July 29, 2008

Rosneft Looking to Italy for Expansion

Russian oil firm Rosneft has stated its aim to start selling fuel in Italy. The Mediterranean country represents a decent prospect for Rosneft as the lack of price competition would provide it with an opportunity to undercut its rivals. Moreover, Rosneft's refining capacity in the Black Sea means that it would not be dependent on market incumbents for supplies.

Russian oil major Rosneft's European representative, Alexander Karpushin, has revealed that the company is looking at the different possibilities available to the company in the Italian market. However, he added that, as yet, no final decision has been made as to whether Rosneft will buy a distribution chain or some other assets.

Although the market is relatively fragmented, with nine players, most of which have a market share of less than 10%, making up the bulk of the market, this has not been sufficient to induce the levels of price competition that are present in markets such as France and the UK.

Because of the lack of competition, Italy has some of the highest fuel prices in Europe. For example, during 2007, the average price of one liter of regular unleaded gasoline in the country was E1.29, compared to E1.26 in France and E1.20 in Germany. Also, as the levels of competition have not been sufficient to weed out the weaker players, Italy has the highest number of service stations to cars in Europe. While there are 3,326 cars for each service station in the UK, there are only 1,596 cars per service station in Italy.

However, Italy should be considered a good market for Rosneft to penetrate. The lack of competition has created a situation whereby fuel retailers make high margins on fuel, providing Rosneft with an opportunity to come in and undercut the other players, possibly by a significant amount if it opts for a basic no-frills service station offering. Indeed, during 2007 the average margin on a liter of petrol in Italy was the second highest in Europe, after Luxembourg and Norway.

Rosneft's large and flexible refining capacity should also stand it in good stead to enter the Italian market. In the past, many of the smaller players have been largely dependent on incumbents, such as the national oil company Agip, to source their fuel. However, as one of Rosneft's refineries is located on the coast of the Black Sea, and it has nearby shipment facilities, the company should be able to transport its fuel to Italy relatively easily.

Of the markets in Western Europe, Italy would be a good choice for Rostneft. The lack of competition and the high margins made by fuel retailers in the country provide Rosneft with an opportunity to undercut its rivals. Furthermore, the fact that it has refining capacity close by places it in a stronger position than many of the smaller players which are dependent on incumbents for supplies.