, having never been transhipped onto rail or road. Esso’s Fawley refinery dispatches over 80% of its finished petroleum products by pipeline.

Only a small proportion of the mainland’s petroleum products are now moved by small coastal ships to sea-fed terminals. Plymouth probably remains the most significant sea-fed terminal from UK refineries at both Pembroke [Shell via their exchange contract with Texaco] and Fawley [Esso]. This normally sees ship freight movements of some 10,000 – 15,000 dwt at a time. This is in contrast with typical movements of up to 3,000 dwt into Jersey. The Isle of Wight benefits from the proximity of its sea-fed terminal at Cowes just across Southampton Water from the Esso refinery at Fawley.

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2.2 Terminals, Storage and Throughput

Inland terminals in the UK are owned and operated by the major oil companies. Esso is alone in operating certain of its inland terminals on an exclusive basis. The other major terminals and distribution points have been developed by joint-venture partnerships to share capital construction costs and to seek the critical mass for unit operating costs, or have been constructed by consortia of 2/3 oil companies.

The principle of a Fuel Consortium operating a fuel farm facility, as occurs at La Collette, is therefore neither unusual nor new on mainland UK. Where a consortium exists, a separate limited company is often formed with the participating oil companies taking a respective equity stake in that company in proportion to their anticipated share of the terminal’s throughput. The operating company seeks to recover, in throughput charges from each of the supplying oil companies, the costs of owning, operating the assets and storing the fuel in the tanks. The operating company does not take title to the product itself, which remains vested in the supplying oil companies.

On the mainland UK, despite the fact that [say] 2 companies own the terminal assets, access to products at the loading racks for end-user distribution would be open to a wider audience of oil companies and their distributors. The UK petroleum market operates on extensive exchange, swap and purchase agreements between all the major oil companies, by which means refiners do not have to expensively transport their refinery output across the whole of the UK by dedicated supply logistics. Exchanges between refiners allow access to local markets using other people’s products. For example, Scotland has only one refinery, BP at Grangemouth, but sees Esso, Shell, Conoco, Texaco and Total marketing their brands whilst ostensibly using BP products produced at the BP refinery. It is far more cost efficient to exchange products drawn in Scotland by allowing BP to draw similar volumes at others’ refineries in England or Wales.

These exchange arrangements are not present on Jersey, where the 2 Consortium members have dedicated lines of supply through La Collette and onto their distributor companies.

It is a conclusion of this report that the presence of a Consortium Agreement, in itself, does not either limit competition or places the members of the Consortium into a position of duopoly in the marketplace.

The Jersey Consortium Agreement, however, provides that new participants “shall purchase a proportion of the Joint Facilities (equal to % of throughput and based upon replacement value of the Joint Facilities)”7. In addition, the old lease for La Collette bestowed upon the Lessees [the Consortium] exclusive rights to use the pipelines between the discharge jetty and the fuel farm. This prevents any other supplier – in legal terms at least – from throughputting petroleum products at La Collette and this exclusive right must be removed from any new lease arrangements.

New entrants to the petroleum market in Jersey have a financial barrier to entry in that they have to either pay a throughput premia to one of the existing operating companies or join the Consortium by equity participation. In particular, the equity participation is based on market value of the fuel farm, which has variously been assessed at £ 10 million, whereas the cost to build the tankage and facilities in the late 1970’s was £ 2 million8. This values a 10% equity stake at £ 1 million in 2004, as opposed to an initial capital expenditure of £ 200,000, adjusted for 4% RPI each year since 1979 would equate to around £ 530,000 in today’s terms.

It is not disputed that the market value of the fuel farm assets are in the order of £10 million in 2004. Reinstatement to the same standards that exist may cost as little as £ 8 million, but incorporating new Health & Safety legislation and Environmental measures could see a rebuild figure of some £ 12 million.

7 From presentation by the Jersey Consortium to the States of Jersey, March 2003 8 Source: Fuel Oil Supply and Distribution: Committee of Inquiry Report, States of Jersey, 28th October 1986

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Equity participation alone cannot be condoned, as there appears to be a significant barrier to entry for new participants, thereby preserving the status of the original and existing two Consortium members. Any new lease, therefore, must insist that new participants can have the rights to import, store and distribute petroleum products from La Collette based on paying a commercial throughput fee to the Consortium.

Abuse of this concession could be monitored under the Jersey Competition Act, as the benchmarked costs of operating the La Collette facility are contained in this report. Furthermore, future terminal throughput costs can be referenced back to several UK mainland terminal independent operating companies as a comparison.

2.3 Distributor Structure

Esso are alone in having an arms-length relationship with its distributor on Jersey. Petroleum Distributors (Jersey) Limited are Esso branded distributors but are a separate legal entity. Typical practice is a 5-year exclusive purchasing arrangement structured on a daily net price basis between Esso and PDJ.

Both Shell and Total operate as distributors with fully owned subsidiary companies. In these cases, it is difficult to establish precisely the terms of the transfer pricing arrangements between the parent company and the subsidiary. We have established through the honesty and co-operation of Shell that FSCI has purchased product on a daily pricing basis since 1st July 2004, and that prices are formulated on the basis of the actual costs of supply, taking into account the frequency and timing of the product imports to Jersey.

Total Channel Islands reassess its commercial and domestic prices weekly and its retail petrol station schedule prices as market dictates. This is in contrast to the monthly pricing mechanism that exists between Total and Esso for the purchase agreement.

It is believed that the existence of two equity-owned distributors by two oil companies does not adversely affect the marketing operations of the Esso distributor. One can only conclude that cross-subsidisation or predatory pricing has not been practised by either Shell or Esso to gain unfair market advantage over Esso.

On mainland UK, within the hinterland of any given distribution terminal, several differing types of distributor would be found: - Shell9, Texaco and Total equity-owned distributor companies; branded authorised distributors; independent distributors and smaller resellers. All independent distributors, and the resellers would source their petroleum products from a selection of oil companies; indeed even branded distributors may have a volume-related purchase agreement rather than an exclusive tie to their oil company brand.

This structure gives rise to increased competition between the oil companies to sell their products to wholesale distributor customers, and in turn, increases the competition between distributor companies in end-user marketing. In complete contrast, Jersey’s distributors are inexorably linked to just one supplier, and end users only have three distributor companies from which to make an informed consumer choice.

Whilst current market share between the 3 distributors is assessed as Esso – 43 %, Shell – 45%, and Total – 12%, the introduction of a fourth distributor, with the aim of reducing the dominance of both the Esso and Shell distributors, would destroy further the critical mass currently experienced. The market demand for the mainstream fuels [Gasoline, Derv, Gasoil and Kerosine] spread evenly over four distributors equates to some 28 million litres each per annum. A static market further restricts opportunities for business growth.

9 Shell have recently divested ShellDirect to DCC Energy [an Irish conglomerate with energy interests] but with an exclusive 5-year supply agreement

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This level of sales and turnover may be sustainable on mainland UK, where such an operation could be part of a larger, integrated organisation with a central head office and functional management. It is extremely doubtful whether profitability could be maintained on Jersey with its associated need for separate management and logistics.

Coupled with the finite boundary of Jersey’s coastline and a static, if not slightly falling, market demand, it is a conclusion of this report that introducing yet more competition in the form of further distributor groups would accrue no further consumer benefits. Indeed, unit distribution and throughput costs would increase because of loss of critical mass in the Shell and Esso distributors. It is not beyond belief that these increases would be passed on and recovered from Jersey consumers.

2.4 Secondary Distribution Logistics

Secondary Distribution logistics are defined as the movement of petroleum products from distribution terminal to end-users. In the case of Jersey, La Collette should be regarded as a distribution terminal.

There are significant differences between both the structure and costs of secondary distribution between Jersey and the UK. These are most notably marked in the retail petrol station market.

Distribution to Retail Garages

Automotive fuels are distributed to petrol filling stations in a most cost efficient manner in the UK today. Increases in the maximum permissible gross vehicle weight on the roads now allows all retail distribution to hypermarkets and the oil companies’ owned forecourts on 44-tonne articulated tankers, with gasoline payloads of c. 40,000 litres.

These 44-tonne tankers are operated on a 24/7 basis, 364 days of a year, thereby maximising utilization and minimising unit distribution costs. The capital standing cost of the tanker is spread over as many deliveries and as maximum a payload as possible.

Consultancy Solutions for the Oil Industry’s own logistic cost modelling programme has been used to assess current distribution costs using these parameters, and concludes that typical distribution costs for mainland UK fuel companies would be less than 0.50 pence per litre, based on current tanker replacement prices rather than historical costs.

Road tankers on Jersey have been restricted to a carrying capacity of no more than 10,000 litres due to a combination of weight and vehicle width restrictions, individual site throughputs, garage tank capacities, the requirement to interchange the tanker to service other markets and access and manoeuvrability requirements.

Logistics modelling results suggest that the capital standing costs of a tanker servicing retail garages on Jersey would be higher by a factor of over 5.5 times against typical UK experience.

Running costs per kilometre have been computed to be broadly similar to that of the UK model, as the annual mileage run by Jersey tankers will be considerably less than in the UK. Fuel economy will be greater on the smaller Jersey trucks; repairs and maintenance will reflect higher labour rates in Jersey, but once again, the lower annual mileage mitigates these elements.

Typically, the Jersey tanker delivering to retail sites will be scheduled for five day-shifts per week, as opposed to 14 shifts on a 24/7 basis in the UK. The significantly higher manpower costs for the UK tanker will be more than nullified by the payload per delivery and the number of deliveries. On the assumption that both Jersey and UK trucks carry out 2 deliveries each shift, the manpower pence per litre cost in Jersey will be a factor of nearly 4 times that of the UK.

Overall, secondary distribution to Jersey’s petrol stations has been assessed at costing nearly 4 times that on UK mainland at 1.90 pence per litre.

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Distribution of Domestic Heating Oil

The differences between distribution of domestic heating oil on Jersey and mainland UK are much less marked. Both geographic areas use small 4-wheeled tankers, although potential payloads on mainland could be 10 – 20% greater.

Typical load sizes, even at times of peak demand, have been assessed as probably as low as 60% of optimum mainland delivery schedules. The island’s small geographical area and the use of some very small tankers, where access is a problem, exacerbate this issue.

Capital costs of tankers would be very similar to mainland, but with additional costs of shipping and Jersey’s New Vehicle Registration Duty being the main differences. It is payload constraints, therefore, that force Jersey truck standing costs to double in unit terms over mainland experience.

Running costs on Jersey have been computed by Consultancy Solutions for the Oil Industry’s own logistics modelling to be cheaper in unit pence-per-litre terms through the lower annual mileages evidenced on Jersey.

Manpower requirements are the same for both markets, as domestic delivery tankers operate on a weekday day shift basis. However, driver wage rates vary considerably, being typically £ 440 per week for a 39-hour week on Jersey, against £ 360 per week for 40 hours on the mainland. Together with the aforementioned payload differentials, this has the effect of doubling pence per litre manpower costs on Jersey over mainland UK costs.

Overall, secondary distribution to Jersey’s domestic heating oil customers has been assessed at costing over 60% more than on UK mainland at nearly 2.20 pence per litre.

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3 Jersey Supply Chain Costs

Introduction Concern has been expressed over many years about the relative expense of fuels on the island with those equivalent products on the mainland. OXERA concluded10 in 2001 that unleaded petrol prices were higher by around 17.5 pence per litre in Jersey than the UK average; and heating oil prices commanded a premium of around 3 ppl over the UK.

The renewal of the States lease of the land at La Collette to the Fuel Consortium has been referred back to the States Harbour Board by politicians concerned over the apparent lack of competition in the fuels market on Jersey and the high level of retail pump prices compared to Guernsey and mainland UK.

This report has set out to investigate the comparable supply cost chain elements associated with Jersey and to contrast them with typical UK mainland costs. This analysis will focus on the differences in the supply chain from a pure logistics viewpoint downstream from a UK refinery through La Collette fuel farm and incorporating distribution costs on Jersey to end-users and garages.

The structure of pricing mechanisms on retail forecourts and the retail marketing of petrol and diesel will not be considered here, but forms a separate section later in this report. The reasoning behind this segregation will become evident.

3.1 Cost Elements of the Supply Chain

These are defined as:

o Primary Distribution shipping and freight costs between refinery and La Collette

o Port & Harbour Dues costs incurred by importation of fuels to Jersey

o Terminal Costs costs associated with the throughput of fuels through the Consortium Operating Agreement on La Collette fuel farm

o Secondary Distribution costs associated with the distribution and delivery to end-users, in particular the retail petrol station and domestic heating oil markets

The costs associated with Jersey’s supply chain logistics have been obtained through questioning of oil companies and distributors on Jersey, together with informed extrapolation and elimination techniques in those cases where direct data was either inexact or unavailable. It should be stressed that certain costs would have been held by organisations to be commercially sensitive, despite the wish and willingness to assist in the preparation of this project report. Without legal compulsion, this report’s conclusions have necessarily been based on interpretation of the data received.

Comparative costs of mainland UK operation have been received from trusted and experienced sources within the UK known to Consultancy Solutions for the Oil Industry. These data sources have the added benefit of independence from the organisations trading on Jersey, but cannot be interpreted by readers of this report to represent the actual costs incurred by Esso, Shell and Total in their own UK operations.

For the purposes of clarity, it is assumed in this comparative study that product stock losses, both in-transit and in-tank, are the same for Jersey as on mainland UK.

10 Fuel Prices in Jersey: A Report to the Industries Committee of the States of Jersey, October 2001, Oxera Consulting

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3.2 Primary Distribution Costs

Several sources have indicated that freight rates under long-term charter with independent shippers [as currently used by Esso and Shell] would be of the order of £ 7.00 per tonne. This figure is based on 3,000 tonne movements from Fawley refinery to La Collette.

In contrast, shipping rates for larger parcels of 10,000 tonnes from Fawley refinery to Plymouth would not show much savings, being in the range of £ 6.00 per tonne.

Shell advised that the small shipments of Avgas were currently costing some £ 15 per tonne, but that the shipper had been seeking substantial increases in freight costs of up to £ 80 per tonne. We understand that Avgas is sourced from Rotterdam currently, and the vessel completes a “milk round” route serving the Thames, Channel Islands and the Isle of Man. Therefore, the specialist nature of this product, the lack of availability of load-points in the UK for small vessels and the Jersey demand may combine to make this swingeing increase a reality.

Esso have stated that the cost of shipping petroleum products to Jersey is approximately ten times the cost of sending product by pipeline to an inland UK terminal. This statement is probably based on Esso’s own cost of pipeline distribution, which is both extensive and heavily utilized. Whilst Esso’s pipeline distribution cost is commercially confidential, if we prudently assume that distribution would cost around £ 1 per tonne, this indicates current freight rates of c. £ 10 per tonne.

The difference between this extrapolated cost and that given by independent sources for a Fawley to Jersey movement is that some of Jersey’s petroleum products are now sourced from Pembroke. Shell advised that the freight cost from Pembroke was in the order of 1.5 pence per litre or some £ 18 per tonne.

For the purposes of this costing analysis, it is proposed to use £ 12.50 per tonne in the modelling analysis to reflect the sourcing of primary products from both Fawley and Pembroke.

Future concerns include forthcoming legislation on double-hulled vessels younger than 25-years old. Coupled with the lack of demand for small cargoes of petroleum products to be distributed around the coastal waters of the UK, availability of healthy competition in the shipping market is found wanting.

3.3 Port and Harbour Dues

Current Harbour Dues for landed cargoes of petroleum products in Jersey are levied at £ 7 per tonne. This equates to 0.52 ppl on Gasoline and 0.59 ppl on Diesel and Gasoil. Port dues are increased annually under the Harbour and Light Dues (Jersey) Law 1947 at a rate less than the Jersey retail price index.

Nevertheless, the current port dues are considerably higher than comparable rates in the UK. Petroleum products landed in the Thames port area are subject to dues of around 20 pence per tonne; those in the Port of Immingham at 46 pence per tonne.

Therefore, the comparison in pence per litre terms is a range of 0.015 ppl for Gasoline on the Thames to 0.037 ppl for Diesel and Gasoil at Immingham.

Esso state that the Jersey Harbour dues are the highest of any UK port supplied by them.

There is an inescapable premium of over 0.50 ppl for all petroleum products imported into La Collette.

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3.4 Terminal Costs

The complexity and confidential nature of the Jersey Consortium agreement makes for difficulty in obtaining precise details of the charges levied by the Consortium on all petroleum products imported through and stored in La Collette.

In previous submissions and presentations to the States of Jersey, the oil companies have made the following assertions11: -

• The Consortium does not make a profit

• The Consortium appoints an Operator to operate La Collette and pays a management fee

• Fuel is not owned, bought or sold by the Consortium

• Annual cost of c. £ 250,000 to operate and maintain the Fuel Farm

• The Consortium operates on a full cost-recovery basis

Subsequent investigation by Consultancy Solutions for the Oil Industry has clarified that the annual operating cost quoted in 2003 did not include the lease rental payable to the States of Jersey, Harbour Dues or Cargo Demurrage.

This Operating Cost did not include the depreciation on the tanks and pipe work of the fuel farm [and, no doubt, the associated costs of capital and interest thereon]. Based on the stated costs of construction12, the depreciation element based on a 20-year straight-line method would amount to £ 100,000 per annum. The Consortium is paying current lease rentals of £ 134,630.88 to the States of Jersey for the La Collette facility.

Shell has advised that there have been no material changes to the quoted 2003 operating cost.

We are given to understand that the management fee, paid by the Consortium participants to FSCI, is included within the annual cost of £ 250,000 supplied to the States in March 2003; further, that this management fee is small. Consultancy Solutions for the Oil Industry believe, in its professional opinion, that this fee does not exceed £ 20,000 per annum.

The total operating costs incurred by the Consortium at La Collette would thus be in the order of £ 500,000 per annum.

In 2003, the total volume of petroleum products throughput La Collette amounted to some 133.5 million litres of petroleum product, so that the terminal costs equate to around 0.38 pence per litre.

Consultancy Solutions for the Oil Industry have obtained independent assessment of the costs of operating the tankage and area of the La Collette facility from an independent tank storage organisation based in the UK. On the basis of the facilities at La Collette, the known land rental and Jersey rates, and allowing for higher employment costs on Jersey, a prudent estimate of the total operating costs, including depreciation, equates to some £ 525,000 per annum, using this “zero-base” methodology.

Neither the extrapolated terminal costs nor the independently derived data contain any element for return on capital. Assessing the initial capital construction at £ 2 million we have estimated that the element for ROCE could be in the order of £ 50,000 per annum, equivalent to a flat rate of 2.5% per annum over 20 years.

Esso advise that their terminal operations all seek to purely recover operating costs, which are passed onto their fuels marketing department. There is no element of seeking a return on capital invested in the cost recovery process.

11 Presentation by The Jersey Consortium to the States of Jersey, March 2003 12 Source: Fuel Oil Supply and Distribution: Committee of Inquiry Report, States of Jersey, 28th October 1986

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The low demand of the Jersey market, the need for storage for many grades of petroleum products, and the individual parcel size of each product requiring to be shipped on vessels not exceeding some 3,000 dwt all combine to deliver a very low stock turnover.

La Collette has a physical capacity in all tanks of some 18 million litres. Current throughput is around 130 million litres, so that the stock-turn figure is some 7.4 times a year, or every 49 days. On a product-by-product basis, the stock turn varies enormously, from a high of every 27 days for Unleaded Petrol down to every 166 days for Avgas.

In comparison, pipeline-fed distribution terminals on mainland UK would typically complete stock turnover every 5 days, and those fed by sea or trainload would normally achieve complete stock-turn between every 7 to 10 days.

Therefore, a fuel farm facility capable of storing some 18 million litres of petroleum product would be expected to show a throughput of between 936 million litres [High case] and 657 million litres [Low case]. On the independent assessment of operating costs of some £ 525,000 per annum, plus an allowance for ROCE, the unit pence per litre terminal cost would be under 0.10 pence per litre.

This evaluation assesses the unit costs of operating La Collette to be sustainable and justifiable at up to 5 times the cost of operating an equivalent terminal, with pipeline supply, on mainland UK.

3.5 Secondary Distribution Costs

As already detailed in Section 2.4, secondary [road] distribution costs on Jersey have been extensively modelled and compared with those on the UK mainland. It was concluded that deliveries to retail filling stations on Jersey would incur a unit cost of around 1.90 pence per litre, whilst those for domestic heating oil would be of the order of 2.20 ppl.

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3.6 Summary

The differences in the Supply Chain Logistics costs are summarized in the following table:

Table 3-1: Summary of Differences in Supply Chain Logistics – Jersey v. UK mainland

ELEMENT UK JERSEY DELTA

Notes: - (ppl) (ppl) (ppl)

Primary Distribution UK – pipeline; Jersey – sea-fed 0.08 1.00 0.92

Port Dues UK – Immingham; Jersey - actual 0.04 0.56 0.52

Terminal Throughput Costs

As assessed 0.08 0.38 0.30

Product Downgrading13 As detailed in Section 1.1 Nil 0.20 0.20

Oil Company profit CSOI’s own assessment 0.20 0.20 Nil

Secondary Distribution Based on domestic heating oil 1.34 2.20 0.86

Distributor net profit Industry knowledge 0.50 1.00 0.50

TOTAL COSTS 2.24 5.54 3.30

This evaluation and assessment can be verified by reference to the fact that Total have said that the premium throughput fee they have paid in the past was in the region of 2.50 pence per litre or £ 31 per tonne. This figure would have excluded Secondary Distribution costs and Distributor net profit. The equivalent figure in our assessment is 2.34 ppl.

The total costs assessed are further validated by reference to the tender bids received by the States of Jersey for their own fuel consumption. Whilst these are a matter of commercial confidentiality, the bid documents studied by Consultancy Solutions for the Oil Industry would support the financial appraisal shown in the above table.

Finally, verbal evidence from major consumers on Jersey would indicate that our extrapolation of secondary distribution costs and oil distributor profits are correct.

13 Includes downgrading of Ultra Low Sulphur Diesel to Gasoil; Jet A1 kerosine to Domestic Heating Oil; adding additives at the loading rack to Super Unleaded Petrol to achieve the Lead Replacement Petrol grade and for Shell to make an odour-free kerosine available

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4 Comparative prices for Domestic Heating Oil

4.1 Historical Data

Since 1988, the Statistics Unit of the States’ Policy & Resources Department has been collating relative domestic heating oil prices between Jersey and mainland UK. Until January 2001, the figures for Jersey and Guernsey were collected on the first of each month. From that date, the collection was effected on the fifteenth day of each month.

The Jersey data is now only collected every quarter – in March, June, September and December. The purpose of collecting the three fuel distributors’ prices for 900 litres of domestic heating oil is to feed into Jersey Retail Price Index.

Consultancy Solutions for the Oil Industry do not believe the fixed timing and methodology of collecting prices on the fifteenth of every quarter month, or indeed every month as used to happen, can really establish credible data on true consumer prices. Indeed, there is anecdotal evidence to suggest that all three oil distributors are aware of when the Statistics Unit is monitoring domestic heating oil prices. It would be expected that standard schedule prices would then be quoted. Customers who “shop around” may well achieve discounts off this standard schedule price, dependent upon payment method, season of the year and demand for heating oil at time of enquiry.

The UK prices are collated by the Department for Trade and Industry (DTi) and have a preponderance of urban areas in their survey14. Nevertheless, these comparisons form a useful benchmark. The average of each month’s differential between the mean of prices on Jersey and UK mainland are reproduced hereunder.

Table 4-1: The Higher Cost of Heating Oil on Jersey v. mainland UK [pence per litre]

1988 2.92 1996 2.251989 2.85 1997 2.16 1990 2.01 1998 2.60 1991 3.24 1999 3.00 1992 2.16 2000 2.96 1993 2.12 2001 2.95 1994 2.16 2002 2.97 1995 2.25 2003 2.95

Source: Statistics Department, Policy & Resources Department, States of Jersey

4.2 The OXERA Report – October 2001

OXERA reported extensively in their report about Jersey Heating Oil prices, and tracked historical performance against international product prices, and drew comparison with prices on UK mainland.

They concluded that the Jersey price had tracked changes in the underlying price of oil, although they were erroneously using the Platt’s quotation for Gasoil, where the domestic heating oil is Kerosine and the correct international reference price should have been Jet-A1 kerosine.

14 Barrow, Barnet, Bedford, Hartlepool, Reading, Watford, Worthing and the Isle of Wight

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Despite over-reliance on the Policy & Resource collated data, OXERA concluded that average differentials between 1988 and 2000 were 2.52 ppl, and those for 1999 were 3.00 ppl, and for 2000 Jersey prices were 2.96 ppl more expensive than mainland UK.

Their summary concluded that “…the 2.5 – 3 ppl premium would appear to approximate the likely cost differential of the sea transport, the additional storage stage at La Collette, the necessary use of smaller road tankers, and the (possibly) higher general labour costs”15.

We would once again take issue with their statement about the use of smaller tankers for domestic heating oil deliveries on Jersey, as these are virtually the same size and capacity with those found on mainland UK.

4.3 Consultancy Solutions for the Oil Industry’s own Modelling and Conclusions

During late October 2004, Consultancy Solutions for the Oil Industry established each of the three oil distributors’ prices for 900 litres of Domestic Heating Oil16. These were benchmarked against a basket of prices available in the South East of England and East Anglia from known, reliable and leading marketers of domestic heating oil.

All prices were obtained based on a 900-litre delivery, payment on a cash/cheque/credit card on delivery. Prices that reflected Budget Plans, Automatic Top-Up Services or Monthly Account Settlements were excluded.

Hard evidence shows that against an average price of 31.73 ppl on Jersey at the end of October 2004, equivalent prices on mainland UK were 2.96 ppl lower.

This survey confirms the more general comparisons made previously by the Policy & Resources Department and OXERA.

We are forced to conclude that the extra costs of c. 3.00 ppl on domestic heating oil in Jersey, relative to mainland UK are both inescapable and sustainable. The analysis of the supply chain logistics proves the additional costs of getting petroleum products to Jersey, throughputting at La Colette, and the additional distribution costs. It is incontrovertible that neither the oil companies nor the distributors are making excessive profits over and above their counterparts’ experience on mainland UK. Domestic heating oil supply on Jersey has further competition in form of alternate fuels, such as coal, LPG gas and electricity. This cross-product competition will keep consumer prices in check relative to each other, despite the fact that much power generation and LPG gas prices will be affected by increases in the price of crude oil over time.

15 Source: Fuel Prices in Jersey: A Report to the Industries Committee of the States of Jersey, OXERA Consulting, October 2001 16 Also described as Kerosine, or Standard Grade Kero

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5 Jersey’s Retail Petrol Market - Structure

Introduction The retail petroleum market – the supply of automotive fuels to motorists through garages and filling stations – is so significantly different in structure and operation than that found on mainland UK that special in-depth analysis is required. The supply chain cost uplifts discussed above equally apply to the supply of gasoline and road diesel. However, the nature of the ownership and size of the sites, the supply ties between the garages and the oil companies, and the pump pricing methodologies that exist on Jersey all create unusual marketing conditions for the oil companies, garage owners and motorists alike.

This section of the report seeks to fully evaluate the differences noted in the Oxera reports of 2001 and 2002 between Jersey and mainland UK pump prices. The differences of some 17.5 pence per litre were noted in May 2001, but the reasons for this large discrepancy were not satisfactorily explained at the time. The feeling that some allowance for higher importation costs may have accounted for around 3 pence per litre of this difference, left a balance of some 14 pence per litre, which was not satisfactorily delineated between the wholesaler and the retailer. This report seeks to redress this lack of clarity, once and for all.

5.1 Market Infrastructure

At October 2004, Jersey had some 38 petrol service stations. All of these, bar one site, were owned and operated by businesses independent of the oil companies. At the time these garages were surveyed, it was found that 15 sites were branded Esso, 13 sites were branded Shell, and 6 sites were branded Total. A further 3 sites showed no branding, and are referred to as “spot” sites.

It is understood that the Shell site at St Mary’s is owned by Shell, and is therefore categorised as “company owned”; all other sites are categorised as “dealer owned”.

None of the big 5 supermarkets is present in the Jersey petrol market, although Safeway Stores [acquired in 2004 by Wm Morrison Supermarkets] does have a store, it does not have an attached petrol station.

By comparison, on UK mainland over 40% of garages are owned by the oil companies. The three oil companies present on Jersey combine to have just over 60% of their branded outlets in their corporate ownership17.

The “Big 5” hypermarket groups18 have over 1,000 petrol outlets in the UK representing a 10% share of the physical locations.

The Jersey petrol market diverges considerably from the UK norm because the operators and not the supplying oil company own all but one of the service stations.

17 Source: Energy Institute – UK Retail Marketing Survey 2004 18 Tesco, Sainsbury’s, Asda, Safeway and Morrisons

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5.2 Retailers Market Share

Three local companies operate 13 sites out of the total 38 on Jersey. They are C.I. Traders [Le Riche’s Stores], Roberts Garages and Falles Motor Group. Their service stations tend to be better developed, have associated convenience grocery stores, and are situated on the main traffic flows. Market share analysis has estimated that these three chain operations, together with the C.I. Co-operative site at St Peter and three other sites have 65% of the market.

The following table is Consultancy Solutions for the Oil Industry’s estimate of market share.

Table 5-1: Estimated Jersey Market Share by Forecourt Operator

Operator Location Number of Sites

Estimated Market Share

Roberts Garages Various 5 23.5 %

C.I. Traders Various 6 17.5 %

C.I. Co-Operative St Peter 1 7.4 %

Falles Motor Group Longueville & Airport

2 6.1 %

Freelance Les Augres 1 4.4 %

Shell [company-owned] St Mary 1 3.5 %

Davis Bros Georgetown 1 2.2%

Individual Garages 21 35.3 %

The conclusion from this analysis is that the 21 individually operated service stations each have an average throughput of only 750,000 litres per annum.

5.3 Density of Service Stations on Jersey

Jersey’s population has access to nearly 3 times as many service stations as they would have in England. The 10,000 or so petrol stations in the UK mean that there are 157 outlets per one million population19. The highest concentrations are found in Northern Ireland with 240 service stations per million people and Wales, where the density figure is 233.

By contrast, Jersey has the equivalent of 423 petrol garages per million population. If the overall UK average were applied to Jersey’s population of 87,500, then the island would have only 14 petrol stations. This would represent a reduction of over 60% in the number of outlets.

Proscriptive Licensing legislation to force down the number of outlets would have a “twin” effect. On the one hand, site throughputs would increase, but consumer choice may be forced into a smaller number of chain operators, who would then possess a more dominant position in the market.

19 Source: United Kingdom Petroleum Industry Association – Statistical Review 2004

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5.4 Retail Site Throughputs

Using modelling theories developed with confidence in the UK, taking the annual volume for gasoline and 50% of the annual volume of derv on Jersey and dividing by the 38-strong retail garage network the average sales of a Jersey petrol station are around 1.2 million litres per annum.

In the remainder of the UK, excluding Jersey, the average site throughput is 3.3 million litres a year, or nearly 3 times that of the island’s garages.

The UK average hides a wide range of throughputs, however, as most of the 1,000 hypermarket sites will retail over 9 million litres per annum. The average throughput in the UK after deducting these supermarkets drops to around 2.6 million litres, still over double Jersey’s average.

As shown in the market share analysis of the retail market, some 21 service stations on Jersey have throughputs on average of 750,000 litres per annum. In the UK, service stations with this level of volume have disappeared through the severe attrition since 1976 following the introduction of Esso’s “Price Watch” marketing campaign that matched supermarket petrol prices. The perverse market conditions in Jersey see garages with this level of volume able to survive and prosper without the need to diversify into car- and motorist-related activities.

5.5 Break-even Fuel Margin and Site Throughput

Studies reported by the United Kingdom Petroleum Industry Association but reflecting the situation in 1998, showed that the break-even margin for a service station selling 2.6 million litres a year was a gross profit of 5.25 pence per litre if the site had to rely on fuel sales alone. The break-even fuel margin dropped by about 2 pence per litre if the site had a convenience store. This is explained by the far higher margins on shop merchandise than fuel.

According to this data, the average garage on Jersey would require a fuel margin around 8.25 pence per litre to break-even.

Fierce competition in the UK has driven down pump prices, making fuel retailing a high volume low margin business. This has seen attrition of service stations at a very high rate, as marginally profitable sites have been forced to close. In the past 10 years over 6,000 service stations have ceased retailing fuels, a decrease of nearly 40%. Market conditions have pressurised fuel margins during this same period from about 6 pence per litre to 5 pence per litre in 2003.

Latest market trend indicators from OPAL20 suggest that retail fuel margins in the UK during 2004 will average between 4.0 and 4.5 ppl.

20 Oil Price Assessments Limited

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5.6 Site Operating Costs

Despite their much lower throughputs, Jersey’s service stations will incur many of the same operating cost levels as their UK counterparts. In the case of self-service garages with convenience store attached, the numbers of cashiers and service personnel will replicate those staff levels found on the mainland.

At the smaller sites on Jersey, an element of attendant service is still found; thereby maintaining higher staffing levels than the throughput should really dictate.

It is concluded that Jersey’s comparatively lowly site volumes preclude any further reductions in forecourt staffing levels.

Employment costs for Jersey’s retailers are considerably higher than in UK. Forecourt cashiers on Jersey are paid in a range from £ 6.50 to £ 8.50 per hour, dependent upon experience. With less competition for employees, UK mainland forecourt rates are often just held above the legal minimum wage around £ 5 per hour. The top end of the UK range would be represented on oil company forecourts at nearly £ 7 per hour.

On a petrol station open 15 hours every day and with 2 staff on duty at all times, we have calculated that the additional costs of staff wages would be over £ 300 per week on Jersey. When the small site throughputs are also taken into account, the pence-per-litre staff cost on Jersey is three times that of petrol stations in the UK.

A high proportion of Jersey’s petrol stations are leasehold sites. Land being a premium on such a small island, it not surprising to learn that rental costs are considerably higher than would be found on the mainland. From information supplied to us as part of this investigation, Consultancy Solutions for the Oil Industry have estimated that lease rental costs on Jersey are between £ 50,000 and £ 60,000 per million litres fuel throughput. Contrast with mainland UK where knowledge shows that the equivalent figure is in a range between £ 10,000 and £ 20,000 per million litres. Forecourt lease costs on Jersey replicate those seen in London for inner city garages.

5.7 Length of Contract between Retailers and Oil Companies

Under both EU Block Exemption and Memorandum of Undertakings, following Monopolies Commission findings, oil companies on mainland UK cannot offer a "solus" [exclusive] supply agreement to any independent garage owner for a period longer than 5 years in duration. Whilst some loan agreements have been amortised over longer periods, the dealer has the right in law to change his fuel supplier every five years, even if that means the loan balance has to be paid down early.

As Jersey is bound by neither set of legislation, it has become custom and practice for garage owners to be offered 10-year supply agreements. We acknowledge that this length of supply contract would enable the oil companies to finance major capital investments such as canopies, new pumping equipment and converting to self-service operation.

With oil companies experienced in tailoring their investment returns and capital spends over a normal 5-year horizon, the possible length of contract on Jersey bestows an unfair advantage on the incumbent supplier to renew the contract after about 6/7/8 years. As the garage owner has no right to terminate the contract at this point [neither is he obliged to accept the offer of renewal], the incumbent supplier can effectively isolate the competition from bidding for the contract.

Currently many of the forecourts on Jersey are modern, well developed with up-to-date pumping equipment and canopies. There would appear to little short-term requirement for substantial capital investment, thus obviating the need for long periods of supply agreements.

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Competition amongst the three fuel suppliers on Jersey remains intense, as the length of tie currently possible increases the importance to the fuel supplier to “win” or “retain” solus agreements with retailers. We see no evidence to suggest that negotiations for any solus tie are anything other than true free-market commercial negotiations.

Consultancy Solutions for the Oil Industry strongly recommends that the States pass legislation to limit the length of "solus" tie that can be granted on Jersey. We would recommend that the maximum period is 3 years. This is less than that which applies under EU legislation, but we justify a shorter period by arguments that such legislation will force greater levels of competition between the three oil companies for retail market share. Should a new fuel supplier feel encouraged to enter the Jersey market, this move will give opportunity to gain critical mass of volume share more quickly than could be envisaged currently.

5.8 Planning Constraints

From interviews conducted during the course of this project, we have been made aware that there are significant barriers of entry and exit for development and disposal of garage forecourts. We questioned the States of Jersey Planning Department about these barriers, and cited the example that C.I. Co-Operative Society had to incorporate an existing service station into their new development at St Peter.

The States Planning Department state there is no policy outlawing new garage developments, but the “Greenfield” nature of the island is jealously guarded, so an application for a completely new build is unlikely to be successful. The planning policies are likely to be restrictive in the three countryside-planning zones.

It would appear from anecdotal evidence that getting planning permission for change of use from a service station is also difficult to obtain. Only prescriptive legislation that banned over-the-pavement dispensing of petrol has had any affect in engineering any rationalisation in the Jersey petrol market.

Consultancy Solutions for the Oil Industry conclude that natural evolution of Jersey’s retail petrol market is severely hindered by these onerous planning restrictions. Creating non-commercial barriers to entry and exit hampers evolution and rationalisation of the retail garage network. It is preventing entrepreneurial development by progressive retailers to develop a greater range of motorist-shopper services on single sites, thereby gaining critical mass in volume terms. In turn, increasing the average site throughputs on Jersey will lower the break-even margin needed, which should be passed on to Jersey consumers. Planning restrictions through these entry and exit barriers help maintain high retail pump prices.

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6 Jersey’s Retail Petrol Market - Pricing

Background Retail petrol prices in Jersey have long been the subject of debate and many governmental inquiries since 1979. Aside from investigating the movement of the old oil depots in the Harbour to a concentrated single site at La Collette, the two common themes of all these previous studies have been the differentials between UK and Jersey pump prices and whether there was enough competition.

The last inquiries into petrol prices carried out by Oxera Consulting Limited in 2001 and 2002 highlighted the widening divergence of Jersey’s pump prices with those of the UK [after adjusting for taxes]. Whilst they concluded there was a differential of some 17.5 ppl in May 2001, they did not determine, in our opinion, whether this differential arose through the actions of the oil companies or the retailers. We can now categorically resolve this issue.

Several politicians have argued against the renewal of the lease at La Collette saying “the whole issue had to be about driving down the price of petrol at the pumps…” We would strongly counsel that the lease arrangements are purely a commercial transaction between a willing landlord and a willing tenant. To argue otherwise, is to assume that the lease at La Collette bestows upon the Consortium a dominant position, which is abused in the Jersey marketplace.

There is no evidence from the pricing of domestic heating oil to suggest this is the case, and we will now dissemble the pricing mechanism of Jersey’s retail petrol market to prove that the solution to Jersey’s high petrol prices lies in the retailing sector.

6.1 Comparison of Jersey Pump Prices

During October 2004, we carried out a comprehensive survey of actual pump prices on Jersey by visiting each outlet at least once during a 3-week period. At the same time we monitored petrol and diesel pump prices on Guernsey and those typical of the southeast of England.

To offer further comparison we have included French retail prices as collated in a national survey of prices on 27th September 200421. These have been converted from Euros into Sterling using an exchange rate of £ 1 = € 1.45.

21 Prix et marges des produits pétroliers en France et dans l’Union Européenne – Direction Générale de l’Energie et des Matières Premièrs

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Table 6-1: Comparison of Gross and Net Pump Prices – Unleaded Petrol [all figures in ppl]

UNLEADED Jersey Guernsey UK France

Pump Price 82.0 53.0 83.9 74.3

Less VAT Nil Nil 12.5

Less Duty 36.7 6.8 47.1

Net Pump Price 45.3 46.2 24.3 21.522

Differential + 0.90 - 21.0 - 23.8

Tax & Duty as % of Pump Price 45 % 13 % 71 % 71 %

Table 6-2: Comparison of Gross and Net Pump Prices – Diesel [all figures in ppl]

DIESEL Jersey Guernsey UK France

Pump Price 85.0 45.0 85.9 63.5

Less VAT Nil Nil 12.8

Less Duty 36.7 Nil 47.1

Net Pump Price 48.3 45.0 26.0 24.523

Differential - 3.3 - 22.3 - 24.0

Tax & Duty as % of Pump Price 43 % Nil 70 % 62 %

These tables once again demonstrate the considerably higher levels paid by Jersey consumers than their fellow motorists in the UK or in France. Pump prices appear to UK tourists to be at similar levels to those on the mainland, yet there is no VAT @ 17.5% on Jersey and the difference between Impôt and Excise Duty is currently 10.4 ppl.

We have already developed a supply chain cost model for Jersey’s petroleum products and we will now use the results to explain why and where these large differences occur.

22 Survey did not separate VAT and Excise Duty 23 Survey did not separate VAT and Excise Duty

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6.2 Netback Analysis

An analytical tool often used in the oil industry is a Netback analysis, where prices are referenced to the international product prices used worldwide as price-market makers. In this study we will “work back” from Jersey retail pump prices, deducting known costs in the supply chain, against Platt’s international prices for the month of September 2004. This analysis incorporates the additional costs of importing petroleum products to Jersey; the costs of storage and distribution on Jersey leaving the retail margin enjoyed by retailers at pump prices. Comparative analysis is shown for the UK mainland.

The following tabular presentation uses data and conclusions already detailed earlier in this report.

Table 6-3 : Netback Analysis for Unleaded Petrol & Diesel

Unleaded petrol Diesel

Jersey UK Jersey UK

Pump Price [ppl] 82.0 83.9 85.0 85.9

VAT [ppl] Nil 12.5 Nil 12.79 Duty [ppl] 36.7 47.1 36.7 47.1 Net Pump Price [ppl] 45.30 24.30 48.3 26.01

Platts Price24 $ 430.77 $ 430.77 $ 445.48 $ 445.48Typical Product Premium on Sale25

$ 5.00 $ 5.00 $ 5.00 $ 5.00

FX [£=$]26 $ 1.7922 $ 1.7922 $ 1.7922 $ 1.7922Litres/tonne 1,325 1,325 1,183 1,183Raw Product Price [ppl]

18.35 18.35 21.24 21.24

Primary Distribution 1.00 0.08 1.00 0.08

Port Dues 0.56 0.04 0.56 0.04

Terminal Costs 0.38 0.08 0.38 0.08

Downgrade Costs 0.20 Nil 0.20 Nil

Oil Company Profit 0.20 0.20 0.20 0.20

Secondary Distribution27

1.90 0.48 1.90 0.48

Distributor Profit 1.00 0.50 1.00 0.50

Retailer Cost Price28 23.59 19.73 26.48 22.62

Retailer Margin29 21.71 4.57 21.82 3.39

24 Platts Marketscan price assessment for September 2004 – Cargoes C.I.F. NWE Basis ARA for Ultra Low Sulphur Petrol and Ultra Low Sulphur Diesel 25 Industry Knowledge and Experience 26 Average for September 2004 27 From Consultancy Solutions for the Oil Industry’s own modelling 28 Excluding Impôt or Excise Duty 29 Difference between “Net Pump Price” and “Retailer Cost Price”

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Verification of the Analysis We have arrived at a determination of Jersey retail margins by the elimination of all other elements of the supply chain. We have developed cogent arguments for the additional costs incurred by the oil companies in the importation, storage and distribution of fuels on Jersey. We proved the quantum of the analysis by reference to the differentials in the price of domestic heating oil between Jersey and mainland UK. This same level of differential has been present for many years.

These calculations show that in the case of retailers on mainland UK margins of between 4.57 ppl for unleaded petrol and 3.39 ppl for diesel could have been expected at the time of the price surveys. We have already quoted OPAL figures that the trend for 2004 suggests retail margins in the range 4.00 to 4.50 ppl.

We know of one large dealer network that have guaranteed margins of just under 4.00 ppl as a contract term, although commercial confidences preclude us from revealing this source.

In addition, a large commercial consumer on Jersey states that by buying “direct” they save about 17/18 pence per litre on pump prices.

Finally, there is widespread use of discounting the pump price on Jersey. One retailer offers a 15% discount on all purchases. At the time of survey, this discount was worth around 12.5 ppl on both unleaded petrol and diesel. On the basis that this site was still in business to cover overheads, wages and make a profit, the quantum of our analysis is proven.

6.3 Why are Retail Margins so high on Jersey?

The answer to this question lies in both historical precedent and higher overheads in running a garage in Jersey. However, do the margins need to be a factor of 5 times as high as mainland UK?

In 1980, a States’ sponsored investigation30 held that “ …[it] did not consider it could be said that the gross margin of 18 per cent of the retail price then obtained was unreasonably high.”

In June 1986, the Jersey Motor Trades Association was setting recommended retail pump price, and hence setting retailer margins, at a level of 23 % of the retail price equivalent to 5.10 ppl. This should be contrasted with typical UK gross petrol margins at that time of around 1.54 ppl31. In 1986, the pump price of petrol on Jersey was 22.3 ppl.

Retailers in Jersey have seen fit to pass on all supply cost increases and all Impôt Duty increases straight to the customer. As these increases affected the cost price charged by the fuel supplier, the retailers held onto their tenet of a 20% gross margin. This is still true in 2004, despite the fact that pump prices have risen by four-fold since 1986.

The retail market in Jersey has been insulated by the margin erosion and site attrition seen in the UK due to the rise of the hypermarkets as aggressive marketers of petrol and Esso’s “Price Watch” campaign launched in 1996 to meet the supermarkets on level price terms. As a consequence of these market drivers in the UK, petrol retailers were forced to accept margins as low as 2 pence per litre. This led to wholesale closure of marginal sites and development of improved garage convenience stores to shore up meagre returns from the sale of fuel.

UKPIA32 statistics show that UK retail gross margins have recovered from the nadir of 1996 and reached to just over 5 pence per litre in 2003. French petrol retailer margins for September are around 4.0 ppl33

30 Committee of Inquiry appointed December 1979, reported to the States on 25th November 1980 31 Fuel Oil Supply & Distribution: Committee of Inquiry Report, presented to the States on 28th October 1986 32 United Kingdom Petroleum Industry Association 33 Prix et marges des produits pétroliers en France et dans l’Union Européenne – Direction Générale de l’Energie et des Matières Premièrs

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Undoubtedly the costs of forecourt operations are more expensive in Jersey because of much higher wage rates for forecourt staff and the extreme level of lease rentals. But how much extra margin can these items justify? The coupling of lower site throughputs but similar staffing levels combine to push Jersey garage unit costs up above the UK. We have estimated that higher lease costs and staff wages would require an extra 4 pence per litre on the low average site volumes in Jersey to preserve the profit levels experienced by UK retailers.

6.4 The Effect of Impôt Duty on Pump Prices

Successive increases in Impôt duty have been passed straight through to Jersey consumers as wholesale prices and retail pump prices were adjusted in line with the increases. The effect of the JMTA recommended margin meant that every time the States increased Impôt duty by 5 pence per litre, the retailers took an automatic extra 20% margin for themselves. Consumers therefore paid an extra 1 penny per litre on top of the revenue raised by the States.

It is therefore interesting to review the escalation of Impôt duty over the last 10 years and contrast with the UK Excise Duty regime in the same period. The following graphical analysis shows a greater significant trend to use impôt duty in Jersey as a means of raising revenue.

Figure 6-1: Duty Evolution on Unleaded Petrol 1995 to date

EXCISE DUTY EVOLUTION : 1995 - 2004Unleaded Gasoline

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exci

se D

uty

[pen

ce p

er li

tre]

Jersey UK

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Figure 6-2: Duty Evolution on Diesel 1995 to date

EXCISE DUTY EVOLUTION : 1995 - 2004Diesel

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exci

se D

uty

[pen

ce p

er li

tre]

Jersey UK

As can be seen from the graphs, UK mainland Excise Duty has been above 40 ppl since 1988. Save for a small increase to encourage refiners to introduce more environmentally friendly fuels by decreasing sulphur content, UK Excise Duty has remained constant for some years.

Jersey Impôt rates kept in line with a similar differential to the UK throughout the late 1990’s, but since 2001 have risen at a far faster rate and are now equivalent to 78% of the UK Excise Duty levels. This can be more dramatically demonstrated by graphical representation of the indexation of Impôt duty rates.

Figure 6-3: Indexation of Duty Rates – Unleaded Petrol [1995 = 100]

0

100

200

300

400

500

600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

INDEXATION OF EXCISE DUTY1995 - 2004

Unleaded Gasoline

Jersey UK

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Figure 6-4: Indexation of Duty Rates – Diesel [1995 = 100]

0

100

200

300

400

500

600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

INDEXATION OF EXCISE DUTY1995 - 2004

Diesel

Jersey UK

Impôt duty rates on unleaded petrol have quadrupled since 1995, increasing from 7.21 pence per litre to 36.70 pence per litre. The increase on Diesel is much the same. The point to be made here is not a political comment about the wisdom or necessity to raise Impôt duty, but to highlight the fact that during this ten-year period, petrol retailers in Jersey were largely following the time-honoured maxims and passing on these increases in full. At the same time they were also preserving their percentage margin, as suggested by the JMTA, and so the Impôt duty increases enabled the garage operators to gain nearly a further 6 ppl in their unit margins.

It is concluded that Jersey’s retailers have had the fortunate advantage of being able to retain their gross margin percentage. With rising product prices and increases in Impôt, this principle has “ratcheted up” dealer unit margins. This is in complete contrast to the UK mainland, where the effect of hypermarkets and severe price competition has held down unit margins level for some years; thereby decreasing gross percentage margins commensurate with rises in product prices.

6.5 Who pays pump prices? The Jersey “discounting” eccentricity

We have calculated retailers’ margins based on the difference between pump prices, adjusted for Impôt duty, and likely net cost prices from oil companies. The Jersey petrol market is, however, strangely different from that found today on mainland UK. Many loyalty schemes exist to reward islanders with discounts from pump price, provided they apply for a loyalty card. The discount is sometimes dependent upon the volume of fuel purchased in a month.

Loyalty cards exist in the UK petrol market. They are either brand specific – Shell Plus Points, or cross-merchandised – Nectar cards earning points at Sainsbury’s, BP and Barclays Bank. They do not give discount on the price paid at the pumps, but award points which can be redeemed for a range of goods. Because of the thin retail petrol margins, these cards do not allow points earned to be redeemed against future petrol purchases.

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C.I. Traders operate a “Checkers Express” loyalty with no membership fee. This currently award 2 points for every litre of fuel purchased, and issues collect+save vouchers every quarter provided you have collected over 500 points. 500 points gets a £ 5 voucher, which is redeemable on C.I. Traders’ forecourts. The redemption rate is equivalent to 2 pence per litre discount. We understand that over 40,000 Checkers Express loyalty cards are in circulation.

Roberts Garages operate a “Discount Card” which offers a range of discounts dependent upon monthly fuel purchases. At the lowest end even such a small monthly spend as £10 qualifies for a 6% discount. The highest level of discount is 10%, which requires the cardholder to purchase over £200 worth of fuel in a month. The discount is issued in vouchers, valid for 3 months, redeemable only at Roberts Garage outlets. The redemption rate at 6% discount is equivalent to a discount of 5 ppl on petrol; at the higher end the large fuel volume motorist would get over 8-ppl discount off pump prices paid. This requires the purchase of over 50 gallons of petrol per month, if we assume fuel economy of 25 m.p.g. This represents a monthly mileage of 1,250 miles of motoring on the island.

A similar discount is available to monthly account customers of Roberts Garages. These customers enjoy an average of 40 days interest-free credit period. We understand that over 5,000 loyalty cards are in circulation.

Channel Islands Co-Operative Society give a 4 % dividend on all fuel purchases made at their St Peter station. They also cross-merchandise by offering a £1 voucher redeemable for fuel for every £ 6 spent in one of their stores. The motorist must purchase £10 worth of fuel to redeem the discount voucher.

Shell operate a loyalty card using the slogan “the Shell Card = Points”. This can only be used at Shell outlets in the Channel Islands. Current issuance rate is 4 points for every 10 litres of fuel purchased. The points can be converted into Air Miles, redeemed for a range of goods or services, or used to credit against the purchase of heating oil. Using this latter redemption method, Shell’s offer is that 2,630 litres of petrol purchased earn enough points to qualify for 500 litres of domestic heating oil. At current prices of heating oil, this redemption rate equates to a discount of around 6 ppl off pump prices.

Other garage operators offer official discounts of typically 10% to account customers. In addition, there are “soft” discounts in operation where forecourt cashiers can allow a 10% discount to taxi drivers, nurses and local business. This practice is impossible to audit with any veracity.

The best discount offer seen during our site surveys was the promotion at Freelance Garage in Les Augres, which offered a unequivocal “ 15 % discount on all fuel”. At a pump price of 82.3 ppl, this equates to a discount of just over 12 pence per litre.

We conclude that the evidence of large percentage discounts available to motorists on the island, coupled with the justifiable need for greater margins to meet increased wage and lease costs, proves that pump prices are set by retailers at a mark-up of around 20% on oil company schedule prices. Even after deducting up to 12-ppl discount, retailers will still be making profits to stay in business.

The inability to accurately audit the precise issuance rates for discount makes it impossible to determine the average level of discount given by all retailers on fuel sales to Jersey inhabitants. Without a doubt, the half-a-million staying tourists and business travellers are paying excessive retail fuel prices.

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6.6 Petrol Price Transparency and Informed Consumer Choice

One of the most notable and visible differences about the Jersey retail petrol market is the absence of price marker boards on the brand pole sign. We understand that this is a consequence of tight planning restrictions designed to preserve the countryside “feel” of the island. Some retailers have introduced either paper posters of A3 size to promote the price of one grade and some retailers do have price signs at the rear of the forecourt.

The omission of price marking has two effects. Firstly, consumers cannot make an informed choice of buying decision, as they have to visit the petrol station to discover the pump price. Indeed some sites are equipped with pumps where the price display remains hidden until the nozzle is removed from the pump. Secondly, the lack of price transparency from the roadside or passing car helps preserve the regime of discounting from high pump prices.

In the UK mainland, Price Marking Orders exist for all retail operations and specifically for Petrol Prices34. This proscribes the detail of information, the manner in which it is presented and where it should be displayed. Motorists can then monitor price levels between different garages as they drive past in the course of their normal business. Retailers can monitor market activity on an overt basis. Retailers who seek to charge excessive profits will find customers voting with their feet. In short, consumers can make an informed choice before they enter the forecourt and feel psychological pressure to purchase fuel.

Under the nascent Competition Act, the States should act to make a legal obligation for prices to be shown at the roadside in manner conducive to the environment but also capable of being clearly read by passing motorists. We would go further. If the site offers a discount, however qualified, the price shown at the roadside should be the lowest available to any cash or credit card customer. If this displayed price can only be obtained subject to minimum purchase or account facilities, then this information should be clearly displayed both on the pumps and at the point-of-sale.

If pump prices are held to be a problem by politicians, then it is our recommendation that consumer power is harnessed to make motorists more sophisticated in their purchases. This may be an anathema to the “village” mentality of the islanders but will sustain a stronger drive towards driving down pump prices than any form of prescriptive price control imposed by the States.

The historical actions of the Jersey Motor Trades Association in recommending pump prices would be illegal under Jersey Competition Law. An alternative of a prescriptive maximum price set by the States inextricably linked to the lease at La Collette would, in our opinion, be an even greater abuse of dominant power, over-reaching from a commercial lease transaction into retail activities not directly controlled by the lessees.

34 Price Marking (Petrol) Order 1980 and subsequent amendments

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6.7 Are Petrol Prices Important to Jersey’s Inhabitants?

All retailers interviewed in the course of preparation of this report opined that there was no groundswell of public opinion against high petrol pump prices. This evidence is anecdotal and is tempered by the fact that no motorist would ever vote for higher fuel prices.

We have set out to verify this claim by projecting the fuel cost element of motoring on Jersey compared to that of the mainland. We then express these costs as a percentage of household incomes.

National Traffic Surveys indicate that passenger-car fuel consumption averages 30 miles per gallon in the UK. We have taken two-thirds of this figure as the Jersey average, based on a maximum speed of 40 miles per hour on the island.

The average mileage per annum for a car in the UK would be around 10,500 miles. We developed analyses based on 5,000 miles a year [low], 6,000 miles [mid] and 7,000 miles [high] for Jersey-based cars35.

Average Household Incomes are taken from the equivalised statistics compiled by the States of Jersey Statistics Unit. We used the median figures Before Housing Costs. On Jersey, the latest published figure is £ 523 per week, compared with £ 311 for the UK average.

Only at the High Case mileage with lower fuel economy does a Jersey motorist consume the same volume of petrol as the UK average. Adjusting for the slightly differing pump prices of October 2004, the fuel element of motoring costs for a high-mileage driver will represent 4.8 % of household income. In the Low Case scenario, fuel costs represents 3.4 % of household income. In contrast, UK annual fuel costs account for 8.3 % of average household incomes.

The conclusion is that Jersey's motorists spend less in percentage of income than their UK mainland colleagues do on fuel. Not only is this expected because of Jersey’s geographic, but the higher incomes enjoyed on Jersey do not suggest that petrol prices are yet a sensitive consumer issue.

6.8 Retail Pricing Decisions

We found no dynamic to the movement of petrol pump prices on Jersey during our studies. Retailers reviewed their pump prices only when their suppliers increased or decreased their supply cost prices. This appears to occurring about once a month.

Unlike the UK there was no evidence given to suggest that any market-led or customer-driven dynamics apply to Jersey petrol prices, in complete contrast to mainland UK where the market is totally consumer facing and market-share driven.

This reflects the long-established view that any increases, including Impôt duty increases are passed through in full onto the consumer.

Jersey’s pump prices are “cost-plus” pushed rather than “market-force” led.

35 There are no statistics collated by the Driver and Vehicle Standards Department for annual car mileage; these estimates are based upon local opinion from a variety of expert sources

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6.9 Oil Company Schedule Pricing and Rebates

Oil companies persist to price-market fuels in Jersey on a Schedule Price less Rebate basis. Schedule Price basis of price referencing has long disappeared from the UK market, replaced by Platt’s international price base plus costs.

On the basis of the forensic analysis we have carried out, the retail petrol market appears to function on the basis of pump prices some 10-ppl above oil company schedule price, with the potential of significant quarterly rebates paid in arrears. From evidence and investigation, these rebates could be worth between 4- and 8-ppl dependent upon the retail site volume and performance targets.

Whilst respecting the need for commercial confidentiality in contract negotiations, we would prefer to see a more transparent relationship between the actual cost of product in-tank at La Collette and the cost invoiced to the retailer, without levels of rebate that can effectively represent 50% of the total retailer margin.

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7 Issues Relevant to the Lease at La Collette

7.1 Security of Supply

Politicians must appreciate that neither Shell nor Esso have a “divine obligation” to remain as fuel suppliers and marketers on Jersey. Neither will leave a market that is generating a return, and will stay, in our opinion, as long as a new lease is granted, or remains a possibility.

Significant capital expenditure, for instance in yet another move to La Collette III, would trigger a serious review of their business commitment. It is our belief that the Channel Islands markets do not match their current business models, but whilst profits can be made and there are no serious problems, the issue of their presence on Jersey will not be questioned in European or Global Headquarters.

The attractions of a competitive “free-for-all” on supply need to tempered by several sobering facts. Jersey’s fuel market is in slight decline. Impôt duty was collected on 55.5 million litres of road fuels in 1994; this had dropped to 51.9 million litres last year36. There is no geographical possibility of widening the marketing or distribution area. A fourth entrant would probably destroy the critical mass enjoyed by the existing three distributors.

The lack of a current formal lease provides little barrier to exit from the Jersey market for either Shell or Esso. The States must consider a long-term commitment to ensure continuity of fuel supplies in the event of war, disturbance or interruption to crude oil production in the Middle East.

Independent supply through oil traders will not bring the same level of security in the face of difficult product availability. If the fabric of island life and its quality is to be preserved, then security of supply must be considered with equal weight as the desire for competivity.

It is our strongest conviction that the non-renewal of the lease is a very high-risk strategy for the States and the people of Jersey. This inaction has prevented the equity participation of Total within the Consortium, such that they would have become more competitive in the marketplace. It has also delayed improvement projects at La Collette that would have created a safer and more environmentally friendly workplace.

The attractions of marketing fuel in Jersey are put into complete context by the fact that Jersey’s demand is less than 0.2 % of total UK demand. We have to recommend, unreservedly, that a new lease be granted to the Consortium to guarantee a secure and reliable supply of petroleum products to the island.

7.2 Environmental Risks & Attitude

A distinct advantage of having Shell and Esso as Consortium Participants is their attitude and attention to the prevention of environmental damage. This was evidenced by the conclusions of the HSSE audit we carried out at La Collette in mid-October 2004. Not only was the maintenance regime at La Collette found to be of highest quality, but the expertise and facilities that are available in case of environmental emergency would not be found with independent oil importers. Insurance cover alone does not bring to Jersey an emergency oil-spill response unit that Shell and Esso will provide.

36 Source: States of Jersey Customs & Excise

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7.3 Compulsory Stockholding

There is no provision in the old lease for a legal commitment by the Consortium to maintain an emergency level of stock for Jersey. This is a significant omission and should not be repeated in the new lease.

Calculations show that if the main grade tanks at La Collette are completely full, then in the case of interruption to supply, Jersey would have about 30 days’ worth of Unleaded Petrol stocks, 36 days of Diesel/Gasoil and Domestic Heating oil and over 60 days’ supply of Aviation Turbine Fuel.

We recommend that discussions with the Consortium be begun to determine a legal obligation for compulsory stockholdings for Jersey. These discussions could reference the obligations appertaining in the UK under the Compulsory Stocking Obligations that command that refiners hold 67.5 days of stock. As this is twice the capacity of La Collette’s main grade tankage, this stock would have to be held elsewhere. The financial implications of a severe compulsory stocking regime would form part of the negotiations between the States and the Consortium Participants.

7.4 Term of New Lease

Indications received from the Consortium Participants are that a 10-year lease term would be an acceptable length over which to amortize capital expenditure and terminal improvement projects. Any less would put into jeopardy any plans to upgrade facilities such as bottom loading racks and vapour recovery. The 10 years can clearly not be backdated, so that the actual outcome would be a 13-year lease running from the expired extension to the old lease.

We recommend a minimum future term of 10-years for the new lease commencing from January 2005.

7.5 Development Area

The old lease allowed for a much-reduced rental on land reserved for future expansion of the tank farm. This reduced rental was set at 10% of the developed area, and is not currently being charged because Jersey Harbour Board, the fuel farm’s landlord, occupies the expansion area.

We recommend that in the new lease, the expansion area concessionary rental is abolished, and the rent becomes payable by the Consortium at the time of Harbours vacating the expansion area, not at the time when the Consortium occupies it.

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7.6 Collection Methodology for Impôt Duty

Currently Impôt duty is collected on petrol and diesel as it passes through the loading gantry meters at La Collette. Esso and Shell are responsible for submitting returns to Customs and Excise and then remitting the duty collected on the deliveries made to customers. In this manner, litres are measured at ambient temperature.

On UK mainland, Excise Duty is levied on bulk litres corrected to a standard temperature. This is referred to as Standard Temperature Accounting (STA). The temperature to which bulk litres are corrected is 15 degC.

Analysis conducted using the last twelve months of Impôt Duty returns37 and average monthly Jersey temperatures38 suggest that the States could benefit to the order of £ 40,000 per annum if STA were introduced. This would probably require expenditure at La Collette to upgrade the loading rack meters; further, the loss to the distributors could be charged back to retailers and diesel customers, thereby inflating consumer prices by 0.10 ppl.

37 Source: Jersey Customs & Excise 38 Source: Jersey Met Office

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8 Recommendation

The Terms of References asked for a review of the current arrangements for the importation of petroleum products to Jersey and to make recommendations as to how the provision of a Fuel Farm can be arranged in the best interests of the island.

Jersey politicians were concerned that they had insufficient, and impartial, information on which to make a significant strategic decision for the island if a new 21-year lease were to be granted to the Consortium.

We trust that this report, the research and forensic analysis that it contains, satisfies all those issues and balances the arguments between a search for the introduction of new competition in the market place and the security of supply.

There is no direct evidence to suggest that the operation of the La Collette fuel farm itself by two of the island’s fuel suppliers results in fuel prices in Jersey being unfairly elevated. We have demonstrated the real additional costs of doing business in Jersey, and these costs are inescapable in a static market.

We not believe that “divorcement” of the fuel farm operation from the marketing companies will achieve any significant cost savings, and may well increase costs because of the need for an independent fuel farm operator to seek a return on its investment on the island. This is, however, an option for the States to explore in the future and will require a significant capital investment to procure the tank farm assets from the Consortium Participants. Consultancy Solutions for the Oil Industry are pleased to advise the States further on this issue and the costs involved.

In the short term, we believe that the barriers to exit from Jersey are very low for all oil companies. It would be unlikely that a unilateral withdrawal would take place, but even one less participant would reduce the level of competition. In the worldwide market, mergers and acquisitions have reduced the number of integrated oil companies. Jersey is supplied by 3 out of the top 4 oil companies. The fourth – BP – left the market some 8 years ago.

Our unreserved recommendation to the States of Jersey is to renew the lease at La Collette, giving a clear 10-year term of occupancy from 2005 and incorporating new conditions on environmental protection and compulsory stock-cover. Exclusive rights to the pipelines should be removed and The Consortium obliged to allow independent throughput of products on commercial terms.

In addition, greater retail market place competition should be catalysed by a new law prohibiting contracts between oil companies and retailers of longer than 3 years and the provision of petrol price marking orders to ensure transparency of choice for motorists.

James Milne


14th December 2004

© 2004 James Milne & Consultancy Solutions for the Oil Industry. Although every effort has been made to ensure the accuracy of this material and the integrity of the analysis presented herein, Consultancy Solutions for the Oil Industry accepts no liability for any actions taken on the basis of its contents.

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9 Glossary

Aviation Spirit Specially blended grade of Gasoline, suitable for use in aircraft engines,

having high anti-knock ratings, high stability, and high overall volatility and low freezing-points

Auto-Oil Collective name for a series of co-operative ventures between the oil and

automobile industries in Europe to develop fuel specifications and engine designs to meet environmental objectives on emissions

Bio fuels Fuel produced from organic matter produced by plants. An example of bio

fuels is alcohol (made from fermented sugar) Bridging Distribution terminology used to denote the movement [almost invariably by

road tanker] from a refinery or terminal to a distributor-owned depot, before further intermediate storage of the product prior to onward delivery to end-user

Distillates Products obtained by condensation during the fractional distillation process Dry Depot Facility, usually operated by a fuel distributor, which houses road tankers, but

that does not have any tankage for the storage of petroleum products Ex-Rack Industry term used to describe the collection of product from a refinery or

terminal [as opposed to having the product delivered] Fuel Oil Heavy distillate oil used for power stations, industry and ships’ boilers Gas Oil Medium distillate oil, used to produce diesel fuel and to burn in older central

heating systems Gasoline Term the oil industry uses to refer to petrol GVW Gross Vehicle Weight, used in road transport to describe the [maximum]

operating weight of the vehicle and its payload. Current maximum GVW in the UK is 44 tonnes

High Flash Generic term used to describe those products with a high flash point, or

temperature, at which products burn when exposed to an ignition source. Diesel and gas oils are high flash products

Hydrocarbon Compound containing hydrogen and carbon only. Hydrocarbons may exist as

solids, liquids or gases. Kerosine Medium-light oil used for lighting, heating and aircraft fuel Low Flash Generic term used to describe those products with a low flash point, or

temperature, at which products will burn when exposed to an ignition source. Gasoline and kerosene are low-flash products, even at ambient air temperatures

Low Sulphur Fuel Any fuel that has reduced sulphur content to meet a mandated government

specification. Typically applied to Gasoline and DERV. Sulphur removed by re-processing products through a second distillation stage or a de-sulphurisation plant.

LPG Liquefied Petroleum Gas. Generic term that includes the products Propane and

Butane

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m3 Cubic metre, metre cube or just “cube(s)”. Typically used when describing amount of storage space in tank farms

Middle Distillates Term used to group together Gasoils, Diesel oils and Kerosines, derived from

the fact that these products distil off from crude oil in the middle of the fractionation column

Octane Rating Measure of the performance of gasoline. A high octane rating gives efficient

ignition Primary Distribution Modal movement of finished petroleum products from refinery to inland or

coastal terminal. Modal methods include sea-tanker, pipeline or trainload Secondary Distribution Distribution, usually by road tanker, of petroleum products to end-users from

refineries, terminals and distributor depots Self-Bridging Industry term that denotes the transportation of petroleum products from a

refinery or terminal to a distributor depot in the distributors’ own tankers. These movements would be dedicated out/empty and back/full flows.

Terminal Used in this report to describe a large tank farm facility, fed by pipeline, train

or sea-tanker from refinery. Stores finished petroleum products for onward distribution to end users

Ultra Low Sulphur Description applied to both gasoline and diesel fuels. Commonly interpreted to

mean that the fuel has less than 50 p.p.m. [parts per million] by weight of sulphur

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10 Acknowledgements

Consultancy Solutions for the Oil Industry would like to thank the following organisations and businesses for their co-operation and help in researching this report. Without their inestimable assistance, the analysis and conclusions would have been impossible to achieve in the timescale.

States of Jersey

Customs & Excise Driver & Vehicle Standards Emergency Planning Officer Environment Department Health & Safety Inspectorate Jersey Competition Regulatory Authority Jersey Harbours Maison de Jersey Meteorological Office Planning Department Property Services Department Public Services Department Regulatory Services Solicitor General, Law Officers’ Department Statistics Unit, Policy & Resources Department The Esso Petroleum Company Limited Shell UK Oil Limited Total Oil Limited Petroleum Distributors (Jersey) Limited Fuel Supplies (C.I.) Limited Total Channel Islands Limited United Kingdom Petroleum Industry Association Senator Len Norman

Senator Phillip Ozouf Deputy Alan Breckon

Deputy Patrick Ryan C.I. Traders/ Les Riche’s Stores Channel Islands Co-Operative Society Davis Bros, Georgetown Falles Motor Group Limited Jersey Chamber of Commerce Jersey Consumer Council Jersey Electricity Company Jersey Motor Trades Federation Roberts Garages Limited

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