ExxonMobil Ending Contract With PWI

Retailers question future strength of Mobil brand in Houston

Carole Donoghue, Petroleum Editor

HOUSTON -- Changes are afoot for the hyper-competitive Houston market, CSP Daily News has learned. Exxon Mobil Corp. is not extending its supply contract with large distributor Petroleum Wholesale Inc. (PWI), leaving marketers to wonder what will happen now to the Mobil brand in the city.

PWI had a 10-year marketing contract with ExxonMobil that expired in late 2010. ExxonMobil had extended the agreement but has now told the company that the supply deal is over. Some retailers said they have been told by PWI to get their Mobil signs down by month's end. Some of the stations are operated by open dealers, some of whom have time left on their supply agreements with PWI, sources said.

In all, there are approximately 60 Mobil-branded stations that will be affected by the decision.

It is not clear why ExxonMobil has decided not to renew its contract with PWI, which is the last of the refiner's so-called "national accounts." "We do not comment on business transactions with our branded wholesalers," said an ExxonMobil spokesperson.

Market speculation on the parting is rife. Some suggest PWI may not have met ExxonMobil's volume requirements following the recent rebranding of some of its Mobil stations to the Texaco flag. Others point to bad press from lawsuits filed by the state alleging pump miscalibration and commingling.

PWI confirms its relationship with ExxonMobil is ending. "All parties knew at the outset that the contract was for a finite term and that the goal was to divest certain assets over time," PWI general counsel Stuart Lapp told CSP Daily News. He denied that the formal debrand date is March 31, saying the company is still in negotiations with ExxonMobil. It is PWI policy not to divulge details of its contracts with anyone who is not party to the agreements, Lapp said.

ExxonMobil is exploring its options for the Mobil brand. Some of the open dealer sites could be converted to the Exxon flag if the retailer agrees to his contract being assigned to an Exxon wholesaler. But there could be station conflicts. ExxonMobil has a "strategic site" policy under which it will protect some sites from competition within a three-mile radius. Those stores are usually high-volume units with more than four multipump dispensers (MPDs) and a nearby traffic light. Outlets considered "secondary" or "marginal" get no such protection. If there are conflicts at more than five to 10 strategic sites, the Mobil brand may be retained, but there are likely to be fewer Mobil sites in the city in future, sources said.

PWI has been trying to persuade some of the dealers to rebrand, with ChevronTexaco the primary flag being touted. "Some of the sites that are currently branded Mobil have been approved for rebranding with the ChevronTexaco brand," Lapp confirmed.

PWI could also try to bundle some retail supply contracts into an assignment deal with another large wholesaler, such as Susser Petroleum, sources said. Susser flies several flags, including Chevron, Texaco, Shell, Exxon, Valero, ConocoPhillips and CITGO among them.

PWI has sold contracts to Susser before. In 2010, Susser bought one fee property and 39 wholesale dealer contracts from PWI, Lapp confirmed. A 10-year bundled assignment deal could earn PWI around $1 per gallon, depending on how much volume PWI could put together, some jobbers said.

Lapp denied that PWI is contemplating an arrangement with Susser on the Mobil units. "Petroleum Wholesale owns the real estate at a majority of the sites that are still branded Mobil and all of the sites will be accommodated as the Mobil contract reaches an end," Lapp said.

PWI is in full compliance with the Petroleum Marketing Practices Act, he noted in response to a question.

PWI has been a Mobil jobber since 1993 when Mobil granted the company exclusive rights to its flag as part of a move to resurrect the brand in the city. Mobil gave PWI a one-of-a-kind pricing arrangement and sold the company an idled terminal that it agreed to supply from its Beaumont, Texas, refinery.

The deal also included $20 million to cover PWI's station conversion costs, according to reports at the time. In return, PWI switched 90 of approximately 200 sites it supplied to Mobil from other brands, primarily Diamond Shamrock. PWI has always maintained that the $20 million figure was "exaggerated."

When Exxon bought Mobil in 2000, the Federal Trade Commission (FTC) ordered Mobil to divest assets in Houston and Bryan-College Station, Texas. Mobil turned over 102 supply contracts to PWI. Under the FTC consent order, PWI also received a 10-year license to the Mobil brand. The deal was to cost nothing the first five years, but ExxonMobil was allowed to charge PWI a licensing fee that could increase annually for the next five years. The clock started running on the fee in April 2005.

PWI has had trouble with Texas attorney general Greg Abbott in recent years.

The company was accused of miscalibrating 985 dispensers in order to shortchange customers but the trial judge threw out a $30 million damages verdict in 2010 when it was discovered that the jury had examined documents that had not been entered into evidence. The state sued PWI again in August 2011, alleging that its gasoline did not contain promised octane content on more than 1,000 occasions. The state contends that PWI regularly cross-dumped fuel, dropping more than 500,000 gallons of regular into premium and midgrade tanks.

PWI has called the latest case "a vindictive prosecution of a responsible and respected family-owned company." PWI also settled a 2009 case brought by the state over the way it disposed of credit-card records, paying $100,000.