Andy Kemp talks oil

Levant Oil International executive on negotiating Lebanon’s energy sector

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Levant Oil, incorporated in Lebanon, has been trading, importing and storing oil derivatives since it opened a storage terminal in Jiyeh in 2001. This year, the company is launching a chain of “LEO” gas stations across Lebanon. The Levant Oil Group comprises three companies: Levant Oil International, which started up in February 2005, and specializes in general oil trading and business development; Levant Oil, which specializes in storage and distribution within Lebanon; and LEO, which started up a few months ago and specializes in lubricant blending and station development. Andy Kemp heads Levant Oil International’s import operations. He has also worked for Shell Oil, Goldman Sachs and Salomon Smith Barney. Executive asked him about Levant Oil’s new chain of service stations and Lebanon’s oil sector in general.

E What is the rationale behind opening the new service station chain now?

I think it’s an effort to provide a more integrated, stable company system. If you import into Lebanon you are to some extent restricted as to how much market share you have, and to some extent to wholesalers and intermediaries and so on. So if you have your own chain you have a slightly more stable system. Levant Oil is also an attempt to build a brand and one of the most important ways to build a brand is to have retail networks.

 

E How important are the plans to build the LEO station network in the revenue projections at Levant Oil?

It will help stabilize your revenues by having your fixed off-take systems. But it’s a bit of a double-edged sword of course, because when we live in a posted-price environment here, there are times when it’s actually a disadvantage because you are obliged to be supplying your own terminals, your own retail network when realistically you don’t want to do that. So it’s a double-edged sword. On the one hand you have a consistency of off-take and you have some margin income that’s fixed from that off-take. But at the same time it’s an obligation. So my own personal view is that it’s part of the brand-building exercise. It’s part of an integration exercise. There is some value in it but you have to be particularly cautious and not make it too large.

E How much of your income do you plan to derive from secondary business, i.e. sales of side items, car washes, mechanical or maintenance services?

I’m a firm believer in that. The retail network is extremely well established. There are far too many retail stations. Everybody has too much choice. There seems to be quite an obsession with having retail networks. It’s fairly expensive to set up a new petrol station. There are an enormous number of them here. I’m a little surprised at how many retail stations there are. It can’t be particularly efficient, and people are building new ones. Perhaps it’s a characteristic of local business. So I think you have to go into some kind of added value element. You compare it to ones in the UK. They have supermarkets and they have just about everything in them that you can imagine. There has to be some extra value to having a retail station.

E Consumers have been shielded from strong oil price increases over the past year by a government cap on prices at the pump. How does this affect the margins of traders?

It doesn’t, because inside the government formula are a bunch of add-ons. In fact, you net back to an element of price which reflects the international market. What varies seems to be the amount of tax that is taken by the government. They have had the chance, in the last few months, to raise retail prices slightly and perhaps should have taken that opportunity when the time was there. But to us it doesn’t make an enormous amount of difference. It does, of course, if there’s no money left for tax, which has been the case lately.

E Would an end to government caps on fuel prices affect the consumption of your products?

I think so. I think there is an elasticity of demand here. I think it’s probably more pronounced in this country than in stronger Western economies. You’ll have an effect on demand with higher prices, that’s for sure.

E As traders, you import oil derivatives. Where do you get your best deals these days?

Most come from places like Italy, Greece, France, Romania, sometimes from other locations, but the bulk comes from those kinds of areas. There are only a certain number of refineries in Europe and that’s where the refineries are situated.

E Where can you make profits in the import and distribution of oil derivatives?

There are margins, obviously, between the importation price and wholesale prices. There are margins in the wholesale chain. The system that’s executed here does provide some protections for the importers, but with the market movements that you’ve seen lately it’s not a great deal of protection. If you get it wrong, you get it very wildly wrong.

E Is the quality of oil derivates imported to Lebanon better today than five or ten years ago?

Yes. For the most part, the qualities imported here are pretty similar to European norms. Some of the specifications like for example, gasoline have been improved; diesel’s been improved again in Europe. We’re not like them at the moment. But mainly it’s pretty similar. In Europe in particular the sulphur specifications are tighter. Diesels, for example, are now more commonly 10 parts per million (ppm) diesel in Europe. We are largely importing 50 ppm but we can import much much higher levels of sulphur in the diesel if we wish. So, there are some improvements going on but in the main it’s pretty good diesel and pretty good gasoline that’s being imported here for the moment. Where there are probably large differences is with the power stations. There are power stations on gas oil, which is a form of diesel and has a very high sulphur specification. When you compare it with 50 ppm, and you’re talking about half a percent, it’s more like 5,000 ppm. That is an anomaly.

E Are the current industry structures good for the consumer or could you envision improvements through more competition, new regulations, or other changes?

It’s a very strange system here in Lebanon. A large number of oil terminals – I think I once counted up 24 oil terminals – are all lots of little oil terminals distributed up the coast. So ships will come and go to three locations, which is not a particularly economic thing to do. The feudal system in Lebanon is really the way things work and the system as it stands at the moment is a workable system. The infrastructure here though is a little bit anomalous. Government oil storage installations are severely underutilized. Look at Zahrani for example. A terminal in Europe is expected to turn over more than one times its capacity in a month. Here in Lebanon I’d be surprised if the turnover in the private storage locations for the imports of gasoline and diesel is much over 0.3 [of their capactiy] a month and that’s really underutilizing the terminal capacity. In addition, the valuation of assets is too high. If you compare it to other examples internationally these are not assets that would be valued at the rates they are here. Partially it’s done on land costs, partially on cash flow for margins. There are so many people who have invested money over the years at times when the situation was different. They have legacies. They have asset investments that they have to maintain at value. That’s the barrier now to a more efficient infrastructure here in the country, these legacies.

E There have been many allegations of cartel structures in Lebanon’s energy industry. Do such structures exist in the private sector importation and distribution business or only in other parts of the energy sector?

Perhaps what you’re referring to is for example the pool system with importation for the private sector, which is effectively cooperation between groups for imports. But there is actually a logic to this. It’s back to the feudal structure. It partly works because people can combine to import these cargos themselves so if you want to call it a cartel you probably could, but it’s not for anti-consumer purposes. Quite the reverse. It actually allows people to bring in bigger shipments that are more economic to bring in. For example, all the people in the pool, which we’re not a member of – we came and we left – will provide a sealed tender for their importation and the best price wins, so effectively it’s not really a cartel in that sense. It’s actually for the consumer benefit because they will get the best prices for the importations that way. By cooperating, they can bring in 30,000 ton cargos when some terminals will only take a few thousand.

E Why did you leave the pool?

We preferred to have our own flexibility. The pool works for the people in it due to their locations. We’re probably a number too many. We have the capacity to bring in our own 30,000 ton ships without the pool. The problem for us was that we would end up taking small pieces off a number of different ships that came in. It’s not particularly economic. If you say that a ship will cost you about $20,000 to $25,000 each port it goes to, if you’re going for just a few thousand tons or for 30,000 tons it makes quite a substantial difference to your economics.

E Where do you expect our energy costs to go over the long term, and how do you plan your business strategy in response to potential ‘energy wars’ or consistent high costs?

If there was an energy war I think we would be in particularly good shape because we have a terminal that has a reasonable size to it. We have the capacity to bring in ships ourselves. We have an efficient system. We have a relatively low cost base. We don’t have historical debts. It would just crush margins in the short run and I don’t fear for that. I would have thought that the government would need to consider – and I obviously don’t want to say anything that would upset the consumer – reflecting the new reality of world oil prices some time and to do it gradually so that people can absorb it and adjust to it. They really need to not avoid the situation that’s out there. They need to deal with it.

E How much of your revenue do you reinvest in environmental safety measures?

The oil terminal is currently being ISO-approved. It has the requisite systems on it, to, for example, stop evaporation losses and cooling systems to minimize any kind of airborne losses. Our terminal is well looked after in that respect and the ISO qualifications should endorse that.

E What effect does the ongoing instability in Lebanon have on your strategy and projections?

On a general level I think that the Lebanese have a business spirit that stands them in extremely good stead. Effectively, the issues that we see around us can prevent investment and the creation of a more organizational structure. We have a lot of individual small companies that are ruled as fiefdoms. At some point Lebanon needs to evolve to where companies actually run themselves. And those structures could, with the Lebanese spirit, become very powerful in the region. The factors that we’ve seen lately don’t help the Lebanese situation of development and growth, despite the fact that it is well placed to do so. And it’s missing out on the growth that you see in Amman and other places nearby.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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