"Branson plans £1bn refinery to combat cost of jet fuel"

[PAXboy]

This is the headline on the business section of the UK national The Independent on Sunday 1st August 2005.

It states that Virgin has a team of people assesing how they might cut out the middle men and refine their own fuel, due to rapidly rising costs. this was confirmed by Will Whitehorn, Virgin's Corporate Affairs and brand development director, who is quoted in the article.

"Through our investment in NATS we are getting used to working with other airlines" he said, explaining that they were also considering a multi-lateral approach to the problem.

[TheOddOne]

Sure it wasn't 1st April?

My understanding is that the cost of fuel is dictated more by the cost of crude, rather than the cost of refining it.

The petro-chemical industry is a huge, complex entity. You can't just take some crude oil and make jet fuel out of it. There are all sorts of 'fractions' that come off that either need to be disposed of or sold. You need to mix different crudes form all over the world to achieve a blend that will crack apart to satisfy each of the markets you develop for each product, in an economical ratio. What's Branson going to do with the stuff he doesn't need? This is a multi-billion doller/pound/euro operation.

If he wants to have better control over fuel prices, he'd better go and explore the world and find some new reserves. That costs billions, too, with no guarantee of finding any. Now, Nigeria is potentially one of the world's biggest suppliers of crude. Is that why he's started flying there?

The price of crude is governed by many factors, a couple of major ones being supply/demand and political tensions, especially in oil-producing regions. Demand is likely to continue outstrip supply until the oil runs out, so prices can only continue to rise. Sir Richard could do more, perhaps on the political front. I admire his straightforward approach, but I don't think it will impress non-western politicos much.

If he wants to benefit financially from increased fuel prices, he'd be better off investing in oil company stock. BP seem to be doing quite well at the moment.

The price of fuel at his main UK bases is very competitive; at Gatwick there are several companies vying for his business. I'm sure he's already paying the lowest price he can get...

Cheers,
The Odd One

[conor_mc]

I suspect that, ultimately, this idea may be more of a bargaining chip than a genuine attempt to reduce their costs.


My understanding is that the cost of fuel is dictated more by the cost of crude, rather than the cost of refining it.

To a certain extent, yes. Although BP's share price, on the back of significantly increased profits in recent years, suggests that there may be scope to reduce the cost by cutting out Virgins... eh, 'contribution' ... to BP et al's profits.

You can't just take some crude oil and make jet fuel out of it. There are all sorts of 'fractions' that come off that either need to be disposed of or sold. You need to mix different crudes form all over the world to achieve a blend that will crack apart to satisfy each of the markets you develop for each product, in an economical ratio. What's Branson going to do with the stuff he doesn't need?

I'd suspect he'd sell it to BP or another willing buyer. Maybe we'll even see Virgin petrol stations, a la Tesco, Sainsburys etc.

[patdavies]

The current high price is not being caused by a shortage of crude, but by a shortage of capacity at refineries.

It would appear that Branson has seen a business opportunity that will benefit himself and provide consistently priced fuel to his airline. I would suspect that in the simplest of terms, he can forgo the profit on jet fuel for VA and also therefore pay less tax (due to reduced profit).

The bearded one, for all his casual appearance etc. is one sharp cookie when it comes to business.

[Hand Solo]

but he has had more successful ventures than failures.

Can you back that up with figures?

[1DC]

Refineries are very expensive things to build, and he has missed the boat for a used one.They are also high maintenance and sometimes lose money, so all that glitters isn't always gold. Jet fuel is a small part of the content of a barrell of crude and the remaining products have to be sold, sometimes for delivery at the other end of the world.(It is more profitable for a UK refinery to sell gasoline in New York than in the UK.)
He would be far better persuading the airline's to form a purchasing cooperative so that they can get the price down, don't know how easy that would be. Unless Star Allliance, One World etc., already do it.. If they don't they should be thinking about it.
Mmmmm.. if they read this, don't forget it was my idea. A couple of lifetime first class tickets wouldn't go amiss.....

[Ploz]

Pat - You're right there on the refining capacity, but those traders in the City don't seem to understand the difference between crude and refined product. Therefore, if the City percieves a shortage anywhere in the supply chain, it trades crude higher - this then reduces the refining premium and disincentifies any further investment in refining capacity. The only reason that the world keeps turning is that most big oil companies are on both sides of the fence, so can cross subsidise refining losses through higher margins on the crude.

May be Branson's move could shake out this market failure - but it must be very high risk.

[ormonde]

Avtur is a fairly small portion on the barrel and the investment would be massive. He would need a marketing operation to sell the rest. A processing deal with a Major, allied to a buyback of other products would be his best bet. I think it is Branson seeking more cheap publicity

[WHBM]

I think that what RB is highlighting is that the price of oil products has moved away from being determined just by normal supply and demand for the product, and more into the hands of commodity speculators, whose prime interest in the process is to buy at a price and sell at a higher price. It is fine for speculators at a time of gently increasing demand over supply (the current case for oil) as it exaggerates the price increases to their benefit.

It has increasingly afflicted various commodities, and indeed national currencies, in recent years.

[Jockflyer]

Just a thought, but could it be that Mr Branson and his advisors know far more about all this that you lot (and of course I) do.

From scratch he has built up airlines, music label, mobile phone company. I think we can give him enough credit to assume he isn't thinking about all this on a whim!

Cheers

JF

[jammydonut]

I can see the Nigerian conection developing into something

[Re-Heat]

I think that what RB is highlighting is that the price of oil products has moved away from being determined just by normal supply and demand for the product, and more into the hands of commodity speculators, whose prime interest in the process is to buy at a price and sell at a higher price. It is fine for speculators at a time of gently increasing demand over supply (the current case for oil) as it exaggerates the price increases to their benefit.
Rubbish; it elimintates pricing discrepancies worldwide by ensuring that globally each grade of oil trades at the same price. The price rises have little to do with traders, who ultimately must still sell into the market, and much more to do with low refining capacity, lack of lighter-grade crudes and heightened demand in highly-fuel-subsidised economies of South-East Asia, where prices are unrealistically low.

Traders cannot hold oil in a black hole - they have to sell it on: that nets out any effect that they have, beyond ensuring pricing uniformity.

[Bart O'Lynn]

Yes but if Stelios does it and calls it easy fuel, youll get it deliverd in orange buckets by a man in an orange boiler suit. This also cuts out the need for a hi vis jacket...Brilliant. Perfect for those that want quick easy fuel with out all the hasle of a tanker , storage , or hoses.

[+'ve ROC]

"Maybe we'll even see Virgin petrol stations, a la Tesco, Sainsburys etc."

I'm pretty sure Mr Tesco hasn't dipped his greedy fingers into the oil refining business!

[PAXboy]

My guess as to why Tesco and other supermarkets are not interested in refining, is because fuel is only a small part of their biz. Their biz is to sell products retail. They buy their fuel wholeasle at a big discount and sell it at a lower profit than their competitors, as it will bring shoppers to them - which is what they really want. If they ran out of fuel, or could not sell it for a day, it would irritate their customers but not be critical.

For an airline, fuel is an enormously important product and critical to their every act. They buy it, effectively, retail as they are the last in the chain. There are a limited number of places that they can get fuel. So need look at the possibility of changing that.

If any company did NOT fully investigate alternative sources for their most vital and expensive item - they would be negligent.

When I posted the headline and snippet of the story, I knew that there would be some who would come up with the usual nonsense about Branson. But he has driven the long haul airline market considerably more than he has been pushed.

[M.Mouse]

But he has driven the long haul airline market considerably more than he has been pushed.

And some would question in which direction!

[WHBM]

I knew that there would be some who would come up with the usual nonsense about Branson
Actually my own piece of nonense on RB is that he doesn't play the key role in Virgin Atlantic at all, that is left to the airline professionals at V.A. HQ, and RB just lets them get on with it, and is good for being used as the centre feature of PR efforts.

After all, look at the difference in achievement betwen Virgin Blue (done particularly well), Virgin Atlantic (good steady performance), Virgin Trains (absolute shambles) and Virgin Cola (disappeared from the market it seems). They all, by the way, have very substantial other shareholders, Singapore AL's 50% ownership of V.A. is well known, Stagecoach's 50% ownership of Virgin Trains less so.

The refinery plan is likely to have originated with oil people coming to RB rather than him waking up one morning and saying "lets have a refinery". Apparently he has a dedicated team to sift through all the business propositions put to him for him to, effectively, franchise his name onto.

[Sheep Guts]

I cant see RB doing anyting much more with the Nigerians they are members of OPEC hence their export prices are regulated. Maybe RB should look Russias or Kazakstans way see what Non OPEC nations have to offer ie. cheaper deals etc .

Heres a link to some Non Opec info www.eia.doe.gov/emeu/cabs/nonopec.html


Then, if he gets a good crude price, maybe he can circumvent these inflated Jet Fuel prices

Classic example of inflated prices are in the first world states because the majority of their running crude comes from OPEC.

Where I operate now in Central Asia the difference in supplies is amazing

We are paying$1.23 usd /litre (flown in on IL76s)

Down south in the same country US subsidized fuel is $1.70usd/USGAL was 0.70uscents/ USGAL before.

Yet back in the States some FBO s in Florida are charging $4.00usd/usgal.

Crazy indeed.

I like Richard Bransons ideas he is allways thinking outside the box, thats how most entrepneaurs do their stuff.

If he secures a cheap crude supply with Modern technology for refining he will be onto something as this Refining Hitechnology and Supply is not confined to the OPEC eleven.


Then all the products he produces he can sell cheaply especially to countries like in the Carribean and alike who are the poor recipients of high cost Opec fuels and oils.

Aruba is an interesting nation is doesIT OWN refining but buys its products from Venezuela at an agreed price (still controlled by Opec). But if it could attain cheaper crude who knows. But I suppose its close proximity to Venezuela has made its position unique.

Its a very tough problem to crack. Good on you Richard I say best of luck

SheepNON OPEC FACTS (http://www.eia.doe.gov/emeu/cabs/nonopec.html)

1DC what you saying is essentially true it will be a tough undertaking but not impossible with maybe the Russians as suppliers he Sir Richard may have the right amount of leverage to burst this insane Oil Barrel Fuel Price inflated bubble.
1DC I don not agree on your Airline Fuel Buying Co-op, I belive that is indeed not what we want, more Buracracy in the Airline or Oil Industry would stifle progress even further.

[Re-Heat]

I cant see RB doing anyting much more with the Nigerians they are members of OPEC hence their export prices are regulated
What do you think really happens, where NNPC is one of the most corrupt businesses in the world?

Aruba is an interesting nation is doesIT OWN refining but buys its products from Venezuela at an agreed price (still controlled by Opec). But if it could attain cheaper crude who knows. But I suppose its close proximity to Venezuela has made its position unique.
Venezuela provides subsidised oil to many Caribbean nations - not at market price.

PRICES are not regulated by OPEC, the output is (which is significantly broken by many OPEC members anyway as no regulation exists of actual output). The market regulates the price according to output. You manage price (in theory) by changing output, though even OPEC have had no effect on it as yet in recent output rises.

Then all the products he produces he can sell cheaply especially to countries like in the Carribean and alike who are the poor recipients of high cost Opec fuels and oils.
What would be the business reason to do so? If you cen get a higher price in the market...you choose to sell at a lower price? Hell no.

The only way to get reduced price crude is to play arbitrage on the differing grades of crude, or get involved in corruption. It is the latter that is prevalent even today in the oil markets, as national oil companies are entrusted by governments with a highly-valuable, but highly fungible commodity that involves huge amounts of cash and has few controls over its operations.

[Sheep Guts]

Gday Reheat,
Your signature sure smells of burnt fuel. So lets see.

[QUOTE]PRICES are not regulated by OPEC, the output is (which is significantly broken by many OPEC members anyway as no regulation exists of actual output). The market regulates the price according to output. You manage price (in theory) by changing output, though even OPEC have had no effect on it as yet in recent output rises.


Ok fair enough statement except you contradict yourself after the first clause. If one controls output one controls price, with exterior factors aside like wars etc

look at this straight from the Misson Statement of OPEC

"OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry. "



http://www.opec.org/aboutus/history/history.htm

OPEC does control its outputs. You just have read the papers they are having a meeting next month and guess what I bet the change their output quotas.

The reason the oil prices are haywire at the moment is mainly due to Iraqs output and political uncertainty and its memebership of the OPEC eleven.

I think we are getting closer with our lines of argument here Reheat. I understand that Nigerian is corrupt, hey I didnt say it initially you did.

I realise that many Non Opec and Opec nations have problems with corruption and civil rights but thats another whole agrument business is business. I dont think Sir Richard B put that on his agenda when setting up Virgin Nigeria, Im sure he knew what he was in for.

If you can get good cheap oil and refine it properly theres no reason a cheaper Fuel can be attained for you own operations world wide.


I like to think outside the box

By the way Re-Heat your last statement is a doosy

About selling fuel at market price is ok if your market share is biggest like SHELL and B.P. etc, but if you want to sway the market share towards you, you need to undercut prices, this is Business Principles 101.

How do you think the Virgin Brand has gottten a hold in most of it business sectors cutting price initially to get market share
Virgin Atlantic did in the 80s and90s so has Virgin Blue in this Century aswell

Sheep

[Re-Heat]

Your signature sure smells of burnt fuel. So lets see.
That's a fantastic line! Loving it.

Anyway - back to topic:

Ok fair enough statement except you contradict yourself after the first clause. If one controls output one controls price, with exterior factors aside like wars etc
I'm not contradicting myself; global output against global demand determine price of the global commodity - the OPEC output can impact upon that if they are to double output, however they have neither the capacity to do so nor the economic inclination, since they earn so much from the price at the moment.

They do not and cannot manage price directly - and the price is no different in Nigeria than it is in Central Asia - the output changes will ensure greater or lesser supply to indirectly change the price, else the demand flows will correct that price to match that in the global market.

For example if Nigerian oil were at all cheaper (corruption aside), then demand for it would be so high that its price would be forced upwards through demand such that it ultimately matched the global price, unless the vendors were idiots, which they patently are not.

OPEC do not control all global output, therefore they cannot control global price. Equally they do not control demand flows, refining capacity, and trading activity, otherwise they would indeed control price. All they can do is to cut off supply to indirectly ensure that prices rise as demand is unmatched, yet the lost revenue due to demand reductions at such high price would be to them - and indeed was in the 1970s - too much to bear in the long run, such that output had to rise again to a sustainable level.

The reason I say that they do not control global output is that much oil is non-OPEC, and even OPEC countries cheat on the agreements to produce more, since cartel behaviour cannot be enforced, and where greater revenue can be obtained by selling more then it is. Last time it was reported in the Economist, it was ~10% greater output than the agreement for OPEC countries.

About selling fuel at market price is ok if your market share is biggest like SHELL and B.P. etc, but if you want to sway the market share towards you, you need to undercut prices, this is Business Principles 101.
But when the market is fully competitive, you die, especially since margins are very thin in oil markets. That is fine if you are a market leader and can support losses, however there is not a chance in hell of even BP & Shell managing to do that, since - as above - demand would outstrip supply by such and extent that it would be nonsensical. The supply of oil to those companies is limited by technology and drilling rights, and globally there is a highly competitive market with prices being unable to be determined by any individual or groups of idividuals such as OPEC.

Why do you think the actions of OPEC (restricting output), and what you suggest (undercutting) are contradictory?

Put it this way, my employer could undercut PWC, E&Y and KPMG for the audit market, but there isn't a chance that we could supply the audit staff for those audits as business would flood in the doors too quickly to recruit, train and retain staff.


Branson has not got the technical expertise, supply of oil, industry contacts, infrastructure, sufficient demand from Virgin group airlines or anything else to be any better than BP at their own industry. It is a marketing gimmick, none different from trying to fly Concorde at Virgin, unless it were to be a marketing agreement, which is worthless to him since Virgin Refineries would not sell to the street, but to other industries who care little about the name. In an industry of thin margins, where profits are buily on volumes of those thin margins, what hope could he have to build one refinery and get fuel cheaper for Virgin. He would not have the critical mass to lower the cost base sufficiently.

[reynoldsno1]

Refineries are very expensive things to build
Mr B is not actually very innovative or inventive - but he is very good at rebranding stuff. I don't think he would even dream of building a refinery, but he would have a lot of stickers to put on one that was already there....

[PAXboy]

Mr B is not actually very innovative or inventive - but he is very good at rebranding stuff. Well ... No! RB's usual process is to see where a market is stagnating and introduce a new service/product offering something different. This might be a lower price or higher quality or both (for a time!).

He tends not to re-brand. He did this with Virgin Express in Belgium and went on record to say that he regretted it. Once an organisation is in place, even if the old management has failed and the company is bought from the receivers, then the original attitude clings to the wreckage. Starting afresh is the best way (he said).

He did purchase part of a railway company in the UK and experienced similar problems, not to mention the hideous system that the Conservative govt put in place. However, having used his trains to Scotland a few times, (and within the last 10 days) I can say that I would not hesitate to use them again.

(No, I have never been employed by a Virgin company, I am just a satisfied customer.)