Minnesota Middleman

FROM THE NOVEMBER ISSUE: Waterford Oil has grown into a vital piece of the Upper Midwest’s renewable fuel infrastructure.
By Tim Portz | October 18, 2017

To Brian Lynch, the fuel marketing and distribution game has changed because customers have changed. To help make his point, he recalls a time when his grandfather had a favorite brand of motor oil for his vehicles, and wouldn’t have dreamed of using anything else. “That just didn’t happen and then all of that changed and it was very painful for some people,” he says. Lynch, vice president for Waterford Oil Co., a family-owned fuel distribution company in Northfield, Minnesota, refers to customers’ preferences when he explains how and why Waterford does what it does in the liquid fuel marketplace.

Lynch says, historically, oil refiners established marketplace brands and built retail outlets around them. Customers loyally sought out branded filling stations. Connecting these stations and the refineries that produced the motor fuels were fuel marketers, sometimes called “jobbers.” They were a vital piece of fuel distribution infrastructure, trucking fuel from pipeline terminals to storage tanks, and making a small margin on the sale.

This model defined the fuel marketplace for decades, but is undergoing a change. Waterford Oil finds itself squarely in the middle of it.

First, long gone are the days of full-service, fuel-only filling stations. They’ve been replaced by convenience stores offering fuel, but also attracting customers inside, where they can purchase food and drinks. The offerings inside generate far higher profit margins than the fuel sold outside. While brand names, such as BP, ConocoPhillips and Mobil, still exist, an entirely different class of convenience store with no brand connection to any refinery whatsoever has sprung up. Retailers such as Kum and Go, Kwik Trip, Casey’s, Sheetz and Minnesota brand Minnoco have entered the space and are quickly gobbling up market share. Additionally, retailers like Hy-Vee, Walmart and Costco are coming in, betting that increasingly busy customers will combine their grocery and fuel purchases into one efficient stop.

Second, customer awareness of and demand for a renewable fuel product is on the rise. While ethanol can be found in nearly every gallon of oxygenated gasoline sold in the U.S., demand for fuel with more than 10 percent ethanol is growing.

Waterford Oil has found a home at the convergence of these marketplace trends and, as a result, is achieving impressive growth. Lynch’s parents bought Waterford Oil in 1983. At the time, the company was a small, local distributor. By the time Lynch joined the company after graduating college in 2000, ethanol was a reality in the fuel marketplace and Waterford's attention to this and other marketplace trends was fueling impressive growth. The company's revenues have increased by a factor of 20.

Small Footprint, Big Impact
Considering the sales volume that Waterford Oil achieves on a yearly basis, the company’s Northfield headquarters location is somewhat of a surprise. Two 18,000-gallon tanks and the frequent coming and going of fuel trucks are the only indications that the site is a vital cog in the fuel distribution wheel for the region.

“People will often say that if you are going to be a fuel distributor, you’ve got to have a bulk plant,” Lynch says. “We don’t believe in that. We use our pipeline inventory as our bulk plant and this facility really functions as a transfer station.”

Lynch says Waterford Oil is a “just-in-time” fuel distributor. While it does procure hydrocarbon fuels from conventional refiners, it maintains a light storage footprint by pulling inventory, as needed, directly from the Magellan pipeline that serves the Upper Midwest. Waterford does lease some storage at a handful of the fuel terminals that are connected to the pipeline, but prefers to keep the fuel moving, typically taking it from the terminal and delivering it to customers on the same day.

But Waterford handles ethanol and biodiesel differently. Most notably, they are not moved from producer to markets via pipeline. They move by rail or truck, through Waterford’s widely distributed roster of truck drivers. “We’ve got drivers located near here and all the way south to the Iowa border,” Lynch says. “It works out well because most of our trucks begin their day in the heart of ethanol production country.”

Lynch is quick to underscore the importance of the company’s storage and blending capabilities in the effort to grow the availability of higher blends of ethanol such as E15 or E30. Many retailers have the underground storage capacity to support these fuels, without the blender pumps to mix them as they’re purchased. “With our assets here in Northfield, we’re capable of mixing up any fuel blend our customers might want,” Lynch says.

Waterford Oil serves as a bridge to market availability of these fuels until the blending infrastructure at retail locations catches up. Recently, Lynch notes, the state of Minnesota passed a B20 mandate and many in the diesel and biodiesel marketplace are wondering how the fuel distribution infrastructure will accommodate the new mandate. “There is still a pretty significant infrastructure gap for blending in the state and what we do with regard to fuel blending is only becoming more important,” he says. Without the blending capabilities of companies like Waterford, the policy victories won by the industry would struggle to gain footing and momentum in the marketplace. “I think, ultimately, the responsibility of achieving mandates like a B20 mandate and whatever might follow will ultimately fall to the distributor,” Lynch says.

Looking Ahead
Lynch expects the demand for renewable products to continue to grow and is positioning Waterford Oil to be able to help meet it. “I think that E15 and E30 are going to have a pretty big role in the market,” he says.

Lynch sees two primary catalysts behind the demand drive. First, octane value in ethanol is getting more traction in the marketplace. “I tell all of my customers that E30 is likely going to be a pretty good substitute for any high-octane needs their customers might have, especially in newer vehicles,” he says. “It really is the perfect substitute for that high-octane need, particularly in the summer months when there is an octane squeeze and that premium product is more difficult to find. E30 fills that octane need quite well.”

Next, he points to the efforts to increase consumer awareness of renewables, specifically higher blends of ethanol and biodiesel, and is confident they are beginning to bear fruit. “Kwik Trip is offering E15 at pretty much every store. Minnoco and Hy-Vee here locally and other retailers like Sheetz out east are all working to make their customers aware that it is available,” he says.

Lynch sees the demand in the company’s other sectors, too. Waterford does robust business with farmers and farm operations, and Lynch says he sees a strong demand for ethanol and biodiesel in that market. “Our agricultural customers often select fuel blends with higher rates of ethanol and biodiesel than you can buy normally, but they can purchase whatever they’d like because we can mix it up for them right here. E30. B30. It doesn’t matter, we’re happy to make it up for them,” he says. During harvest, Waterford’s agricultural business is brisk and a few of his customers take semi-loads of fuel.

Just half of Waterford’s business is tied to convenience store customers. The other half is spread across a number of different categories including marine, aviation, agricultural and heating industries. “We’re not just a conventional reseller anymore,” Lynch says. “We’ve evolved into a true supplier and trader. We’re taking on every role that makes sense for us and we feel we can do well at.”

Finally, Lynch sees Waterford Oil growing stride for stride with the renewable fuel industry, particularly in Minnesota. “Minnesota was one of the first states to have a mandate, and it was a great place for the industry to take hold,” he says. “We’re right in the middle of the Corn Belt. It gets hot here. It gets cold here. This is the perfect place to prove the viability of these fuels, but for usage to grow like the renewables guys want it to, they’ll need distributors. That’s the role we’d like to play.”

Still, Lynch is reluctant to cast himself as an industry advocate or catalyst for change. His customer focus is what has helped him dramatically grow the business and he’s committed to that approach. “I’m not here to reinvent the wheel,” he says. “My responsibility is to stay attuned to what my customer wants, and then give it to them.”

Author: Tim Portz
Executive Editor, Ethanol Producer Magazine