Base oil and finished lubricant suppliers may be missing an opportunity to profit from material stored in Europe without even selling it. That was the message of Amedeo Giammattei of the OTX Group, explaining how a European Union directive on emergency preparedness can help lube marketers make money by leasing temporary reservations of their products in tank.

EU legislation introduced in 2009 mandated that each member state must have access to a minimum amount of reserve petroleum stock at all times in case of a civic emergency. Known as Compulsory Stockholding Obligation, the directive was updated in 2012 to expand the list of acceptable petroleum products in some member states to include finished lubricants and all groups of base oils.

Requirements vary among individual member states, and there are several options for meeting the obligations, Giammattei explained to the UEIL Congress in Malta last October.

Whos Responsible?

Some countries divide the responsibility between all private importers and suppliers of petroleum products that hold stock within their respective borders, based on market share. For example, he noted, the United Kingdoms CSO requirement at the time of the presentation was 10 million kilotons of petroleum products. A company holding 10 percent of the U.K.s domestic market share is responsible for a corresponding 10 percent of the requirement, or 1 million kilotons.

Others, such as Belgium, have created government-owned units, known as Central Stockholding Entities that are responsible for meeting and maintaining the countrys CSO obligation. Regardless of the scenario, most member states dont require obligated parties to actually own and hold all of the minimum volume of petroleum products. The obligors must just prove that they have exclusive access to that level of products at all times and can provide it if required.

One way of doing this is by reserving products from suppliers through whats called a CSO ticket – which is simply a leasing agreement that says a certain amount of a certain product is being held in reserve during a certain time frame, so that it can be purchased immediately if necessary. Thats where the opportunity for the lubricants industry comes in, he said. Suppliers can make a profit just by setting aside excess stock to be reserved through the purchase of CSO tickets.

Using the U.K. as an example, Giammattei pointed out that the company responsible for 1 million kilotons can meet its obligation just by maintaining that level of its own petroleum products stocked in storage at all times. But lets say that the company expects to only have 900,000 kilotons of stocks during the coming three months, he said. They have the option of delegating part of their obligation to another company that does have availability of any accepted type of petroleum stocks.

To do so, the company buys a CSO ticket to reserve 100,000 kilotons for the specific three-month period in question. The seller of the CSO ticket agrees to hold that amount of stock during that time frame in exchange for a reservation fee, which is usually expressed in euros per ton per month.

So lets say that the fee agreed upon between the companies [in the aforementioned example] is 1 per ton per month, he hypothesized. The ticket seller would get 100,000 per month and 300,000 in total. The fee is a pure margin for the seller, and can be used to mitigate inventory costs.

Yet, the deal benefits both buyer and seller, he pointed out, because its cheaper for the obligor to buy a CSO ticket than to actually procure physical stock. It is clear that buying CSO tickets is the cheapest way to comply with the obligation because the buyer saves on transport and storage.

Ticket Market

While it can be profitable, the market for CSO tickets fluctuates based on supply and demand, he conceded. As oil companies have been building stocks to take advantage of the current price structure on crude and other finished products, the present market environment for CSO tickets is characterized by increased supply and reduced demand, he told LubesnGreases-Europe Middle East and Africa. At the moment, the reservation fee is between 0.40 and 0.60 per ton per month. It was 1 [at times during 2014] and even higher than that previously.

Although ticket proceeds are lower now, Giammattei noted that his company has seen tickets traded for up to 10 per ton per month previously. Its good to be in the market, he said, because every ticket sold represents a pure profit, and if the price at the time makes sense, youre ready to contribute.

Therefore, he said, any companies holding petroleum products of any kind should at least consider the possibility of selling CSO tickets on their stocks. This is especially true for lubricant and base oil manufacturers, traders and distributors, he noted, because many may not even know the opportunity exists.

Meeting Obligations

Citing the directive, he noted that the definition for lubricants that can be employed to meet the CSO obligation includes all finished grades of lubricating oil, from spindle oil to cylinder oil, and those used in greases, motor oils and all grades of lubricating oil base stocks. Lubricants may not be accepted in every member state, but they are accepted in the two largest markets for CSO tickets – Italy and the U.K – he noted.

The possibility to sell CSO tickets on lubricants was introduced by the latest CSO directive [enacted in early 2013]. While relatively new, this opportunity has been captured by some lubricant companies. However, there is certainly room for engagement of more industry players that are either not aware of this possibility or are still in the process of evaluating how they can benefit from it.

Suppliers might also be unaware that they are able to participate in the CSO ticket exchange even if they are based outside the countries that are looking to buy tickets, or even based outside the EU. Of course, some restrictions and limitations apply on a national level in some member states. But, in principle, most states allow obligated entities to hold compulsory stocks in another member state, as long as the physical stock is held within the EU.

CSO tickets can be sold to European obligated entities only on stocks located within the EU. However, the stockholder does not need to be based in the EU in order to sell CSO tickets on EU stocks. For instance, companies based in the United States or Switzerland holding stocks in the EU could effectively sell CSO tickets.

While the ticket-selling process might sound easy, it actually requires several steps and a bit of knowledge of the market, Giammattei added. In some member states, the CSO ticket seller will need to register with the competent authorities as a simple formality. The company that wants to sell CSO tickets will need to identify its available volumes on different time horizons – short term, such as the following month versus the next few quarters or the next year.

States commonly have a minimum reservation period of three months, but he pointed out that in some countries its possible to trade tickets on stocks reserved for a single month, a single week, or even one day. The parties involved will then negotiate and agree on prices, which include the monthly reservation fee for the term and a fixed buying level for the stocks should they need to be purchased at any point during the reservation period.

The products are then approved by the competent authorities. During the reservation period, sellers report to the authorities on a monthly basis to prove that they are actually keeping the stocks on behalf of the buyer.

Traditionally, there were only two ways to participate in the ticket exchange. One was to trade tickets on a peer-to-peer basis, which involves a company reaching out to other companies that have availability to sell a ticket or that need to buy a ticket, negotiate a deal directly, and report to the authorities.

The other option is to hire a broker who can make the calls and the deals on a companys behalf. For these two alternatives, the process of buying and selling tickets was often a time-consuming process, he said. Because the ticket program is open throughout the entire EU, the number of potential counterparties is immense, making it hard for buyers to find available stocks and for sellers to maximize revenue opportunities.

Also, he said, the process that determines the pricing of tickets is not always well-informed because there is no visibility on all the transactions closed on the market. Thats where the Oil Ticket Exchange Group comes in. OTX created a simple, web-based market platform at a European level to facilitate supply and demand matching and bring more transparency to the market, said Giammattei, who cofounded the London-based OTX and serves as its managing director.

Through OTX, buyers and sellers can access the market in real-time, in a do-it-yourself format. The exchange program searches across all products accepted, automatically taking into account all member states restrictions and legislations so that companies dont even need to think about all the various constraints. OTX helps parties make decisions such as when to access the market based on forecasted price movements, he said, and facilitates draft agreements and the process of obtaining approval from authorities.

Launched in April 2014, OTX now has more than 130 members and is available in 21 EU member states, covering most of the countries where a significant volume of CSO tickets is traded. OTX places a lot of importance on building solid relationships with the competent authorities in Europe, as they are an important stakeholder in the market because they need to approve CSO tickets. We are constantly updating the evolution of the ticket framework, and we reflect the situation in the platform so companies dont need to worry about closing impossible deals.

Giammattei added in parting that there are very few cases of emergencies that would require the realization of CSO reserves – only three instances worldwide in the last 25 years.