Colin Harvey, managing director of Shell UK Downstream Oil, said the intense pressures facing petrol retailers, particularly from supermarkets, and changing patterns of demand were resulting in a fundamental restructuring of the UK downstream oil industry.
Mr Harvey told the Institute of Petroleum European Retail Conference in Birmingham that overcapacity in the UK industry would result in the closure of many filling stations. "The 38,000 sites in 1965 have already fallen to 16,000. I believe that the rate of closure will accelerate and we may end up with half that number of outlets," he said.
The warning comes in the wake of the national launch by Esso, the market leader, of its Price Watch campaign in January, which was widely credited with intensifying competition. The Esso move, which promised to match competitors' prices within a certain radius of individual filling stations, was in response to the substantial market share, now estimated at around 22 per cent, carved out by supermarkets in recent years.
Shell currently has 1,905 filling stations, just behind Esso, but the main impact of the price war is expected to fall on small, independent retailers who made up around 9,500 of the 16,244 outlets recorded in the UK at the end of last year. James Frost, chairman of Frost Group, one of the biggest chains not owned by the majors, has said as many as 3,000 independent retailers could go out of business this year. The Petrol Retailers Association reckons the total number of outlets could dwindle to 9,000 or 10,000 by the end of the decade.
Mr Harvey echoed Mr Frost's forecast that continuing low profit margins could lead to further moves towards mergers or takeovers. The Shell chairman said this was most likely to affect wholesalers and that there was a possibility that one or more refineries would be closed. Earlier this year, BP unveiled a deal to merge its downstream interests in Europe with those of Mobil.
Mr Harvey said overall fuel demand remained static. Within that, however, petrol sales were falling and diesel sales rising. The rise in demand for diesel could make redundant previous investment by British refiners to meet rising petrol demand, he said. The switch to diesel could force oil groups to launch heavy investment programmes amounting to possibly pounds 3bn over the next 10 years to increase the yield of diesel. But he said "producing more diesel would make it more difficult to meet rising demand for aviation kerosene. So imports are likely to rise, to the detriment of this country's economy."
Mr Harvey warned, however, that nothing should be done to limit market forces. "Nobody owes integrated oil companies a living. They can only succeed by ensuring that each sector of their business can compete with all comers," he said.
Separately, Cullens, the convenience store operator, said it had signed an agreement with Mobil Oil to develop a number of shops on the oil company's forecourts in the next five years.