The Question of Supply

The Question of Supply

In Miami, jet fuel reps discuss the future; cost of storage; ATA 103

By John F. Infanger, Editorial Director

March 2001

MIAMI — Several hundred representatives of the oil industry, distributors, FBOs, and others convened here in January for the 3rd annual International Jet Fuel Conference & Exhibition, hosted by the Armbrust Aviation Group, publisher of the Jet Fuel Report.

The future of product supply was at the top of the agenda at the conference, which coincided with the release by the Department of Energy it’s own projections. In sum, the DOE expects a fairly stable supply and pricing environment through 2020, despite the experience of recent price spikes which saw crude go from $10.50/barrel in January 1999 to $30/barrel within a few months.
Much of the recent turmoil in pricing, says Mark Wagner, who heads up Phillips 66’s aviation department, can be attributed to the Asian/Thai economic crises in the mid-90s. It was the Asian markets which had driven up demand on the supply side. The Asian downturn triggered a reaction by OPEC nations in an effort — largely successful — to drive up prices to support their own economies. Says Wagner, "OPEC has never been this well united."
To appreciate the short- and long-term history of the oil industry, say insiders, one needs to understand the economies of the industry. That is, in changing times where do the players in the oil industry place their resources, their dollars?
Another key factor impacting the downstream side of the business — refining and distribution, and subsequently jet fuel — is the fact that in the U.S. many such suppliers have backed off in favor of exploration, say sources. Also, the U.S. environmental movement has essentially thwarted expanding into downstream — it is difficult to get built a new refinery, pipeline, etc.
(A significant, and contrary, development following the conference was the February 5th announcement that Phillips Petroleum Company would acquire refining company Tosco Corporation for $7.49 billion. Phillips, like much of the U.S. industry, had been moving away from refining and marketing of supply, according to sources.)

Doe Projections
In its Annual Energy Outlook 2001, DOE forecasts stable prices for the next 20 years despite a projected demand rise of some 55 percent. OPEC production is expected to nearly double during that period, from some 30 million barrels per day to 57.6 million. Non-OPEC oil production is projected to rise from the current 44.8 million barrels per day to nearly 60 million.
U.S. oil production is expected to continue to decline at an annual rate of 0.7 percent, and by 2014 OPEC will account for more than 50 percent of U.S. imported crude, says DOE.
The Jet Fuel Report, in its analysis of the DOE findings, criticizes the fact that the agency takes a "business as usual" approach and fails to take into account world political hot spots that also supply significant amounts of crude oil.
North America is expected to lose its position as the number one refiner to Asia within the next five years. U.S. refining capacity will grow only modestly, says DOE.
Consumption of crude’s light products, including jet fuel, will continue to grow while, at the same time, the cost to produce such products grows as well. Processing costs are projected to grow some six cents per gallon from 1999-2020. During the period, jet fuel consumption should grow by 1.2 million barrels per day.
To paraphrase Jet Fuel Report: Will aviation concerns grow as dependence on imported jet fuel rises? And, will demand in other countries lead them to be less willing to export product to the U.S.?

Role of Airports
Jonathan Howe, director general of Airports Council International, based in Geneva, Switzerland, told the conference that individual airlines are having a declining impact on airports as the latter move away from exclusive agreements with carriers. "I think this will have some impact on your business," he says.
Howe says that airports, particularly in Europe, are looking more and more at fuel as a potential profit center but adds, "the airports are not going to want to antagonize their best customers." In the final analysis, he says, the end result will come out of constructive negotiations.

Gold-Plated Farms
A general discussion regarding airport fuel facilities led to a consensus that too frequently airports over-build facilities. According to conference sponsor John Armbrust, a higher cost for fuel farm infrastructure leads to increased costs to airlines, higher customer rates, and ultimately a negative impact on the use of the airport and its facilities. The more a facility costs, the more it takes for upkeep and debt amortization.
A fuel facility is justified only if the costs are reasonable and reconcilable, he says.
Other concerns raised about fuel farm construction at airports:
• Among air carriers, the number of staffers who can offer valuable input for a fuel farm is lessening.
• To help contain costs, engineering should be done up front. Often, there’s a "rush atmosphere" to get the farm up and running.
• "What we’re all saying is you (airports) have the wrong process," says Armbrust. That is, it is airports, authorities, and politicians that generally drive such an infrastructure building process without first consulting the airlines, engineers, designers, manufacturers, etc.

ATA 103
A panel discussion on fueling operations spurred a lively discussion of Air Transport Association rule 103, which the panel defined as an attempt to set guidelines for fuel quality when the major fuel suppliers began getting out of the U.S. airport market.
ATA 103, say sources, assumes a separate refueler maintenance program will be put in place by an operator. In fact, they say, many refueling companies use it to serve as a guide for refueler/chasis checks.
Agreement was reached that some sort of standard for refueler maintenance should be set, perhaps by another trade association which represents such operators. At the least, say sources, ATA 103 should clearly say what it is not.