FMN Magazine: Fall Issue 2014

SHOW ISSUE

Fall Issue 2014

Your Source for News and Information

Digital Marketing at the Dispenser

Joe Petrowski: A Way Forward for America

Mobile Payments

Changes in US Fuel Choice

Three Big Trends Driving Change in Fuels Distribution

Your Source for News and Information

A Publication of Fuel Marketer News Online

EDITORIAL STAFFPublisherGary Bevers

[email protected]

Editorial DirectorKeith Reid

[email protected]

Managing EditorTricia Corrigan

[email protected]

Copy EditorKathy Bevers

[email protected]

Columnists and ContributorsBetsi Bixbi

Greg CushardVladimir CollakShane Dyer

John EichbergerDoug Haugh

Corey HenriksenMaura KellerAlan H. Levine

Joseph H. PetrowskiFred M. Whitaker

Dr. Nancy Yamaguchi

Editorial BoardEd Burke

Lisa CalhounGeorge A. Overstreet, Jr.Joseph H. Petrowski

Art DirectorJeff Beene

Advertising SalesGreg Mosho

115 Tinton Falls RoadFarmingdale, NJ 07727732.610.5735 [email protected]

Mailing Address12320 Barker Cypress

Suite 600-203Cypress, TX 77429

www.FuelMarketerNews.comCopyright 2014, Fuel Marketer News

All rights reserved.

A note fromGary Bevers CEO & Group Publisher

Welcome to the Fall Issue of our Fuel Marketer News print magazine where we cover all things related to fuels. From refinery supply to terminal and bulk plant storage totransportation via pipeline, barge, rail and truck, to wholesale distribution and retailmarketing, we cover topics from a high level management overview down to theoperational details. If you find our expert columnists, industry news and operationalfeatures interesting and valuable, you can find much more online every day in our FMN Web Magazine and our free weekly newsletter. So, dont wait for the next issue of our print magazinego to our Web Magazine at www.fuelmarketernews.com to stay connected daily.

Today, I am happy to announce that my former editor-in-chief at National Petroleum News, Keith Reid, has joined us as the editorial director for our Online Web Magazine,Email Newsletter, Vendor Marketplace and the Print Magazine that you are reading.

In 1999 Keith began working at NPN magazine, where he worked his way up from staffeditor to a managing editor to editor-in-chief in 2007. His starting year, he won aprestigious award for his feature on MTBE in a competition with editors from 60magazines. At NPN, from among hundreds of articles, he notably covered the rise ofhypermarket competitors, the move of the Majors out of retail, zone pricing, numerousareas of equipment and technology, legislation and regulation. Keith is a passionateeditor, but I would say that to the core, he is a writer. During his tenure at NPN one of his articles on price modeling made it into the official Congressional record.

Previously, Keith handled communications for an international trade association where he gained experience with many of the same federal agencies he covers today. Whilethere, he became grounded on how the legislative sausage is made. He also has notedthat as the national media spokesman for that industry, his interactions with the nationalmediaincluding hit pieces from The New York Times and Time magazineshowedhim what a journalist should not be.

We all have biases, he told me. I try to be open about mine. I wont hide my biases or package the news to avoid any realities that go against my viewsbig picture or smallpicture. The audience deserves to be treated like adults who can think for themselves ifpresented with all sides of the story.

Most recently, he has served as the editor of Fuel Oil News. Prior to that, he wrote forTobacco Retailer, then took a year away from the industry to edit an internationalmagazine covering the imaging industry before I dragged him back to the world of fuels.

Last, but certainly not least, Keith served in the Army Reserve. In his words, I served seven years as a cavalry scout NCO instructor at the end of the Cold War. While just asmall cog in the big green machine, that was a highlight in my life, he told me.

So please welcome Keith and feel free to reach out to him at [email protected] withcomments, questions and suggestions for topics you would like to see covered in thefuture. Keith and I both believe this is your industry and were committed to serving you and providing useful news and information to help you grow and manage your fuel businesses.

PUBLISHERS NOTE

FMNMagazine 4 fuelmarketernews.com

TABLE OF CONTENTS

3 Publishers Note

FUELS & SUPPLY

6 POLICY BRIEF: Killing Coal to SaveWhat Exactly?

10 POLICY BRIEF: Fed Up at the Pump Fights Back

12 A Way Forward for Americaby Joe Petrowski

16 Three Big Trends Driving Change in Fuels Distribution and Marketingby Doug Haugh

20 Winters Gasoline Margin Squeezeby Alan Levine

24 Changes in US Fuel Choice: Does A Fuel Marketer Have a Choice?by Dr. Nancy Yamaguchi

32 Are Hydrogen Fuel Cell Vehicles Dead On Arrival?by Dr. Barry Stevens

RETAIL OPERATIONS

38 Loyalty Car Wash Programs Create Longevity, Revenue Growthby David Dougherty

42 Digital Marketing at the Dispenserby Maura Keller

50 Get Smart about Fleet Card Acceptance in Your Retail Locationsby Shane Dyer

52 Mobile Payments: Growing Excitement and Establishing Infrastructureby Vladimir Collak

56 Stop Letting Your Back Office Application Run Your Businessby Joe Kratochvil

WHOLESALE & FLEET OPERATIONS

60 The Growing DEF Marketby Fabricio Cardoso

64 Cold Filter Plugging Point: Let the Buyer Bewareby Everett Osgood

68 The Silent Thiefby Brian Reynolds

TERMINALS & BULK PLANTS

70 Upcoming OSHA Regulationsby Mark Stromme

BUSINESS OPERATIONS

78 Growth in Use of Transactional Risk Insuranceby Greg Cushard and Charles Sternberg

84 Mergers & AcquisitionsProper Planning Prevents Poor Performanceby Fred Whitaker

92 Financing When You Want It for What You Need and at the Right Ratesby Corey Henriksen

97 NACS/PEI SPECIAL SUPPLEMENT

98 NACS/PEI Intro and Table of Contents

100 NACS Show/PEI Schedule of Events at a Glance

102 PEI Rises from the Ashes, with Barely an InterruptionFMN Interview with Bob Renkes

104 Fuels Institute: Whats Going On?by John Eichberger

108 Connecting with Conexxusby Maura Keller

114 PRODUCT ROUNDUP

126 INDUSTRY NEWS

142 ADVERTISERS INDEX

12 A Way Forwardfor America by Joe Petrowski

16 Three Big Trends Driving Change in Fuels Distribution and Marketingby Doug Haugh

38 Loyalty Car Wash Programs Create Longevity, Revenue Growthby David Dougherty

24 Changes in US Fuel Choice: Does A Fuel Marketer Have a Choice?by Dr. Nancy Yamaguchi

Special Supplement

84 Mergers & Acquisitions Proper Planning Prevents Poor Performanceby Fred Whitaker


FUELS & SUPPLY POLICY BRIEF

Killing Coal to Save...What Exactly?The Obama Administrations most recentannouncement (June 2, 2014) of aggressive andunilateral executive action on energy policythrough the EPAprimarily impacts coal andelectricity generation. Natural gas should alsobe impacted indirectly in a positive manner(except for the electrical costs relative tocompression) from a demand standpoint as gasreplaces coal. Although FMNs readership isfocused on liquid fuels, this latest initiative isinstructional on general trends in energy policyunder the current administration and itswillingness to bypass the legislative branch asneeded. Of course, convenience storeoperators will be directly impacted by anyincrease in the cost of electricity.

Cap and Trade was, and remains, a non-starterlegislatively, and there is virtually no grassroots support of any scale to otherwise push aclimate change agenda to the forefront. Nordoes this make a great deal of political sensein an election year as it alienates voters in key

coal states, and traditionally Democrat-supporting unions. However, here we are.

As many pundits have stated, this is apparentlya personal ideological/legacy issue for thepresident.

Here are some of the viewpoints being presented by various impacted parties:

Gist of the EPA Proposed Rule Nationwide, by 2030, this rule wouldachieve CO2 emission reductions from the power sector of approximately 30percent from CO2 emission levels in 2005. This goal is achievable becauseinnovations in the production, distribution and use of electricity are alreadymaking the power sector more efficient and sustainable while maintaining anaffordable, reliable and diverse energy mix. This proposed rule would reinforceand continue this progress. The EPA projects that, in 2030, the significantreductions in the harmful carbon pollution and in other air pollution, to whichthis rule would lead, would result in net climate and health benefits of $48billion to $82 billion. At the same time, coal and natural gas would remain thetwo leading sources of electricity generation in the US, with each providingmore than 30 percent of the projected generation.

American Petroleum Institute API President and CEO Jack Gerardraised concerns over EPAs newly-proposed regulations on greenhouse gasesfrom existing power plants in a statement today: This proposal is notconsistent with the administrations own all of the above energy strategy. The uncertainty created will have a chilling effect on energy investment thatcould cost jobs, raise electricity prices and make energy less reliable. Theenergy sector is already one of the most heavily regulated industries in theUnited States. Our air is getting cleaner under existing regulations, and carbonemissions are down due to technological advancements developed by theprivate sector. We can continue to make environmental progress withoutdamaging the economy.

American Public Power Association The AmericanPublic Power Association (Public Power) believes climate changeshould be addressed but Congress, not EPA, should determinethe best framework outside of the Clean Air Act to do so whileensuring affordable, reliable electricity from all fuel sources,including coal and natural gas. The Clean Air Act is ill-suited toregulate CO2 emissions. If the EPA moves forward withregulations that call for too much change too fast, we will likelysee unnecessary coal-plant retirements without long-term plansfor viable, cost-effective alternatives; higher electricity prices;and potential shortage of electricity supply.

American Coal Council The US has already investedabout $118 billion to improve air quality, reducing conventionalemissions of CO2, NOx, and particulate matter byapproximately 89% since 1970. Technology development waslargely in step with these reductions. In more recent years, USelectric utilities have faced a huge number of environmentalregulations on all frontsair, water, and wastewhich havecontributed to widespread shuttering of existing coalgenerating capacity. According to the American Coalition forClean Coal Electricity, EPAs rules have contributed to theclosure of over 300 existing coal units totaling more than 50,000megawatts of electric generating capacity.

Additionally, the regulatory uncertainty caused by the April 2012precursor to EPAs currently-proposed GHG (Greenhouse Gas)rule had the effect of stopping development plans for most ofthe approximately 15 plants that had received a PSD (Preventionof Significant Deterioration) permit but not begun construction,in spite of the exemption EPA included in that proposed rule.When EPA did not propose that rule within a year and insteadre-proposed it in 2013 without any exemption for transitionalsources, the impact was fully manifested.

In addition to the ongoing impacts of regulation alreadypromulgated by EPA, proceeding down a regulatory path whicheffectively prohibits the development of new coal generation isextreme and ill-advised. Such a path unnecessarily risks USenergy reliability, affordability, security and diversity for virtuallyno identified benefits.

National Resources Defense Council The first-everlimits on carbon pollution from power plants can save Americanhouseholds and business customers $37.4 billion on theirelectric bills in 2020 while creating more than 274,000 jobs, aNatural Resources Defense Council analysis shows.

Most Americans support curbing dangerous carbon pollutionfrom power plants because its the right thing to do. Cleaningup dirty power plants can be a bonanza for public health and aboon for energy efficiency jobsand save Americans on theirelectric bills, said Daniel Lashof, chief operating officer atNextGen Climate America, and senior fellow at NRDC who

oversaw development of the NRDC proposal. This is awinning step toward a cleaner, cheaper and healthier 21stCentury energy future. Its time to get moving.

NRDCs approach, introduced in December 2012, is largelydriven by energy efficiency investments and grants states theflexibility to meet the standards in ways that best meet theirindividual needs, such as accounting for their differing energy mixes.

Whats interesting about these developments is that if climate change is actually linked in some substantial way to human activity, and not just the current cycle in a pattern of solar-influenced warming and cooling as old as the

Earth itself, the actual impact of these unilateral Americaninitiatives on climate change is virtually nil.

And, if the NRDCs glowing positive jobs and economicestimates are wrong, and such a centrally dictated, massivedisruption in domestic energy production turns out to beharmful then it hurts American competitiveness and individualAmericans at the expense of international competitors thatlack similar environmental impulses. See below:

The New York Times (With China and India Ravenous forEnergy, Coals Future Seems Assured Nov. 12, 2012)Global demand for coal is expected to grow to 8.9 billiontons by 2016 from 7.9 billion tons this year, with the bulk ofnew demandabout 700 million tonscoming from China,according to a Peabody Energy study. China is expected toadd 240 gigawatts, the equivalent of adding about 160 newcoal-fired plants to the 620 operating now, within four years.During that period, India will add an additional 70 gigawattsthrough more than 46 plants.

If you poke your head outside of the US, coal-fired plants are being built left and right, said William L. Burns, an energy analyst with Johnson Rice in New Orleans.

Coal is still the cheapest fuel source.

Besides strong demand for thermal coal, which is burned inpower plants, use of metallurgical coal or coking coal, used inblast furnaces, is also expected to more than double in China,to about 1.7 billion metric tons by 2016, as the countrys steelmills churn out more steel for automobiles, skyscrapers andexport goods, the Peabody study says. n

The full FMN editorial can be found at: http://fuelmarketernews.com/?p=6912

FUELS & SUPPLY POLICY BRIEF Killing Coal ... to Save What Exactly?


READ MORE

One story that Fuel Marketer News hasbeen covering in recent months is theefforts of the California Independent OilMarketers Association (CIOMA) to resistthe damage about to be inflicted on itsmembers, the state economy and itsresidents with the ill-considered AB 32cap-and-trade regulation. The Californiastate law, which includes motor fuels, isexpected to add as much as 20 cents tothe cost of a gallon of gasoline when itgoes into effect on January 1, 2015. Thisestimate has been recently validated bythe states Legislative Analysts Office thatconfirmed gas prices will likely increase by13 to 20 cents per gallon.

While California has a strongenvironmentalist populism, research hasconsistently shown that support forbeing green tends to taper off when itpulls excessive green from consumerswallets. As the association notes,Californians already pay the highest gasprices in the country including some 71cents per gallon in taxes. A cynic mightnote that the new initiative, while claimingto be environmental in nature also standsto redistribute a fair amount of rawrevenue for state coffers.

Our members are having conversationswith California consumers everyday whoare surprised to hear that a new fee willincrease the cost of a tank of gas comeNew Years Day 2015, said JayMcKeeman, vice president of governmentrelations and communications for CIOMA,

in a press release. But they are shockedwhen we tell them its because of a statelaw, not the gas industry, and the moneygenerated will not go toward greenhousegas emissions programs and instead intothe states general fund.

CIOMA has taken a strong role in the FedUp at the Pump initiative. The campaignwas launched on May 23 as a coalition ofbusiness owners and employees,consumers and advocates are working toeducate and inform California motoristsabout the coming gasoline price hike.The ultimate goal is to delay or reversethe fuels component of the law.

While the average Hollywood celebrity orSilicon Valley software tycoon might haveno issue with rising gas prices, that is notthe case for the average Californiaresident, and most especially those notleading a gilded lifestyle.

The poor and low-income people wehelp are barely able to purchase food andclothing, let alone pay more for gas,Chaplain Loron Hodge, executive directorof the Hope Center, a non-profitorganization assisting low-income familiesin Kern County, said during a Fed Up atthe Pump event. Weve already seenproblems with people who dont haveenough money to buy the gas they needto drive here and pick up food andclothing we are giving away for free. Anincrease in gas prices causes the most

FUELS & SUPPLY POLICY BRIEF

Fed Up at the Pump

Fights Back


problems for people who have nomoney to begin with.

Even higher energy prices will certainlynot help the business environment in astate that already sees the flight ofcompanies to other states such as Texasbecause of over regulation and therising cost of doing business.Unfortunately, some business sectorssimply cant vote with the moving truck.

The ag industry in Kern County isgetting hit on all sidesa serious lack ofwater for crops, the lingering recessionand now this, said Beatris Sanders,executive director of the Kern CountyFarm Bureau, who spoke at thepreviously referenced Fed Up at thePump event. This gas tax is anotherburden that is making it harder for theagricultural industry to remainsustainable and viable in Kern County.

While Fed Up at the Pump has done anexcellent job educating Californiansabout the ramifications of AB 32, thestate politicians do not seem to bepaying attention. In the most recentdevelopments, Senate pro Tem DarrellSteinberg wrote to Assembly MemberHenry Perea denying his bill, AB 69, alegislative hearing. AB 69 would providefor a three-year delay to California AirResources Boards (CARB) fuelscomponent within the cap and tradeprogram. n

Real leaders look forward not backward, and whether Iraqturmoil today is the Republicans fault for invading and topplinga secular Sunni leader or the current administrationssquandering of the achievement is immaterial. What do we donow? Boots on the ground or the false hope of costless airpower are not the solutions.

We have spent too much treasure and blood, and becoming theShia Air Force and advancing Irans interest is not in the USinterest. This 3,000-year-old civil war is not subject to coalitionbuilding or a charm offensive. The fight today is not about therightful successor to Mohammad, but about who controlsapproximately $500 billion of oil revenue to wage jihad and buildthe caliphate. Either a Shia or Sunni caliphate is bad for America.

FUELS & SUPPLY

A Way Forward for Americaby Joe Petrowski


The 9/11 terrorists were Sunni, and Irans record on terrorism iswell established. The Mideast is a tumor and the least invasiveway to kill a tumor is to cut off the blood supply.

Oil revenue is that blood. Oil prices would be much highertoday if the United States had not dropped its consumption ofenergy to 97 quads while domestic production, primarily fromshale, has increased to 82 quads (a quad is a quadrillion BTUsand a barrel of oil contains 5.8 million BTUs). We will truly beindependent when the current ratio of 85% crosses to over100%. And with the scheduled closure of coal plants (19 quads)and nuclears future (9 quads) uncertain, our dependence mayget worse and not better in the interim. What should ourleadership do?

Joe Petrowski

Petrowski has had a long career ininternational commodity trading, energy andretail management and public policydevelopment. In 2005, he was namedPresident and CEO of Gulf Oil LP and electedto the Gulf Oil LP Board of Directors. InOctober of 2008 he was named CEO of thenow combined Gulf Oil and CumberlandFarms whose annual revenues exceed $11billion and that now operates in 27 states. InSeptember 2013, Petrowski stepped down asCEO of The Cumberland Gulf Group. He isnow managing director of MercantorPartners, a private equity firm investing inconvenience and energy distribution.


READ MORE at fuelmarketernews.com

Our stated national goal should be to become a net energy exporter wheremischief and black swan events actually would help the United States and thedollar relative to the rest of the world, and drive the price of petroleum under$75/barrel, starving whatever beast survives the Mideast insanity.

The lower energy prices from enacting the above would:

Stimulate our economy Hurt Putins Russia Drain the Mideast swamp Create jobs and new industries Help diffuse the next powder keg (Chinas covetous desire in East Asia for the shale and oil fields off of Taiwan, Japan and Vietnam)

We can support Jordan, Israel and the Kurds while protecting Americans. We do notneed military action, but rather leadership and forward-looking strategic thinking.You cannot reason with evil; it must be destroyed.

I am sure there will be some on both sides of the aisle that will find fault with some ofthe above, but maybe Senator Kerry can come home and bridge the gap betweenDemocrats and Republicans before we try and settle a 3,000 year old blood feudbetween irrational evil doers.

We do not have a shortage of energy, just leadership, courage and a plan. n

1

Continue drilling for natural gasour 28 quads can be doubled in nextfive years.

2

Renew the investment tax credit insolar (.5 quads can be 5 quads in fiveyears as panel and installation costsare falling).

3

Some 1.5 quads in wind can easilytriple in next five years withinvestment in the smart grid, whichwill have the added benefit of saving10 quads in power transmission.

4

Stop the attack on ethanol. It iscurrently $1 gallon cheaper thangasoline and supplies 10 quads, andwith some legislation on tank andengine liability, we can easily add 5quads of energy.

5

Invest in pipelines and replace oldcast iron natural gas pipes where welose more methane than in fracking.

6

Encourage small CHP (combined heatand power projects) that will have anancillary benefit of eliminating powerline loss and securing our energysupplies from catastrophic eventswhether man made (cyber-attacks,terrorism) or nature (hurricanes,tornadoes, floods, solar flare).

7

Incent the new hydrogen fuel celltechnology relying on water andnatural gas to produce hydrogen fuelthat is cheap, clean and efficient.

Total US energy production reached 81.7quadrillion British thermal units (quads) in

2013, enough to satisfy 84% of total US energy

demand, which totaled 97.5 quads. Natural gas

was the largest domestically produced energy

resource for the third year in a row and, together

with the other fossil fuels (coal, crude oil, and

hydrocarbon gas liquids), accounted for more

than three quarters of US energy production. In

total, the United States consumed 97.5 quads of

energy, 82% of which was fossil fuels. Renewable

and nuclear energy made up 10% and 8%,

respectively, of US energy consumption.

Source: EIA/ Mary Joyce, Ryan Repice



FUELS & SUPPLY

Three Big TrendsDriving Change in Fuels Distribution and Marketing

d e c l i n e i n d e m a n d

i n c r e a s i n g s p e c i a l i z a t i o n

e x p l o d i n g p r o d u c t i o n

by Doug Haugh

First, the biggest trend impactingthe US fuels industry at every levelis the long-term decline ingasoline demand. Gasoline

demand is expected to drop 30 billion gallonsyes, billion.With the average fuel marketer being around 30 million gallonsa year, we are looking at the potential demise of 1,000distributors. The industry, from refining through distribution andon down to the street at retail, has been structured to serve amarket that has grown around 1% a year for many decades. Areversal of the gasoline market to one of shrinking demand willremake the entire fuels industry.

Refiners must now count on exporting their way to prosperity.Distributors will consolidate to survive and those survivors mustcontinue to lower costs to grow profitably. Fuel retailing willevolve to where gasoline is increasingly just an importantcategory for many different retail formats, but will cease to be aproduct that is a reason for a store to exist on its own.


A second significant trend is theincreasing specialization ofpetroleum marketingcompanies. When I entered the

industry 20 years ago there were nearly 12,000 distributors.Today, there are by most counts around 4,000 left. Soconsolidation has been a theme in the downstream industry formany years. If we think about it in another way, approximatelyone distributor per day has been acquired or absorbed byanother for the past 15 years. But consolidation today is different than the traditional largely local mergers we havebecome accustomed to.

In the past few years we have seen the significant growth ofpetroleum distribution and marketing companies that are either largely or entirely focused on one product line. Companies likeReladyne and PetroChoice have brought significant amounts ofprivate equity into the industry to first consolidate lubricantbusinesses, and then to invest in growing those lubricantdistribution companies into more advanced service providers toindustrial, automotive and fleet customers. Similarly we havelarge retail companies becoming public MLPs (Master LimitedPartnership) and then many other retail-focused distributorsbeing acquired by these public companies that have access tolarge amounts of capital and tax advantages.

Mansfield, where I have the pleasure of working, has beenfocused on consolidating commercial fuels companies whileworking with firms concentrated on both lubricants and retailfuels marketing. Along similar lines Guttman recently divestedtheir long-time lubricants business to concentrate more on theircore fuels business, and TAC Energy sold off their terminals,

one

two

Gasoline

Source: EIA Energy Outlook Release 2014

Everything Else

Automotive Light Duty Fuel Demand

U.S. Petroleum Distributors

Source: Fuels News

We continue to see grocery stores, dollar stores and big boxretailers add gasoline as a product line, while the mostsuccessful convenience stores are hardly conventional withmany having a bigger food business than they do fuelat least

from a gross profit perspective. As fuel economy doubles over thenext decade or so, both of these product-line views on retailinggasoline will continue to become the norm rather than theexception.

becoming more focused on fuels marketing. Lube-Tech, whoworked with Mansfield in Minnesota to acquire Yocum Oilslubricant business while selling their fuels business to Mansfield,is another example of specialization at work. It also shows howthis trend impacts fuels marketing even when a firm is focused onlubricants.

This specialization trend is intimately related to the demandtrend. With demand for the largest product categorygasolinedeclining, every other product category is directly impacted.Historically, many of the most successful distributors were retailmarketers first and they supplied lubricants, diesel and maybepropane because they were there and when their primary product was growing, they could afford to invest in diverse product lines.Now, for many, it is focus or die, and as lubes divisions orcommercial fuels businesses are sold off, they become the rawmaterial for other firms to specialize and grow.

FUELS & SUPPLY Three Big Trends Driving Change in Fuels Distribution and Marketing

Doug is currently President of Mansfield, a$9 billion industry innovator recentlyranked by Information Week as the No. 1technology innovator in Energy & Utilitiesand the only nationwide provider of fuelsupply, biofuels, propane and dieselexhaust fluid. Haugh is a frequent speakeron energy, supply chain technology andentrepreneurship. He can often be foundleading general sessions or seminars atmany national conferences andconventions. He also blogs on energy issuesat: http://thinkingonenergy.com.

The opinions expressed there (and here) arehis, and not those of Mansfield.

The last big trenddriving change in fuelsmarketing anddistribution is newerthan the other two,

less understood and potentially of even bigger impact overall.That is the trend of exploding US production of crude oil andnatural gas. Why would this impact the downstream? Havent oilcompanies been splitting off upstream from downstream likeboth ConocoPhillips and Marathons recent splits? Yes. So far thetrend upstream has been arms length to downstreamdistribution and marketing. But can such a fundamental changein the primary supply of our key commodity remain an armslength phenomenon for long? I, for one, dont think so.

Will we see new large producers like Continental Resources who cannot exportcrude and are giving up big discounts and record crack spreads todownstream refiners, accept being disadvantaged and disconnected from directdemand and stand pat? What about existing refiners that are faced withdeclining demand but still growing capacity? Will they be confident enough inexport growth to continue being comfortable, being largely disconnected fromend-use customers? We simply do not know yet how these upstream and refiningchanges will impact those of us distributing and marketing fuels. I believe we canbe sure that changes of that magnitude just upstream of us will be felt, and likelysooner than later. With the pace at which production is growing and refining isexpanding, change is surely coming. n

Douglas H. Haugh

?Did You Know

Will the generalist who still provides lubricants, commercial fuel,branded retail fuels marketing, propane and even chemicals orother related product lines survive or thrive in a world of larger,more specialized competitors? The answer so far seemssomewhat geographic and demographic. In the Eastern UnitedStates, where there is sufficient population density and many

markets close by, geographical specialization is much furtheralong. In the Rockies, where you are maybe 300 or more miles tothe next closest market of any size, being able to offer a wideselection of products to a smaller population seems to be keepingthe traditional marketer who does a little bit of everything stable-to-growing for now.

three

Source: EIA

U.S. Production of Crude Oil (Thousand Barrels per Day)



Large majorities of registered voters, both Republican and Democrat,support producing more oil and natural gas in the United States and saythey would be more likely to vote for candidates who supportdevelopment, according to a national American Petroleum Institute poll.Some 77% support increased production of Americas oil and natural gasresources, including 92% of Republicans, 80% of Independents and 66%of Democrats.

The retail gasoline dealer generally suffers sub-par profits onsales in winter and early spring. Financial markets offer one wayto deal with this challenge. Crack spreads are measures ofprofit on gasoline available to refiners and the stress this placeson retailers. This article describes the seasonal pattern ofgasoline profitability. It also suggests how the retailer mightrespond to seasonal profit challenges.

Profit margins are usually tight in the gasoline business. Theres lots of competition on the street, gasoline is a standardspecification commodity and prices are readily available toeveryone.

The retailers challenge has grown in recent years. Gasolinedemand has been under pressure in response to changingdemographics and emerging interfuel competition.

Seasonal Gasoline ProfitabilityProfit margins respond to seasonal factors too. They start withthe refiner who generally plans maintenance in late winter. Thistakes gasoline refining capability off line. Gasolineconsumption relies on storage for supply, supporting thegasoline price.

The refiner passes the higher gasoline price through to thedownstream. The refiners profit margin generally grows whenwholesale prices increase. No such luck at retail. Consumersresist higher prices, choosing, in many cases, to alter theirdriving habits. The retailers margin is squeezed betweenhigher gasoline costs and lower consumer demand. Typicallythis happens in the months between November and May.

Refineries are back on line by May, strains on gasoline supplytend to ease and prices top out. Retail margins improve as well.The pattern persists into winter. The pattern of weak margins atretail in winter and spring is followed by improvement assummer margins widen with generally softer prices.

The refiners situation is different. Refineries begin springmaintenance and turnaround as winter gives way to spring.Demand for crude oil eases and the price of crude oil eases aswell. At the same time, demand for gasoline picks up and theRBOB (Reformulated Blendstock for Oxygenate Blending) pricereflects that gain. The difference between the crude oil andgasoline price widens. This difference is the gasoline crackspread, generally called the gas crack.

The Crack SpreadThe gas crack is traded in the futures market. It is constructed bythe purchase of one RBOB gasoline contract while at the sametime selling one crude oil contract. The contracts are traded onthe New York Mercantile Exchange (NYMEX).

The retailer could consider offsetting tighter retail margins byusing the crack spread. This is a common use of hedging: usingfutures to minimize the retailers exposure to tighter margins.The reason retail margins suffer is precisely because refinersmargins expand. And retailers, faced with consumer resistance,have no place to turn.

Buying the gas crack spread, however, effectively puts theretailer in the same financial position as the refiner. Andhistorical records support the idea of buying the crack spread inlate autumn/early winter. With few exceptions, this transactionhas proven effective for retailers. Continued

FUELS & SUPPLY


Winters GasolineMargin Squeeze

by Alan Levine

Disclaimer: Futures trading involvessignificant risk and is not suitable for everyone.

Transactions in securities futures,commodity and index futures, andoptions on futures carry a high degreeof risk. The amount of initial margin issmall relative to the value of the futurescontract or forex (foreign exchange)positions, meaning that transactions areheavily leveraged. A relatively smallmarket movement will have aproportionately larger impact on thefunds you have deposited or will haveto depositthis may work against youas well as for you. You may sustain atotal loss of initial margin funds and anyadditional funds deposited with theclearing firm to maintain your position.If the market moves against yourposition or margin levels are increased,you may be called upon to paysubstantial additional funds on shortnotice to maintain your position. If youfail to comply with a request foradditional funds within the timeprescribed, your position may beliquidated at a loss and you will beliable for any resulting deficit.

A similar transaction can be made for dealersselling distillate fuel oil. The distillate fuel oilcrack spread is called the heat crack, areminder that heating oil was once the mostimportant component of the distillate fuel oilcut of the barrel. These days, diesel fuel holdssway, but the language has not changed.In the spring, distillate fuel oil prices tend tobottom during the first quarter. They rallythrough late April. Following a period duringwhich prices soften, prices recover in July andAugust, moving higher through October. This isalso the pattern for the heat crack.

Crack spreads are very powerful financial tools.Traders would do well to consider findingqualified advisors before undertaking crackspread trades. They rely on relative movementsof crude oil and the two products, gasoline anddistillate fuel oil. Moreover, there are timeswhen it may be more advantageous to useBrent crude oil in lieu of West TexasIntermediate (WTI) crude oil for the crude oilleg of the crack spread. And, with theavailability of regional crude oil and productfutures contracts, more finely directed crackspreads might be indicated. n

Alan H. Levine Alan is CEO of Powerhouse, a companyoffering the Power of Price Protection. He hasserved the energy industries since 1969 andfocused on hedging and price riskmanagement since 1977. He can be reachedat [email protected] or 202.333.5380

?What Does ThatMeanCrack SpreadsAre measures of profit on gasolineavailable to refiners and the stress thisplaces on retailers.


FUELS & SUPPLY Winter's Gasoline Margin Squeeze

FUELS & SUPPLY


Imagine that you started working in the fuel industry twenty yearsago, at the age of twenty-five. You are now forty-five, and as youreflect back on your early days, you marvel at what the businesslooks like today. Now imagine that you want to work for anothertwenty years, until you are sixty-five. What will the business look likethen? Theories abound, naturally, but the only guarantee is that themarket will not look like it does today. The US fuel market has gonethrough astonishing changes, and more are ahead. There is nosegment of the market that has been untouched by the sweepingchanges since the 1990s. Our domestic and foreign fuel sources andtrade patterns have changed. Domestic crude and gas productionhas begun to climb. The US ethanol industry is the worlds largest.Our refining industry has gone through a major overhaul and now isrunning at high utilization rates. Storage, transport and terminallinghave expanded and shifted their geographic focus and favoredmodes. Demand for gasoline, the staple food of the US automotive

diet, has fallen, and it is forecast to continue on its downward slide.Diesel is gaining market share, and the US has become a majorexporter of diesel. Environmental regulations have changed thetypes and qualities of fuels, as well as introducing entirely newproducts. The economy has suffered through a severe and long-lasting recession.

Fuel choice has changed dramatically, and it is continuing to change.Do fuel marketers have a choice about fuel choice? Many believethat their choices are irrelevant, dismissing the idea by saying theCustomer is King. If asked their opinion about the future fuel mix,they may simply say We will know soon enough. Yet as we view theevolution and segmentation of the market, we can see that there aremany kings, and some kings may be capricious in their variousfiefdoms. Even if a fuel marketer feels like a leaf floating along theriver, it is important to see where the river is flowing.

by Dr. Nancy Yamaguchi

Changes in US Fuel Choice:Does a fuel marketer have a choice?


Gasoline and Dieselchanges in volume, grade, productionand tradeTable 1 provides a look at some keychanges in the US gasoline and dieselmarket over the past two decades,drawn from various data sourcespublished by the US Energy InformationAdministration. The drop in gasolinedemand stands out sharply. Of all majorpetroleum fuels in the US market,gasoline has been the most important,but it is also the only fuel for which along-term decline is underway andforecast to continue. Demand of 7,601thousand barrels per day (kbpd) in 1994rose to 9,105 kbpd in 2004, but it hasfallen to 8,715 kbpd during the first fivemonths of 2014.

In addition, consumers have beenswitching away from premium and mid-grade gasolines, in part because of highprices and also because of the gradualchanging of the fleet and a higher levelof consumer awareness. In 1994, regulargrade gasoline accounted for 67.7% ofgasoline sales. This rose to 82% in 2004,and it is currently averaging 87%. Figure 1 illustrates how premium andmidgrade gasolines are occupying asmaller share of a shrinking market.Refinery profitability is reduced not onlyby the loss of gasoline volume but alsoby the loss of higher-value high octanegrades.

The economic relationship betweenregular gasoline and premium gasolineis no longer as straightforward as it oncewas. Figure 2 compares the pricedifferential between premium andregular grades on a $/gallon basis, thencompares this with the price relationshipin percentage terms. Historically,consumers were accustomed to paying10 to 15 cents per gallon more forpremium gasoline. As the nominal costof gasoline began to rise, the pricedifferential rose also and it has beenaveraging 33 cents per gallon this year.

This is a noticeable shift, roughly two to three times the price differential thatcustomers had grown to expect, and it is not surprising that sales of premium gasolinehave fallen.

Yet the second axis on the chart tracks how premium gasoline compares with regulargasoline on a percentage price basis. In the 1990s, the price of premium gasoline wastypically 112 115% higher than regular gasoline. This percentage began to fall, andover the past decade, the premium gasoline price has been in the range of 107 110%of regular gasolines price. Thus, although the absolute price differential has widened,octane is actually less valuable than it was in the past. The higher prices seen for high-octane gasoline are commonly attributed to such factors as the high demand forgasoline in the United States, and the perceived difficulty of producing enough high-octane material. But these reasons are losing validity, and ethanol blending is one of the

Figure 1: Premium and midgrade occupy a shrinkingshare of a shrinking market, 1994-2014kbpd

Source: Derived from data published by the EIA

Table 1: Two Decades of Changes 1994 2014(volumes in '000 barrels per day)

FUELS & SUPPLY

FUELS & SUPPLY Changes in US Fuel Choice: Does a fuel marketer have a choice?


key factors. With 850 kbpd of high-octane, non-petroleum-based liquid being blended into gasoline,the octane balance has eased considerably.Consumer demand for premium gasoline has fallen,in part because the fleet is growing more modern andin part because the modern consumer is moreeducated and more motivated to save on fuel costs.In the future, premium gasoline may become more ofa specialty product. The National Association ofConvenience Stores has noted this trend, and hasraised the question of whether some retailers mighteventually switch their underground premiumgasoline tanks to diesel, E85 or ethanol.

There has also been a major change in how motorgasoline is produced and finished for sale. In 1994, amere 10 kbpd of ethanol was blended into gasoline.By 2004, ethanol blending had risen to 202 kbpd, andit is now averaging 854 kbpdvery close to the 10%blend wall, given the current demand level of 8,715kbpd. This widespread use of ethanol has shifted thefinalization of gasoline away from refiners towardblenders. In 2005, 27% of US gasoline was finalized byblenders, and the remaining 73% was produced atrefineries. By 2014, this relationship had reversed, withrefiners blending 23% of the finished gasoline pooland blenders accounting for 77% of finished gasoline.

Figure 2: The PremiumRegular price differential has grownin nominal terms, but shrunk in percentage terms$ per Gal

Premium

% of Regular

Gasoline net exports commenceThe surge in ethanol use, coupled with the rise in refinery utilizationoccasioned by the rise in domestic crude production, has expandedgasoline production capability. The 854 kbpd of ethanol currently beingblended also uplifts certain streams of lower-octane gasolineblendstocks. Imports of gasoline blending components (GBC) havesurged, growing from 20 kbpd in 1994, to 451 kbpd in 2004 to 541 kbpd

at present. GBCs often arrive in a formthat requires only the last-minuteblending of 10% ethanol to qualify asfinished motor gasoline. Imports offinished gasoline have nearly vanished,after many years of growth. In fact, it wasnot all that long ago that some peoplewere concerned about gasoline importdependency. In 1994, the US imported341 kbpd of finished gasoline, andimports grew to 496 kbpd in 2004. Thedrop in gasoline demand has causedgasoline imports to plummet to 39 kbpdcurrently.

When finished gasoline alone isconsidered, the US actually became a netexporter in 2010. However, much of thereduction in gasoline imports was merelya shift to imports of gasoline blendingcomponents. A more complete picture ofthe US gasoline balance can be gained byviewing gasoline, plus gasoline blendingcomponents, plus ethanol (ETOH). Whennet trade volumes of gasoline, GBC andETOH are viewed in their entirety, theUnited States was in reality still a slight netimporter in 2010. This now appears to bechanging, and the United States may trulybecome a gasoline net exporting market.As the table indicates, during the January-May 2014 period, the United Statesexported 21 kbpd of gasoline+GBC+ETOHon a net basis.



Theoretically, this should work tomoderate gasoline prices. A surpluscommodity generally commands aweaker price, assumed to be a function ofprice minus transport costs to the exportmarket. In this respect, the year 2014

should bring a weakening gasoline price.To an extent, we should also expect asmall recovery in demand. At an earlymeeting of the Society of IndependentGasoline Marketers of America, theauthor predicted that 2014 gasolinedemand would be approximately 44 kbpdabove 2013 demand. This prediction was

viewed with some skepticism, sincegasoline demand had been trendingdownward. However, it is not envisionedas a long-term reversal in the overalldownward trend, but instead a restorationof some of the demand that was lostbecause of the recession. Already,gasoline demand in 2014 is on track toexceed the authors early forecast.

Diesel demand continuesrobust, and the United Statesbecomes a major exporterAlthough gasoline remains the key fuelused in US transport, diesel demand isproving more robust. As Table 1 indicates,diesel demand grew from 3,162 kbpd in1994 to 4,058 kbpd in 2004, and it isaveraging 4,080 kbpd currently. In 1994,the United States was a slight net exporterof diesel, with imports of 203 kbpd andexports of 234 kbpd. Diesel demandcontinued to grow, and by 2004, theUnited States was a net importer of diesel,with net imports amounting to 215 kbpd.Several events now have changed this:first, the price shock in 2008, which alsocontributed to the US recession, andsecond, the sharp increase in tight oilproduction, which has caused refineryutilization to rise. Federal law placesrestrictions on the exports of crude oil, somost of the new output is processeddomestically. This also has contributed tothe emergence of gasoline exports, asnoted above, but it has had a far moredramatic impact on diesel exports. In theJanuary May period of 2014, the USimported 261 kbpd of diesel whileexporting 1,056 kbpd, creating netexports of 795 kbpdan amount largerthan the entire market demand ofGermany.

Most other major oil consuming countriesare more reliant on diesel than ongasoline. OECD Europe (Organization forEconomic Cooperation andDevelopment) consumes three timesmore diesel than gasoline, for example.Having access to these export markets isan immense boon for US refineries. Asdiscussed below, the United States islikely to remain a net exporter of diesel.

When net trade volumes of

gasoline, GBC and ETOH are

viewed in their entirety, the

United States was in reality still a

slight net importer in 2010.

This now appears to be

changing, and the United States

may truly become a gasoline net

exporting market.



Future fuel choiceThe Energy Information Agency each yearcarries out an extensive forecastingexercise known as the Annual EnergyOutlook (AEO). The conclusions changeeach year, naturally, as market conditionsand input assumptions change. Criticspoint out that some of the key inputassumptions hinge upon successfulimplementation of public policies anddirectives. Therefore, some of theconclusions rest upon a wish list wherenot all of the wishes will come true.Nonetheless, the AEO is an impressiveundertaking, always well worthconsideration. Figure 3 presentsinformation on liquid fuels demand fromthe current forecast. The figure showshow demand is expected to change forkey liquid fuels between 2014 and 2034.Over the next twenty years, the AEOexpects US gasoline demand to fall by2.02 million bpd (mmbpd.) The drop ingasoline demand effectively negates thegrowth in all other key liquid fuelsdemand, which collectively are forecast togrow by 2.1 mmbpd in the next twentyyears. Two of the key competitors againstgasoline in the transport fuel sector areE85 and diesel. E85 demand is forecast togrow by 0.29 mmbpd, while 0.66 mmbpdof new diesel demand is expected.

Part of the push for raising E85 use is, ofcourse, the national goal of promotingthe use of renewable fuels. The RFS(Renewable Fuel Standard) rules are soambitious that E85 is viewed as one ofthe best ways to expand ETOH use. Yetdespite the publics desire to promotethe use of renewables, economics stillplay a role in consumer choice, andmarket adoption of E85 and flexible fuelvehicles has been slow.

Figure 3: AEO forecast of liquid fuel volumegrowth/(decline) between 2014 and 2034

Diesel and E85 prices on Gasoline-Equivalent basisOne way to compare fuel costs is on a BTU (British Thermal Unit)fuel equivalent basis. Ethanol has approximately 73.1% of the BTU content foundin E10, and diesel has approximately 115.8% of the BTU content of E10.Accordingly, an E10 gasoline price of $3.50/gallon would correspond with an E85price of $2.56/gallon and a diesel price of $4.05/gallon. Yet even a casual observerof the market could see that the three fuels rarely follow this price relationship.Figure 4 compares the AEO forecast of E85 and diesel relative to E10 during the2011 2040 horizon. In 2011, the E85 price was roughly one and a half times whatit should have been to be cost competitive with E10. As the forecast movesforward, E85 prices are forecast to decline relative to E10, but at no time does theE85 meet E10 cost equivalency. At its best, the E85 price is forecast to be $0.15 0.17 cents/gallon above the E10 equivalent price. In addition, as time moves on,E85 prices are forecast to rise relative to E10, reaching $0.86/gallon above the E10equivalent price by the year 2040. Continued

Figure 4: E85 is forecast to remain above its E10 gasolineequivalency while diesel is forecast to remain below$/gal

mmbpd

?What Does ThatMeankbpd= Thousand Barrels per Daymmbpd= Million Barrels per DayETOH = EthanolAEO= Annual Energy Outlook



In sharp contrast, diesel prices start outthe forecast period at a price well belowE10 equivalency$0.60/gallon below.And despite the relatively strong dieseldemand outlook, diesel prices areforecast to weaken relative to E10, fallingto $1.24/gallon below the E10 equivalentprice by 2040. Therefore, despite that factthat diesel is nominally more expensivethan gasoline, it is cheaper on a heat-equivalent basis. As noted, the UnitedStates is now a net exporter of 0.75mmbpd of diesel. The forecast increasein domestic diesel demand is only 0.66mmbpd by 2034. If refinery outputremains the same, the US should remaina net exporter of diesel, which at leasttheoretically should moderate any priceincreases.

Conclusion: a multitude of kings and queensThe fuel market has grown more complex and segmented, and fuel choice is growingmore complicated as well. Gasoline demand is falling, and demand for high-octanegrades is falling even more precipitously. The E10 blend wall is effectively in place. E15poses a number of technical and economic issues, and although it is being marketed, itis not yet widely accepted. Many have advocated E85 as the sounder way to raiseethanol use, but a technological and/or price breakthrough may be needed. The E85price generally is not competitive with E10. E85 is less expensive in the Midwest, nearerto the centers of ETOH production, but the majority of the population lives on thecoasts. In many of the more densely populated metropolitan areas, E85 prices arescarcely below E10 prices (sometimes only 2 5% below), and the AEO forecastanticipates that E85 prices will remain above their E10 gasoline-equivalent value.

E85 demand is nonetheless forecast to grow, as is demand for diesel and LPG (LiquifiedPetroleum Gas). On a fuel equivalent basis, diesel is highly cost-competitive with E10,though NACS has noted that consumer acceptance has been slow because in nominalterms, diesel remains more expensive than gasoline. This is changing as consumers havegained more experience with the efficiency of diesel engines. Consumer educationprograms about the benefits of ultra-low-sulfur diesel also have been working to changethe outdated image of diesel engines as being heavy polluters.

In this article, we have focused mainly on changes within the major motor fuels gasoline,diesel and ethanol in E10 and E85. A number of other fuel sources also will play moremajor roles in the future, including electricity, LNG, CNG (Compressed Natural Gas) andliquid hydrogen. Their distribution and fueling modes are more specialized, however, sothey will have a different set of dynamics to fuel marketers and consumers.

The ancient Greek poet Homer wrote: A multitude of rulers is not a good thing. Letthere be one ruler, one king. Most fuel marketers believe they have little choice aboutfuel choicethe customer is king, after all. But most now find themselves serving morethan one king or queen in more than one kingdom. The great challenge now facing fuelmarketers is how to choose the best kingdoms and how to best serve the kings andqueens without being beheaded. n

Dr. Nancy YamaguchiNancy is an author and petroleumindustry expert specializing in theadvanced analysis of energy markets. Dr.Yamaguchi is the President of Trans-Energy Research Associates, Inc. focusingon a wide spectrum of fuel related issuessuch as economics and the environment.She possesses a strong interest in globaloil industry, including supply, demand,trading trends, as well as transport,refining, product blending, alternativeand reformulated fuels, product qualityand price behavior.


The national vision by politicians, economists,industrialists and environmentalists to transition to hydrogen economy by 2030 seems deadlocked,with hydrogen fuel cell vehicles projected torepresent a $3 billion market of about 5.9 GW by 2030, according to Lux Research.1

FUELS & SUPPLY

Are Hydrogen Fuel Cell Vehicles

Dead On Arrival?by Dr. Barry Stevens



The dream of fuel cell vehicles poweredby hydrogen from zero-carbon sourcessuch as renewable power or nuclearenergy comes from estimates that thecost of avoided carbon dioxide wouldbe more than $600 a metric tontentimes higher than most othertechnologies under investigation.

Yet today, there are only two fuel cellelectric vehicles (FCEV) available in the USmarketHonda's FCX Clarity, which isavailable to lease, and the Mercedes-BenzF-Cell.

Fuel cells combine the best of electric andgasoline cars without the downsides, theautomakers say. They drive like electriccarsquietly, with tons of off-the-linepowerbut can be refueled just likegasoline-powered cars, writes Jerry Hirschfor the Los Angeles Times.2

In another article for the Los AngelesTimes, Jerry Hirsh points out: As they(fuel cells) move into production, fuel cellcars should gain a price advantage overvehicles that run on battery power, andLesser weight and higher energy densityof fuel cells also enable them to be used ina wider range of vehicles, from a familysedan to full size trucks to city buses.3

BEVs (battery electric vehicles) have anumber of significant issues. Unless you arewilling to shell-out for Teslas Model S,range is still a significant issue. And even ifyou do opt for the Model S, the battery cantake 20 minutes just to reach 50% charge,compared to a few minutes refueling forICE (internal combustion engine) cars,states Katie Spence for The Motley Fool.4

7.6 9.8 11 1629.5 32.2 36.5 36.6 39.5

55.764.5 73

108.6

133.8

202

275.2293

329.7323.3319.6

277.3.

194.2

0

50

100

150

200

250

300

350

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Mill

ions

of $

Fiscal Year

EERE Hydrogen Funding

EERE Fuel Cell Funding

Combined EERE Hydrogen & Fuel Cell Funding

Total DOE Funding for Hydrogen Fuel Initiative

Total DOE Funding for Hydrogen & Fuel Cells

SECA Funding

Total DOE funding for hydrogen and fuel cells: 2002-2011 is $2.5 billion

DoE Hydrogen and Fuel Cells Budget History: 1990-2011

Robert Duffer for the Chicago Tribune states, Fuel cell cars use a stack of cells thatcombine hydrogen with oxygen in the air to generate electricity, which powers themotor that propels the car. The only emission is water vapor and, with a 300-milerange, can run three or four times longer than the most capable electrics, aside fromTeslas all-electric Model S, which has a range of 265 miles. The Nissan Leaf has a 75-mile range.5

Unfortunately, the push to develop a hydrogen economy in the US, which wassparked by the Matsunaga Hydrogen Research, Development, and DevelopmentAct of 1990, never gained sufficient traction and political support to overcome majorbarriers to market entry such as high capital costs and lack of an infrastructure.Capitol Hills indifference to FCEVs is underscored by The Department of Energy(DoE) hydrogen and fuel cells budget history from 1990 to 2011.6

FUELS & SUPPLY

Including years 2012 2014, the total 25-year DoE budget for hydrogen and fuelsresearch, development, demonstrations and deployment (RDD&D) was about $2.8billion, an average annual allocation of $112 million. To put this into perspective,the 2014 budget for hydrogen RDD&D of $100 million, i.e., 0.35 percent of the totalDoE budget request of $28.4 billion. This falls short of other renewabletechnologies such as solar, bioenergy and wind technologies, which receivedallocations of $365 million (1.25 percent), $282 million (0.99 percent) and $144million (0.51 percent) for FY 2014, respectively.

The DoE budget for FY 2014 includes an allocation of $575 million for vehicletechnology programs. However, fuel cell R&D is not directly included in the fundingprofile for these programs. The main emphasis of Vehicle Technologies isbattery/energy storage R&D and vehicle technologies deployment.

The large increase in expenditures between 2002 and 2011 reflect President Bushsannouncement of a major hydrogen initiative in his 2003 State of the Union address:Tonight I am proposing $1.2 billion in research funding so that America can lead

Mercedes-Benz F-Cell. Mario Roberto Duran Ortiz

Source: U.S. Department of Energy


the world in developing clean, hydrogen-powered automobiles.A simple chemical reaction between hydrogen and oxygengenerates energy, which can be used to power a car producingonly water, not exhaust fumes. With a new nationalcommitment, our scientists and engineers will overcomeobstacles to taking these cars from laboratory to showroom sothat the first car driven by a child born today could be poweredby hydrogen, and be pollution-free.

Though marginalized throughout its decades-long history,hydrogen fuel cell vehicles may not be entirely dead on arrival.Today, the media brings a steady stream of discussions,publications and announcements about activity in FCEVs. Thereare just two fuel cell vehicles available in the US market: HondasFCX Clarity, which is available to lease, and the Mercedes-BenzF-Cell. The most recent reverberations come from automakers,such as Toyota, Hyundai, and Honda, with testing and plannedproduction of hydrogen fuel cell vehicles for 2015.

Additionally, Daimler AG, Ford Motor Company and NissanMotor Co., Ltd. recently announced a cooperative agreement toaccelerate the commercialization of fuel cell electric vehicletechnology.

Even with insufficient support from the federal government, lack of a hydrogen infrastructure, and cost uncertainties, FCEVs are poking their heads above the radar. In general, automakers see FCEVs as the most judicious path to satisfy stringent zero-emission vehiclemandates set by California and nine other states. Californiaszero-emission vehicle (ZEV) mandate requires 15 percent of allnew cars sold be emission free by 2025. The ten-state alliancewants about 3.3 million ZEVs on the road by 2025.

Without question, the most important barrier to larger scaleimplementation of low carbon technologies comes down to onefactor: the cost of the technology. Fuel cell costs continue todecline significantly for light duty vehicles, with projectedvolume costs lower by more than 80 percent since 2002 andmore than 35 percent since 2008, according to the USDepartment of Energy.8 The cost per kilowatt (kW) for highvolume production of transportation fuel cells moved closer toDoEs target of $30 per kW where they will be cost-competitivein light duty vehicles.

The Tucson Fuel Cell offers:

A rental price of $499 per month for a 36-month term, with $2,999 down, for customers in the Los Angeles/Orange County region. This includes unlimited free hydrogen refueling.

Driving range up to an estimated 300 miles

Full refueling capability in less than 10 minutes, similar to gasoline

Minimal reduction in daily utility compared with its gasoline counterpart

Instantaneous electric motor torque (221 lb-ft)

Minimal cold-weather effects compared with battery electric vehicles

Reliability and long-term durability

No moving parts within the power-generating fuel cell stack

More than two million durability test miles on Hyundais fuel cell fleet since 2000

Extensive crash, fire and leak testing successfully completed7

Hyundai Tucson

FUELS & SUPPLY Are Hydrogen Fuel Cell Vehicles Dead On Arrival?

2002 2006 2007 2008 2009 2010 2011 2012 2017

$108/kW$94/kW

$73/kW$61/kW

$51/kW $49/kW $47/kW

Target$30/kW

$275/kW$300

$250

$200

$150

$100

$50

$0

Initial Estimate

Balance of Plant ($/kW, including assembly & testing)

Stack ($/kW)

FC s

yste

m c

ost

($/k

W n

et)

Projected Fuel Cell Transportation System Costs per kW, Assuming High Volume Production

In terms of fuel cost, Dr. Robert B. Buxbaum of REB Research writes,REB Research makes hydrogen generators that produce 75 SLPM(Standard Liter per Minute) of ultra pure hydrogen by steamreforming methanol-water in a membrane reactor. A generator ofthis type produces 9.5 kg of hydrogen per day, consuming 69 gal ofmethanol-water. At 80/gal for methanol-water, and 10/kWh forelectricity, the hydrogen costs $2.50/kg., or $5,000 over a 120,000mile life. This is somewhat cheaper than gasoline, but about twicethe dollar per mile cost of a Tesla S if only electric cost is considered.


Nissan's Next Generation

FuelCell Stack, released in 2011


The hydrogen car is much cheaper on a per-mile basis, though when you includethe fact that the battery has only a 120,000-mile life, a 120,000 mile life is shortfor a luxury car, and very short for a truck or bus. 9

The DoE Fuel Cell Technology Office released a 74-page report titled 2012 Fuel Cell Technologies Market Report. The report concludes:

The trends for the fuel cell industry were encouraging in 2012. Total fuel cell shipments increased in 2012, in terms of total units and megawatts (MW). Other notable events highlighted include:

Total fuel cell shipments in 2012 increased 34 percent over 2011 and 321 percent over 2008.

Roughly 30,000 fuel cell systems were shipped in 2012, up from around 5,000 shipments in 2008, largely due to Japans residential fuel cell program.

The number of megawatts shipped on an annual basis more than doubled between 2008 and 2012, rising from about 60 MW to more than 120 MW.

The projected cost of a transportation fuel cell system was at $47 per kW in 2012 and continues to approach DoEs target of $30 per kW.

Fuel cell costs continue to decline significantly for light duty vehicles, with projected volume costs lower by more than 80 percent since 2002 and more than 35 percent since 2008.

The Obama Administration implemented new incentives for fuel cell and other advanced technology vehicles when it raised the fuel economy standard in the US to 54.5 mpg for cars and light-duty trucks.

Cumulative global investment in fuel cell companies totaled $853.6 million between 2010 and 2012. This is a significant increase over the $671.4 million invested in fuel cell companies between 2009 and 2011.10

Another major challenge for FCEVs is a nascentinfrastructure to produce, distribute, store,deliver and maintain hydrogen fuel. Today thereare only ten public hydrogen-fueling stations inthe United States, according to the DoE.California is spending as much as $20 million ayear to help bring the number of fueling stationsup to 100 within the next five years or so. Thereshould be 28 hydrogen stations spread acrossCalifornia's metropolitan areas by 2015, when allthree of these hydrogen models will be for sale.

One remaining question is the reliability, powerquality, endurance and longevity of mobile fuelcells.

Although fuel cells provide electricity at highefficiencies with exceptional environmentalsensitivity, their long-term performance andreliability under real world conditions remainslargely unanswered.

However, according to Fuel Cells 2000, Thematerial handling sector has provided the fuelcell industry with an early market and technologyindicator in the US, with deployments and ordersfor forklifts and lift trucks inching closer to 5,000.This includes many big name companies withmultiple repeat orders, such as BMW, Coca-Cola,Procter & Gamble, Kroger and Lowes. Thereport further states that fuel cells were found tolast longer than batteries, and operated infreezing temperatures as low as -20 F (-29 C).11


Fuel Cell Systems Shipped by Application, World Markets: 2008-2012

Source: Fuel Cells 2000

Fuel Cells 2000 reports, Fuel cells last longerthan batteries, and also operate in freezingtemperatures, which led Walmart, a company thathad already tested and deployed several hundredfuel cell forklifts at facilities in Ohio and Ontario,Canada, to choose fuel cell lift trucks for itssustainable refrigerated distribution center inAlberta, Canada. The fuel cell-powered vehiclesoperate in conditions as low as -20 F (-29 C).




In closing, substantial reduction of fossil fuels fromall sectors of the economy by renewable energy andzero-emission vehicles is the Holy Grail of modernsociety. Zero-emissions vehicles come in two flavors:BEV and FCEV. BEVs longer sales history and widerpublic-private support give them an apparentcompetitive advantage over FCEVs. After many decadesof false hopes, FCEVs market introduction may be a HailMary play by automakers to achieve stringent emissionstandards. To succeed, FCEVs must address BEVsperformance and endurance limitations. Highproduction costs and a relatively nonexistent hydrogen-fueling infrastructure may prolong the agony of successor failure. Until automakers sell FCEVs in volume, theyare expected to cost more than comparable gasoline-powered and electric vehicles, not including thepremium priced Tesla BEV, which is reported by Forbesto have outsold the nearest competitor by more than30%.12 Public-private investments in building ahydrogen-refueling infrastructure are essential for FCEVslong-term success. In the final analysis, BEVs are aninadequate technology push indifferent to consumerneeds and driving patterns. As a technology solution,FCEVs are arising from the dead because the industrybelieves further Lithium-ion battery advances will notsubstantially improve the range and performanceimpediments of electric cars. Will FCEVs and BEVsprosecute a war of attrition? My money is on FCEVs. n

References1. The Great Compression: The Future of the Hydrogen Economy, Lux Research, State of the MarketReport, December 11, 2012; http://www.luxresearchinc.com/news-and-events/press-releases/read/hobbled-high-cost-hydrogen-fuel-cells-will-be-modest-3-billion;https://portal.luxresearchinc.com/research/report_excerpt/12365

2. CES 2014: Toyota shows off fuel cell car that can also power a home, Jerry Hirsch, Los AngelesTimes, January 6, 2014; http://www.latimes.com/business/autos/la-fi-hy-toyota-fcv-fuel-cell-ces-20140106,0,884109.story#ixzz2wi7vjAQx

3. Fuel cell cars from Toyota, Honda, Hyundai set to debut at auto shows, Jerry Hirsch, Los AngelesTimes, November 17, 2013; http://articles.latimes.com/2013/nov/17/autos/la-fi-hy-fuel-cell-cars-20131117

4. Toyotas Hydrogen vs. Teslas Batteries: Which Car Will Win? Katie Spence, The Motley Fool,November 16, 2013; http://www.fool.com/investing/general/2013/11/16/toyotas-hydrogen-vs-teslas-batteries-which-car-wil.aspx

5. Hydrogen or electric? Showdown over the fuel of the future set for 2014, Robert Duffer, ChicagoTribune, Jan. 7, 2014; http://cars.chicagotribune.com/fuel-efficient/news/chi-hydrogen-or-electric-vehicles

6. Fuel Cell Technologies Program Record: Historical Fuel Cell and Hydrogen Budgets, U.S.Department of Energy, Record #: 13004, May 31 2013; http://tinyurl.com/barrystevens1005

7. Hyundai to offer Tucson Fuel Cell vehicle to LA-area retail customers in spring 2014; Honda, Toyotashow latest FCV concepts targeting 2015 launch, Green Car Congress, November 21, 2013;http://www.greencarcongress.com/2013/11/20131121-fcvs.html

8. 2012 Fuel Cell Technologies Market Report, U.S. Department of Energy, Fuel Cell TechnologiesOffice, October 2013; https://www1.eere.energy.gov/hydrogenandfuelcells/pdfs/2012_market_report.pdf

9. REB Research Blog, Random thoughts about hydrogen, engineering, business and life by Dr. RobertE. Buxbaum, February 12, 2014; http://www.rebresearch.com/blog/category/automotive

10. U.S. Department of Energy, Fuel Cell Technologies Office, Pathways to Commercial Success:Technologies and Products Supported by the Fuel Cell Technologies Office;https://www1.eere.energy.gov/hydrogenandfuelcells/pdfs/pathways_2013.pdf

11. The Business Case for Fuel Cells 2013 Reliability, Resiliency & Savings, Fuel Cells 2000; http://www.fuelcells.org/pdfs/2013BusinessCaseforFuelCells.pdf

12. Tesla Sales Blow Past Competitors, But With Success Comes Scrutiny, Mark Rogowsky, Forbes,January 16, 2014; http://www.forbes.com/sites/markrogowsky/2014/01/16/tesla-sales-blow-past-competitors-but-with-success-comes-scrutiny/

Dr. Barry Stevens

Barry is an accomplished business developer andentrepreneur in technology-driven enterprises. He is thefounder and President of TBD America Inc., a globaltechnology business development group serving the privateand public sectors in energy, fuels and water industries.

To learn more about TBD America, please visithttp://tbdamericainc.com.

The opinions expressed in this article are solely those of the author.

H IN HISTORY:


Two key elements spurred the rapid expansion of motor fuels(specifically gasoline) that would eclipse kerosene as the focus ofthe petroleum industry. The first was the development of theFord Model T in 1908, making the automobile something for theaverage person, instead of a luxury novelty for the wealthy. Thesecond was World War I, which prompted an international surgein mechanization and helped unify and advance the petroleumrefining infrastructure. Once the ball started rolling, there was noturning back.

RETAIL OPERATIONS

It is true that if customer loyalty were easyto come by, then every business would beshowing successful program retentions andextensive revenue growth year after year.So, how much loyalty is necessary to besuccessful?

For retail-petroleum or convenience storesite owners/operators who offer a car wash,research data suggests that retaining just5% more of the customer base can meanas much as a 50% gain in revenues*. Formost owner/operators, those kinds ofnumbers make the investment in loyaltyprograms well worth it.

So, why does loyalty pay so well and how can anoperator achieve a level of customer loyalty thatensures success month-in and month-out? It beginswith understanding that attaining customer loyaltyis not easybut, when achieved, it pays dividendsfar beyond any month-to-month retention programor a one-time discount coupon offer.

Those loyal customers, who can be counted on to return to abusiness time and again for a product or service, often do it notto save money, but to feel special, feel appreciated or as aconvenience for their personal time. Like most aspects ofsuccessful businesses, loyalty comes down to bottom-linedecisions.

Loyalty Car Wash ProgramsCreate Longevity, Revenue Growth

by David Dougherty


RETAIL OPERATIONS

What a car wash loyalty program needs todo is build and cement a strong, positivefeeling about a specific car wash. In fact, intheir fast-paced, jam-packed dailyschedules, customers have a lot on theirminds. They have a lot of businesses andservices fighting for their attention. Any c-store operator hoping to secure loyalcustomers for his car wash must be willingto fight. Fight for their attention, fight forthe right to be their choice for a car wash,fight to win their loyalty.

There are many paths to creating loyalcustomers, but it all starts withcommunication. From the attentiongarnered by a modern sign that drawspotential clients to a certain facility, to themessaging they receive at the entrystation, to the very real opportunity to landa return customer with a follow-up thankyou email, communication is critical togetting customers attention, holding itand re-engaging them in the future.

Give customers a reason to return to your car wash. Start by focusing on keeping themessaging fresh; dont let things become static, worn out or dated.

In order for a loyal customer to return, there must be some tangible payoff, a real benefit.If they are on the other side of town, will they make the effort to return, or will they dowhat is convenient?

When it comes to a loyalty program, the golden rule is: You get out of it what you putinto it. Good c-store operators are good at customer satisfaction, which is the foundationof customer loyalty. Customers have to be satisfied before they can become loyal.

Loyalty Needs CommunicationIf a car wash satisfies a customer, that doesnt automatically mean they will return forfuture washes. Therefore, operators must create extra incentives to really make surecustomers are loyal. Consider offering loyal customers a special car wash lane orproviding loyalty discount incentives.

The nail in the coffin for any c-store operator with a car wash is complacency. In order tocreate an effective loyalty program, an operator must be willing to go the extra mile tocommunicate and appeal to customers. Assuming a traffic pattern or catchy sign willkeep them lining up outside the bay or tunnel year after year is not a sustainablerevenue-growth model.



RETAIL OPERATIONS Loyalty Car Wash Programs Create Longevity, Revenue Growth

Recognizing that every customer wantsgreat service, ease of use and efficiency intheir car wash operation, creating a loyaltyprogram that is successful must begin withunderstanding the customers habits, likesand dislikes. Ask yourself: What kind ofexperience do I need to deliver in order tocreate a return visit, or even better, a loyalcustomer who will return every time?

Actively working to connect withcustomers, creating and maintainingrelationships, should be the firstexpectation in starting a loyalty program.The challenge is to choose the correctsystem for a local market based ondemographics and competition, and toconstantly monitor customers to makesure that the car wash is on the winningside of the market.

Whichever loyalty process is selected, thecar wash operator must be clearly focusedon it and confident that it is performingwell. Change is necessary to keep thingsfresh, but changing a program or loyaltyapproach should not be done for the sakeof change; it requires having a target orgoal from real data or behavioral patterns.

Embrace TechnologyWhen it comes to loyalty programs,technology is a friend. From the intuitivenature of the entry station to the onlineapplication the driver interfaces with at awebsite, to a cellular app that remindsthem of existing loyalty credits or a freecar wash, technology can manifest itself inmany forms.

Good use of technology starts withhardware that needs to be capable ofinterfacing with the client in an easy touse, intuitive manner. Ad screens at entrystations can deliver special offers,incentives for loyalty, or possibly even alocal business that may reciprocate in aco-branding arrangement. The entrystation should also be capable ofefficiently assisting the clients through thepurchasing process. Ensuring a simpleprocess will help create a positiveexperience.

David Dougherty David is the Senior Product Manager forIn-Bay Automatics at PDQ Manufacturing,Inc., De Pere, WI. PDQ Manufacturing isrecognized as the technological leader invehicle wash systems, providing superiorquality, outstanding support, andproducts that contribute to its customersprofitability. Brands include LaserWashand ProTouch In-Bay Automatic VehicleWash Systems, SwingAir and MaxAirDryers, Access Wash Activation Systems,Cortex and WALS. Products are sold andsupported worldwide through anextensive distribution network. For moreinformation, visit www.pdqinc.com or call(800) 227-3373. David can be reached [email protected].

and to create manageable loyaltyprograms, is our Wash Access LoyaltySystem (WALS). A web-based system thatprovides the data management andtechnological resources needed tooperate a successful loyalty program,WALS compiles real data that can beused to make educated decisions on thetendencies of potentially loyal customers.

ConclusionTo provide success for the car washoperating in a competitive petroleum-retail and c-store marketplace, making aneffort to set up a loyalty program that canattain a 15% to 20% retention rate is wellworth the cost and effort. To ensure thatonce a level of loyalty is achieved andthen not squandered, it is up to theoperator to initiate direct communicationand utilize technology and data tosustain a program. Sustained success andincremental revenue increases are thepayoffs for those efforts. n

*Based on The Loyalty Effect, by Fredrick Retchheld.

Any c-store operator hoping to secure loyal

customers for his car wash must be willing

to fight. Fight for their attention, fight for

the right to be their choice for a car wash,

fight to win their loyalty.

Radio-frequency identification technology(RFID) is one of the most exciting pay-station advancements of recent years,mainly because it makes the entry processhands-free and no hassle for loyaltyprogram members. An RFID transponderembedded on the drivers vehicle registersas the driver approaches the washentrance. An RFID reader captures thedrivers account information and relays itthrough the pay stations software system,which will automatically begin the washprocess. The client will not even need toroll down the window. This is anothermeans of focusing on generating thatpositive experience for your clients.

Subscription accounts offer clientsincreased flexibility to match theirpersonal lifestyle and individual washneeds. Subscription-based programs aregreat incentives for the loyal customer. Setup as a loyalty benefit, this style of accountallows the client to have their credit cardsautomatically charged on a monthly basisin exchange for convenient use at your carwash.

This type of program illustratesoutstanding use of technology to identifythe loyal customer who might be offeredthe special benefit while delivering avirtually labor-free opportunity to providespecialized treatment and service at thecar wash. Direct withdrawal of the fundsensures that little time is needed by thecustomer to manage the account. This is awin-win for the owner/operatorand theclient.

A reliable system, offering infinite codevariations and tracking abilities that can beused to identify the very best customers


Digital Marketing at the Dispenser

RETAIL OPERATIONS

Few words captivate the dispenser technology sector more thanthe word change. Anyone with even a casual understanding ofthe dispenser technology marketplace recognizes that change isconstantly afoot. And for the past decade, many petroleumcompanies, both small and large, have embraced video andaudio innovations on the dispenser to communicate with theircustomers and establish short- and long-term loyalty.

by Maura Keller

Jay Parsons, senior vice president of digital media and taxisolutions for VeriFone said that, traditionally, marketing at thepump primarily involved static posters and canned audio thatprovided a little bit of distraction, but did not really engageconsumers in a dynamic way while they fueled their vehicles.

Today, gas station and convenience stores have the ability tosecurely accept payments at the pump while actively engagingand influencing consumers purchasing behavior by deliveringuser-activated news, entertainment, promotions and targetedmessaging in a vivid, dynamic manner, Parsons said.

As Parker Burke, marketing director, media systems at GilbarcoVeeder-Root, explains, video and audio marketing at the pumpalso started out with pump toppers that sit on top of thedispenser, playing continuous contentidentical acrossfueling positions.

In 2011, Gilbarco moved to large, color displays integratedinto the dispenser, Burke said. This newer format continuesto drive higher consumer engagement, allowing for couponsto be printed via the receipt printer and only activated oncefuel starts flowing. Audio and video quality has also continuedto evolve with features including couponing, loyaltyintegration, and Amber alerts.

Indeed, media at the dispenser is no longer necessarilyconsidered nice to have, as it has now become a keydifferentiator for many retailers to not only promote in-storeitems, but also cross-sell items like car washes, promote loyaltyand rewards programs and offer rebates and coupons at thedispenser.

Making ConnectionsConsumers now expect a more interactive, entertaining,and personalized experience at the c-store, and theexperience begins for most consumers at the dispenser,said Cameron Nokes, senior product manager, media andloyalty, at Wayne Fueling Systems.

Consumers respond to impulse buy items like food,beverage, car wash and lottery, as well as to brand andloyalty promotions specific to the retailer.

Pay at the pump also is quickly evolving from a point ofpayment to a point of customer engagement andcommerce enablement that provides opportunities formarketers to deliver a variety of special offers and loyaltyincentives that help drive consumers from the pump intothe store.

With Verifones in-dispenser solution, VNET At the Pump,they typically manage ad sales and delivery of market-proven media content, which can be customized usingVerifones media content management tool. Such highlyflexible platforms provide valuable capabilities on the back-end including geotargeting, dayparting, audiencesegmentation and a host of custom solutions for advertisersand marketers of all sizes, Parsons said. Marketers lovethis new type of environment because they can count onguaranteed reach and frequency. Most importantly, fromtheir perspective, it delivers measurable results. Retailersare taking advantage of the opportunity to engageconsumers, drive traffic into their stores, boost sales andincrease loyalty.


Applause TV


When it comes to marketing at thedispenser, the type of content that iscommunicated visually and audibly is asvital as how it is communicated.

For instance, VeriFones programmingoptions allow marketers to createprograms tailored specifically to theirunique needs. They have the option tooutsource it to Verifone or managecontent on their own through a web-based portal. They can build their ownon-screen promotions and printablecoupons, and easily control what, whenand where content is shown at thedispensers.

Most retailers to date have partneredwith experts who specialize in developingprogramming and marketing programsfor on-the-go consumers, Parsons said.The retailers value the entertainmentand informational content, as well as thenationally funded ads that companies likeVeriFone provide as a turn key solution

that engage the consumer and drive in-store sales.

Marketers can opt to supply andmanageupload and schedulethecontent on their own, or let professionalcontent managers provide the contentloop. The latter consists of entertainingcontent, including news updates, sportsupdates, clips from television shows, etc.,a localized weather forecast, national adsand site specific promotions, Burke said.The loop is updated daily and the mix ofcontent is proven to grab the fuelingcustomers attention and drive theminside the store for higher marginpurchases.

As Burke explained, the content can beday-parted and customized to fit aparticular loyalty member profile.

Documents

FMN Magazine: Fall Issue 2014