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Filling up on food: oil majors spot retail opportunity as fuel sales slump

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When the government imposed the UK’s first lockdown last year, fuel revenue shrank at the petrol station in North London managed by Shahed Murshed. Grocery sales, however, kept on flowing.

“Rather than buying a bag of crisps or peanuts, customers have been buying bread, milk, vegetables, microwave meals and frozen food,” said Murshed.

“People are trying to minimise their long journeys so they are shopping locally. It’s not just about snacks as they pay for petrol, they’re coming to buy supplies for weeknight dinners.” he added. “This is what’s different now after Covid.”

Big oil companies such as BP and Royal Dutch Shell also spotted the trend and see convenience retail as a big opportunity as the pandemic brings into focus what the future of the forecourt might look like amid the transition towards cleaner fuels. 

“What happened with Covid has underpinned our confidence about our convenience business,” said Emma Delaney, one of BP’s top managers in charge of customers and products. “It was resilient even in the toughest of years in 2020”.

Staff serving a customer at a petrol station
Bernstein analysis puts gross margins in oil companies’ convenience divisions at 35-50 per cent © Zsolt Czegledi/MTI/AP

The oil major’s earnings were hit hard last year by a 14 per cent drop in fuel sales from its retail network. But it managed to increase the gross margin in its convenience business by 6 per cent.

Delaney said BP planned to double the share of non-fuel sales to 50 per cent by the end of the decade.

Other European oil groups, including Total and Repsol, believe grocery sales are only going to rise. Bernstein Research said this part of the sector was its “most under-appreciated growth driver”. 

“Dirty fuel stations, soggy sausage rolls, misplaced massage chairs and out of order toilets is an image one might conjure up when thinking about fuel retailing . . . But not in the case of the European integrated energy companies,” said Oswald Clint at Bernstein.

“A decade back many (including ourselves) argued these should be sold and placed in the hands of ‘natural owners’ . . . like Tesco, Carrefour and peers as they built out in the sector.” While some did this, Europe’s biggest oil groups stayed put.

By Clint’s analysis these are valuable businesses with more than 20 per cent returns on capital and with gross margins in these convenience divisions at 35-50 per cent.

While petrol and diesel sales are expected to begin to decline from the next decade, they will remain relatively robust. Annual electric vehicle sales are still a fraction of the overall passenger vehicle fleet. Companies are also banking on the traffic from trucks and other commercial vehicles as well as a relatively strong stream of cars. 

Energy executives argue that stronger-performing retail businesses combined with rising adoption of electric vehicles will ensure filling stations stay relevant. As customers wait for cars to charge, they can do their weekly shop.

Royal Dutch Shell petrol station
Shell, the world’s second-largest retailer by number of sites, is expanding its network by more than 20 per cent © Chris J. Ratcliffe/Bloomberg

Shell expects that by becoming indispensable to the average consumer, providing a choice of products — from petrol, hydrogen and low-carbon power to drinks, coffee and chocolate — it can secure its future.

“Unlike Big Box retail we are open 24/7,” said Istvan Kapitany, head of Shell’s retail business. And although coronavirus-related lockdowns have reduced the number of customers, they are buying more, with a “30-35 per cent . . . increase in the basket size”.

While marketing divisions, which encompass grocery and fuel sales as well as services such as car washing, are not as lucrative as drilling for oil and gas, they provide higher-margin returns.

This will be the name of the game in the years to come as companies become more selective about their fossil fuel production and as they pursue lower-margin renewables investments. 

Grocery sales can help compensate for a levelling out of petrol and diesel sales in industrialised economies such as in Europe in the years to come, but there is huge growth potential in Asia and Latin America where car use, of all kinds, and retail shopping is still expanding.

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This is why Shell, already the world’s second-largest retailer by number of sites behind 7-Eleven, is expanding its network by more than 20 per cent to 55,000 globally in the next few years. BP aims to increase its number of stations by nearly 50 per cent to 29,000 by 2030. 

The hope for these companies is that they boost the number of customer touch points by providing what Kapitany calls “a mosaic of choices and solutions”. 

This is part of a broader goal for companies such as Shell, Total and Repsol to deliver customer services along the electricity supply chain, from electric vehicle charging to power in homes. 

“This business is so critical in the energy transition,” said Kapitany. “The way to go forward is to start everything from what the customers want.”



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ExxonMobil proposes carbon storage plan for Texas port

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ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

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Where climate change meets business, markets and politics. Explore the FT’s coverage here 



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European stocks hit record after strong US earnings and economic data

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European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.



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EU split over delay to decision on classing gas as green investment

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The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy under its landmark classification system for investors.

Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week. The document is designed to guide those who want to direct their money into environmentally friendly investments, and help stamp out the misreporting of companies’ environmental impact, known as greenwashing. 

The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be explicitly recognised as a low-emission technology that can help the EU meet its goal of becoming a net-zero polluter by 2050. 

Now the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse. According to a draft of the text seen by the Financial Times, the commission proposed to delay the decision in order to carry out a separate assessment of how gas and nuclear “contribute to decarbonisation” to allow for a more “transparent” debate about the technologies.

But officials told the FT that some commissioners were pushing for gas to be awarded the green label now, rather than delaying the decision until later this year. 

“There are a sizeable number of voices in the commission who want gas to be included in the taxonomy,” said one official. A final decision on whether to approve the current text or delay it again for further redrafting is likely to be made on Monday.

The EU’s taxonomy is being closely watched by investors as the first big attempt by a leading regulatory body to create a labelling scheme that will help guide billions of euros of investment into green financial products.

But the process has proved divisive, as several EU governments have demanded recognition for lower-emissions energy sources such as gas. 

Coal-reliant countries such as Poland, Hungary, Romania and others that are banking on gas to help reduce their emissions do not want the labelling system to discriminate against them. France and the Czech Republic, meanwhile, are also pushing for the recognition of nuclear as a “transitional” technology in the taxonomy.

A leaked legal text seen by the FT earlier this month paved the way for gas to be considered green in some limited circumstances. That has since been removed along with other sensitive topics such as how best to classify the agricultural sector, according to the latest draft the FT has seen.

EU governments and the European Parliament have the power to block the draft if they can muster a qualified majority of countries and MEPs against it. 

Environmental groups have hailed the exercise, and urged Brussels to stick to science-based criteria in defining the thresholds for sustainable economic activity.

Luca Bonaccorsi from the Transport & Environment NGO said delaying decisions on gas and nuclear risked allowing pro-nuclear countries like France and the Czech Republic to join up with pro-gas member states “to forge an alliance that will obtain the greening and inclusion of both energy sources”.

“Should they ally, it will be impossible to resist the greenwashing of these two unsustainable energy sources,” said Bonaccorsi. 

The delays in agreeing the taxonomy have forced Brussels to abandon an attempt to use it as the basis for EU green bonds that will be issued as part of the bloc’s €800bn recovery and resilience fund. About €250bn of debt will be issued in the form of sustainable bonds over the next few years, which will make the commission one of the world’s biggest issuers of sustainable debt.



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