Petroleum Licensing Ultimate Guide

Invictus Business Solutions: Petroleum Licensing Specialists
written: Rorisang Maubane

Factors to consider when setting up a new petrol filling station in South Africa

To ascertain whether an investment in the petroleum industry is the correct decision for you, it would be beneficial to look at the factors involved with setting up a petrol station. These may aid you in deciding if and when to invest and in what form of operation.

There is a multitude of factors that play a part in the setting up of a petrol station in South Africa; some of these are factors that a potential owner can control or affect and others are external factors that affect an owner’s business, but over whom he/she has no control.

Let us now look at these factors in greater detail.

Profitability, Viability and Sustainability

The primary and perhaps the most critical factor in deciding whether or not to open up a petrol station in a specific location is profitability. Whether or not a future site is expected to provide a return on investment is a question many potential investors view as the deciding factor for the decision-making process.

If a station is projected to offer good returns, a timely break-even schedule, and steady income, it will more likely than not be viewed as a viable option by an investor. The viability or ‘desirability’ of a location will hinge on many factors, not the least of whom is how much money it is expected to make its owner(s). How desirable a station is will determine directly whether or not an individual decides to invest in a particular location.

Another factor that impacts the profitability of a petrol station is the cost. A petrol station, like most other businesses, will have both fixed costs and variable costs. Fixed prices include the cost of labor for fixed staff, overheads associated with the location and the taxes and fees involved in the retailing process. Variable costs include the price of fuel, unplanned maintenance works, and costs associated with reasonable force majeure events.

One should always keep in mind that because the fuel price is variable, and retailers are operating on fixed margins, the service station owner needs to grow sales volumes. If turnover increases, expenses will also increase due to merchant service, cash handling, and other turnover related costs. This will, in turn, impact profitability.

Another factor that must be considered related to the two discussed above is the projected rate of growth, i.e., sustainability. Even if a petrol station is expected to provide high returns in the short-term, but seems to stagnate in the long-term, it may not be a wise decision to invest in such an endeavor.

The long-term growth of any business, including a petrol station is crucial in deciding whether or not to open one. If an owner can foresee absolute and sustained growth, it gives him/her good reason to bank on this as a good investment. If on the other hand it is estimated that returns and sales from a particular business will decrease as the months and years go on, it may prove costly to an entrepreneur to hedge their bets on that specific venture.

It is essential to keep in mind that continued societal success, not just financial gain is what the government is hoping for when granting a license to a new proprietor; the growth potential and a station’s ability to provide steady work and value addition to the neighborhood it operates in is thus a key consideration for the state and the company alike. The strength of a station to achieve these objectives is a factor one should bear in mind carefully before deciding on the correct course of action.

The Future of the Industry

Another critical influencer of an individual’s decision regarding whether or not to set up a petrol station is the industry in question. Whether an industry is growing or is in decline, whether it is easy to access or is closed off and whether it offers peace of mind to an investor or becomes a constant source of nuisance to him/her are all valid questions one must ask before diving in headfirst to into a marketplace that may or may not be suited to that person.

As we discussed in the previous chapter, the South African petroleum industry has been and continues to grow at a steady rate. Contributing to more than 8% of the country’s total gross domestic product (GDP); fuel import, refining, and retail is only expected to grow over the next five years as the demand for petroleum increases. The country’s dependence on fuel as the main driving force of its transportation sector secures the industry’s position for the long-term, as an industry that is vital to the economic development of the nation.

Indeed, the industry is heavily regulated, and there seems to be no sign of the government easing-up any time soon, but that can be interpreted in one of two manners by a potential new entrant. Yes, the price of petrol is fixed by the government to ensure that companies do not engage in price wars and no oligopolies are formed. This can, however, be taken either as a cap on profit margins by the station owners or as a guarantee that absolute returns shall be seen irrespective of other conditions.

Although it is safe to assume that an industry such as South Africa’s fuel market, which is tightly-controlled and heavily-competitive, offers minimal room for money maximization, it should also be noted that this also affords it a sense of security, as the government would not allow such a controlled and essential industry to fail. A substantial government interest can limit opportunities, but it can also provide assurances to those who wish to view the glass as half full.

Finally, the presence of large established players in this industry also indicates that it is in good health and should continue for a long time. After all, if companies like British Petroleum and Shell have been willing to invest large amounts into this industry feel as though it is a safe investment for them, chances are it should be a safe investment for you too.

The State’s State of Mind

Another factor to consider before opening up a petrol station in South Africa is the most significant player in this field and the one who has the most control and potentially the most to gain and lose from the industry; the Government of the Republic of South Africa.

The government is an inevitability and not an option if you choose to partake in the fuel business in South Africa, as it (either directly through its various executive bodies such as the DoE and NERSA or indirectly through the country’s largest and only pipeline providers Transnet) plays a significant part in every stage of the oil retail business. 

The government has been known to suffer from the same afflictions that plague many developing nations; namely corruption, inefficiency, and a large amount of state-sponsored red tape. The official processes for permits, licenses, and approvals are tough to navigate at times.  

The government may be far from perfect, but at the moment at least it appears as though it is supportive of the private companies and their efforts in the development of extracting and refining oil and gas. Is the current tax framework conducive of foreign investment in the country, will I be able to conveniently expatriate the money I make in this business are both questions that, depending on who you ask, either the incumbent government’s policies are lagging far behind in or are in-line with other countries in similar positions in their economic development.

Should you find yourself with an investor-friendly government that incentivizes you appropriately to be part of the new forays into the industry, it may be a risk worth taking. Overall, it is far from the worst time to invest in oil in South Africa.

Onus On the Owners

The final factor to consider when setting up a petrol station is whether or not it is something you have enough of an interest into for go the opportunity cost on both your time and your financial and non-financial resources.

In simpler terms, are you as a potential investor, confident of being able to navigate through the challenges posed by the government institutions and the general public alike? If you believe that you can understand and evaluate the factors both in your control and those out of your control well enough to succeed as a station owner in the South African fuel market, it may very well be a worthwhile investment.

The pressure of delivering as a petrol station owner, either as an independent brand or as a franchisee of an existing company is something that must be taken into account before a decision to open up a station is made. Depending on the weightage you place on your knowledge and interest in this market, your drive and passion can either be the least important factor in deciding to open up a petrol station or the essential element.

Irrespective of whether you as a potential owner choose to place significant weight to this or not; one undeniable thing is that it is a factor that you should consider before deciding on whether setting up a petrol station in South Africa is correct for you or not.

At Invictus Business Solutions, we provide petroleum licensing services for wholesaling and retailing business. Contact us on 071 913 5223 /  info@petroleumlicensing.co.za or visit our site on www.petroleumlicensing.co.za

 

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