The three foreign companies, Shell, Total and Petronas, entered the fuel retailing sector in 2004 and operated the fuel retail stations using the company-owned dealer-operated model. However, these fuel retail stations were built to the high internal standards and the operating procedures, especially those of Shell and Total, and were based on their successful experience gained from retailing fuels in many other countries. Even with the disadvantage of selling only the higher-priced non-subsidized premium fuels and having a limited number of stations, Shell and Total succeeded in making their branded fuel retail stations more trustworthy than Pertamina’s.
Pertamina’s fuel retail stations were perceived by customers to be providing lower quality, incorrect quantity and poorer service. This perception of foreign brands being better was interpreted by Pertamina’s executives to be the result of the
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foreign oil companies operating their network under the company-owned company-operated model. This is an incorrect interpretation as the interviewees in the foreign oil companies in Indonesia confirmed that they were operating under the company-owned dealer-operated model. Fearing that this would erode its market share, Pertamina added company-owned stations to match the number of fuel retail stations by the three foreign oil companies and operated them directly (Figure 9). This was in anticipation that Pertamina would be restricted from selling subsidized fuels just like the foreign oil companies. Pertamina’s vice president for retail fuel Basuki Trikora Putra said that “the company’s COCO stations will be ready to implement the restriction because we have a new design to accommodate the new regulations” (The Jakarta Post, 2010).
In early 2013, Petronas sold its network to Pertamina. Pertamina’s investment planning and risk management director Afdal Bahaudin said that “fuel stations formerly belonging to Petronas, acquired by Pertamina would become company-owned, company-operated stations” (The Jakarta Post, 2013). This showed that
Figure 9 Pertamina's COCO network
Source: Assembled from information given by interviewees and archives
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Pertamina considered the company-owned company-operated model to be the more superior organization structure. The company-owned company-operated stations improved Pertamina’s exposure to risks but would also raise customers’
expectation. This would subject Pertamina to greater impact of adverse event.
This is shown on the risk matrix as “I3” (Figure 8 and Table 7).
Malaysia 4.3
4.3.1 Background
Licenses to operate fuel retail stations in Malaysia were issued preferentially to local Malays or Bumiputera. Fuel retail stations were regulated by the Ministry of Domestic Trade, Cooperatives and Consumerism under the Petroleum Development Act. The Act required oil companies to seek approval from the ministry to develop new fuel retail stations. In addition, the station operators required a license to retail controlled items under the Control Supplies Act 1972 from the same ministry. Accordingly, oil companies can get approval for one licence each to operate a fuel retail station directly. The licenses for the rest of the
Oil Company No. of Sites COCO CODO DODO
Petronas 995 0 975 20
BHP 325 1 272 52
SMC / Petron (XOM) 558 0 417 141
Chevron 435 0 221 214
Shell 1039 1 817 221
Total Count 3352 2 2702 648
Table 8 Stations by type of operations in Malaysia
Source: Gilbarco Veeder-Root (Asia) – 2011 Survey
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fuel retail stations in the network went to independent operators as it was the government’s policy to grow local entrepreneurs and specifically to increase the business participation of local Malays (Lee, 2005). Therefore, most of the fuel retail stations were either the company-owned dealer-operated and dealer-owned dealer-operated models with the former being the dominant organization structure (Table 8).
Shell and the defunct Standard Oil expanded into fuel retailing sector to cater to the growth of vehicles when Malaysia became the global source for tin and rubber.
From the first fuel retail station set up by Standard Oil in KL in 1921, the fuel retail network remained for many decades under the control of foreign oil companies like Esso, Mobil, BP, Shell and Caltex.
In 1974, the national oil company Petronas was founded and it subsequently grew to be a major oil player in the world (Von Der Mehden, 2007). In 1981, Petronas
Figure 10 Malaysia vehicle and station population
Source: AJTP Information centre (vehicles); Gilbarco Veeder-Root (Asia) (stations)
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Dagangan Sdn Bhd, a wholly owned subsidiary of Petronas, was formed to manage fuel retailing and it has steadily gained position in the fuel retailing sector reaching the number two position in network size (PETRONAS Dagangan Berhad, 2013).
In 1999, Esso and Mobil merged to form ExxonMobil. BP was sold to Boustead Holdings and the chain was reimaged and renamed to BHPetrol (Boustead Petroleum Marketing Sdn Bhd , 2013). In 2011, the network of ExxonMobil was acquired by Petron of Philippines (Petron Malaysia Refining and Marketing Bhd, 2013). Even with the change of oil companies, the country has managed to grow and spread fuel retail stations in line with vehicle growth (Figure 10). There was adequate fuel retail coverage throughout the country and there were no unlicensed fuel retail stations that were common in the other large SE Asian countries.
Although Malaysia has successfully exploited its own oil resources and elevated itself with its oil wealth, this wealth has to be shared with its citizens. Thus Malaysia became one of the countries in the world to subsidize fuels sold from fuel retail stations. Subsidies were given when the actual price of petrol and diesel were higher than the fixed retail pump price set by the government. This pump price included both the wholesale and retail margins. One of the reasons the Malaysian government had to control the issuance of licences for operating fuel retail stations was to stop oil companies being subsidized on both margins7.
7 Wholesale’s and dealer’s margins were fixed at M$0.05 and M$0.1219 per litre for petrol respectively and M$0.0225 and M$0.07 for diesel respectively.
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Fuel subsidies in Malaysia were administered reasonably well but the low pump prices have resulted in abuse and fraud. With the subsidy making these fuels one of the cheapest in the region, vehicles from Malaysia’s northern and southern neighbours, Thailand and Singapore, were crossing the border to get its cheap fuels. Interviewees also reported that subsidized fuels were also being smuggled out of the country but said that this illegal activity was most likely carried out from the network of commercial stations selling subsidized fuels to the fishery sector.
With the low fuel prices, Malaysia has had difficulty introducing biofuels.
Ethanol-blended gasoline was not possible as there was insignificant ethanol production in Malaysia. While biodiesel from palm oil could be introduced into Malaysia, it could not compete with the low subsidized diesel price. In addition, Malaysian biodiesel industry could hardly survive because of the high price and demand for palm oil internationally. Therefore, there was no network selling alternative fuels in Malaysia.
Based on the background information, I place the start positions of the oil companies at the centre of the risk matrix (Figure 11). The licencing restriction resulted in the enforced company-owned dealer-operated and the dealer-owned dealer-operated arrangements, which meant that risks are shared between the oil companies and the dealers. Other organization changes to manage risk are summarized in Table 9 and elaborated below.