Oil Regulation (Part 2)
- posted in Energy
PART 2 – DOWNSTREAM
Α. GENERAL APPROACH
What is the general structure of the petroleum products’ market today?
In the refining sector only two companies 4 are active (HELLENIC PETROLEUM, MOTOR OIL) which produce homogeneous products and which are mainly targeted to the domestic market.
In the trade sectors there are approximately twenty (20) companies activated, which supply the service stations, the large consumers and the end consumers and which possess their own storage spaces.
In the field of retail distribution there are approximately 8,000 active service-stations, the majority of which bears the trademark of a trading company, while there are approximately 600 independent service-stations5, as well as a small number of service-stations located in Super Markets and exclusively supplying the end consumers.
What is the applicable legal framework regulating the petroleum market in the Greek territory?
The petroleum products’ market is mainly governed by Law no. 3054/2002 «Organization of the Petroleum Market and Other Provisions», as amended, while the terms and conditions, as well as the other parameters, which define the applicable petroleum policy in Greece, are specified in individual laws and the License Regulation.
B. THE REFINING SECTOR
Which are the entry conditions for an investor in the refining sector and how does competition operate?
A new investor, in order to enter the petroleum refining sector must a. be a legal entity in the form of a Societe Anonyme (incorporation) or equivalent thereof, seated in one of the member states of the European Union and b. hold a permit by the Administrative Authority, which is granted following a decision by the Minister for Environment, Energy and Climate Change.
In the petroleum refining market, the development of competitive activities by new entry companies is reduced, given the concerted practices of the two large companies (HELLENIC PETROLEUM, MOTOR OIL) exclusively active in the field, having developed strong connections also due to their participation in the “Athens Airport Fuel Pipeline Company S.A. (AAFPC)”. Meanwhile, the investment cost is reported as quite high, as it is accompanied by increased operating costs (infrastructure) and its amortization often turns out to be difficult and of a long-term.
What is the pricing policy adopted by the refining companies?
The pricing method used by refining companies consists of the calculation of the average of high prices for four days (three last days including the delivery date) from the Platt’s price index for FOB (Free of Board or Freight on Board) cargos in the Mediterranean. The costs of transportation, of maintaining security reserves, of trading and storing are added to the above prices. The final prices with which the trading companies are burdened during the supply of fuels from the refining companies present a slight deviation due to the discount policy followed by the latter. Consequently, the pricing system is directly affected by the upward or downward changes of international products in the Mediterranean.
How is the petroleum products’ ex – refinery price set?
The refinery price is defined as the price paid by the trading companies which procure fuels from the refining companies. The setting of the petroleum products’ ex – refinery price is a function of mainly three parameters and specifically of a. Platt’s index highest prices, b. refinery premium and c. discounts granted by the refining companies.
C. THE TRADING SECTOR
Which are the entry conditions for an investor in the trading sector?
For the entry in the petroleum trading sector, there are five (5) categories of permits provided for a. for all liquid fuels in the domestic market (A), b. for tax-free shipping (B1) or aircraft (B2) fuels, c. for liquefied petroleum gas – LPG (C) and asphalt (D), only granted to legal entities in the form of a Societe Anonyme (incorporation) or an equivalent thereof, seated in a member state of the European Union, with a minimum share capital depending on the permit type, while the possession of private storage spaces, owned or leased, is also required.
Which are the main characteristics of the trading sector competition-wise?
The trading sector does not demonstrate a particularly high degree of concentration. Only 60% of the market belongs to the four largest trading companies, while 90% thereof is divided between 13 trading companies. An investor’s entry in this sector does not face particular obstacles, given the low degree of integration. Any difficulties are mostly due to the security reserves’ maintenance policy and mainly regard bureaucratic matters (licensing etc).
How is the petroleum products’ price set at a wholesale level?
In the trading sector, the price of petroleum products is set by the following parameters: a. refinery price, b. special consumption tax, c. contribution in favor of R.A.E. (0,16€/1.000L gas – diesel), d. special contribution for the petroleum products fund for problem areas (1% of the refinery price), e. special D.E.T.E. duty (0,5% on the total of the above) and f. VAT 23%, except for certain areas. However, the final price for the supply of petroleum products to service-stations is also set by the discounts granted by the trading companies, which vary for high to low levels depending on the area. Meanwhile, there are companies with no discount policy, which consequently invoice their service stations with purchase cost plus a certain profit. Finally, the transportation cost6 depending on the place of delivery of the petroleum products and burdened with additional fare (flag fall) also appears as a separate factor in setting the final wholesale price.
D. THE RETAIL SECTOR
Which are the entry conditions for an investor in the retail sector?
The entry of an investor in the retail sector is conditioned upon the possession of a permit for establishing and operating a liquid fuels’ service station, granted to individuals or companies under any legal form.
Which are the main characteristics of the retail sector competition-wise?
Wholesale prices7 are unilaterally determined by the trading companies and are not part of an agreement between the companies and the service-station proprietors as to their calculation method. Prices vary based on personal discounts.
The agreements executed between trading companies and service-station proprietors contain significantly burdensome terms (“leonine conventions”), resulting to the excessive binding of service-station proprietors, a fact that has a direct impact to the final setting of fuel prices and prohibits mobility from one company to another.
Retail has become particularly difficult since the credit policy change of the trading companies, which reduced to half the credit period for service-station proprietors (20 days instead of 40).
How is the price of petroleum products set at a retail level?
The so-called pump price is a function of three (3) parameters and in particular of a. the sale prices of products by the refineries (31%), b. the imposed taxes – duties (60%) and c. the trading margin of the company and the service-station proprietor (9%), which is a function of domestic competition conditions.
Ε. THE OBLIGATION FOR THE MAINTENANCE OF PETROLEUMRESERVES
What does the obligation for the maintenance of petroleum reserves consist of?
In order for the coverage of the country’s needs at times of crisis, the obliged parties must maintain exclusively within the Greek territory security reserves for all products (light, medium and heavy fractions). The quantities used for covering the obliged parties’
operational needs are admeasured to the above security reserves, as well as the quantities transferred by ships within the Greek territory for the supply of the facilities of refining or trading permit holders within the Greek territory.
The obligation for the maintenance of security reserves burdens a. importers of crude oil, petroleum products or semi-processed products for the domestic market8, b. large end consumers who import products for self-consumption9, and c. refining permit holders. Additionally, there is a provision for the ability of the obliged parties to assign the maintenance of the reserves they are required to hold to a third party.10
The Minister for the Environment, Energy and Climate Change is the competent authority for the monitoring of the maintenance of security reserves obligation. By virtue of a decision thereby, following an opinion by the R.A.E. the Regulation for the Maintenance of Security Reserves is issued, which contains the terms under which the supervision is exercised and the monitoring is conducted.
F. COMMENTS
Initially, it appears that Competition is not operating well. The issue of smuggling undoubtedly constitutes one of the most crucial structural problems of the oil sector. It is necessary to rationalise the existing legal framework accompanied by the direct taking of measures for the minimizing of smugling cases, perhaps through the promotion of a stricter audit system, mainly at the stage of fuel distribution and sanction implementation in cases of violation detection.
According to Law 2773/1999 as amended, which was issued in compliance to European directive 96/92 on the modernization of energy markets in Greece, the Regulatory Authority for Energy (R.A.E.) was established as an independent administrative authority. R.A.E. has no auditing or judicial competence, its objective consists solely of the promotion of free healthy competition in the energy market through constant monitoring of prices, and the general energy market operation and issuance of permits, while it simultaneously informs and assists the investors and the consumers.
In conclusion, solving the petroleum market problems is deemed as a highly crucial issue. The petroleum market needs to adopt new methods and practices, in order to become more attractive and to form the most profitable field for the realization of investment plans. The upcoming increase of Natural Gas in Greece’s energy balance constitutes a visible risk for the petroleum market.
1. On 02.09.2011 an Announcement for an International Public Invitation for the participation in seismic research projects for obtaining non-exclusive data within the sea zone in Western and Southern Greece.
2. “Underwater areas” are the bottom and subsoil of domestic waters, the coastal zone, the continental shelf and the exclusive economic zone (upon declaration thereof ) up to the distance of 200 nautical miles from the base lines from which the range of the coastal zone is measured. In case of lack of border definition agreement with neighboring countries whose coasts are adjoining to or across Greek coasts, the outer border of the continental shelf and the exclusive economic zone (upon declaration thereof ) is the middle line, each point of which is at an equal distance from the closest points of the base lines (both continental and island) from which the range of the coastal zone is measured».
3. Today areas are being selected (Patras bay, Ioannina), which were returned to the Greek State by the joint ventures that held the rights during the previous round of concessions and for various technical and corporate reasons did not complete the research projects. Also selected is the Katakolo area, where a small sea oil deposit has been detected, for which no offer was submitted during the previous round of concessions (1997).
4. The said companies’ refining ability amounts annually to approximately 20 m. metric tons.
5. It should be noted that partnerships, joint ventures and independent service-stations may address the refineries without the mediation of the trading companies.
6. It should be noted that the petroleum products’ transport is conducted mainly by private and public tanker trucks. In Greece, the transport of liquid fuels is mostly conducted by public tanker trucks, while the transport by private tanker trucks is limited due to bureaucratic problems.
7. Wholesale price is the price payable by the service-station proprietor to the trading company for the supply of fuels.
8. The reserve level amounts to 90/365 of the net imports of the previous calendar year.
9. The reserve level also in this case amounts to 90/365 of the net imports of the previous calendar year, with the ability of modifying the limits by virtue of a decision by the Minister for the Environment, Energy and Climate Change.
10. The related agreement is of a minimum one-year term, exclusively refers to the maintenance of security reserves and a copy thereof is filed with the Minister for the Environment, Energy and Climate Change. Moreover, the maximum fee limit for the provision of the said service may be set by virtue of a ministerial decision, taking under consideration the operational and financial costs of maintaining reserves, which includes the profit of the person providing the storage space.
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