Deregulating the petroleum downstream sector
One other issue dear to my heart is the need for the government, the regulator and industry to take a collective decision on what quantity of petroleum products should constitute adequate national strategic reserve stock, and how this can be funded. This is very important because the petroleum industry is key to the survival of the economy and the security of the country. External supply disruptions or internal refinery production failures should never make this country run out of any of the petroleum products; not even for one hour!
Advertisement
Therefore, for there to be predictability in petroleum products supply situation the industry as well as other sectors of the country can plan, it is important that the government and its agencies, working with industry, determine what we consider to be our national strategic stock level for each of the products and work out a sustainable mechanism to fund it.
I personally believe that after arriving at the specific quantities as well as the cost involved, we can introduce a dedicated margin, with sunset clause, to enable us build enough reserves.
The situation where for several years now, the industry has mostly operated “from hand to mouth” must stop. The Ghanaian consumer deserves uninterrupted supply of petroleum products no matter what we may term “external factors”.
Greater focus on downstream sector
At the policy level, there should be greater focus and prominence given to the petroleum downstream sector. With the discovery of oil, there is the tendency for the Ministry of Petroleum to focus more attention on the upstream sector to the detriment of the downstream. But it should be understood that the downstream sector is one of the key growth drivers in the economy.
It contributes over 10 per cent to Gross Domestic Product (GDP) and is more resilient because it withstands the storms of international price volatility. Additionally, it is that sector of the oil and gas industry in the country, without which virtually nothing moves in this economy.
Inasmuch as crude oil exploration and production in Ghana is very important for the economy, the Ghanaian economy can still perform well without crude oil. In fact, judging from the economy’s performance since 2011 when crude oil revenue became an important part of our national income computation, the non-crude oil Real GDP grew on the average by 6.3 per cent between 2011 and 2014 whereas the crude oil sector grew on the average by 1.8 per cent over the same period. This impressive performance of the non-crude oil sector of our economy, notwithstanding the power challenges over the period, has been largely energised by the downstream petroleum sector.
It is, therefore, important that the government, through the Ministry of Petroleum, pays greater attention to the downstream sector. In fact, to be able to properly reap the benefits of the upstream operations, you need a strong downstream sector championed by indigenous players.
In this regard, the government should make it a policy to identify some serious indigenous players in the downstream sector, and based on fair and transparent process, support them with soft funding, just as it has done for the pharmaceutical sector, to enable them to expand their operations.
This is because, notwithstanding the daunting challenges indigenous players face, a good number of them have responded positively to the government’s policy and demonstrated resilience over the years.
Currently, the sector employs a significant number of people who are spread across towns and districts, significantly reducing rural-urban migration.
The downstream sector is a major contributor to government revenue. In fact, going by the current petroleum taxes paid by the OMCs, over a three-year period, tax revenue paid by OMCs will amount to about GH¢12 billion (i.e. US$ 3 billion). This is about three times the three-year Extended Credit Facility granted the government of Ghana by the IMF. In effect, this sector deserves more attention from the government than it gives the IMF.
Therefore, devoting about 5-10 per cent of the taxes this sector contributes as soft loan, with strict guidelines, to support the indigenous private ones to expand and create more sustainable jobs should not be too much to ask for from a government.
Policy predictability
Another key area is for the government to ensure that there is policy predictability. This is because over the years there have been a number of times when the government has come out with a directive either banning the issuance of licences or implementing a policy mid-way into the year, disorganising operators budgets, plans and projections.
Whereas it is understood that the government has the right to issue policy directives, it is important for it to appreciate that this industry is a very sensitive and capital-intensive one. Therefore, such decisions, if not well handled can create more problems for the industry than they seek to address, and this ultimately can affect the government too.
Therefore, a review of policies should call for a lot more prior consultation or notification so that operators can plan appropriately.
The regulator
I wish to suggest that in this era of deregulation, the NPA, as the regulator, should consider the following:
- Instituting Holistic Performance Rating of Operators
- To encourage operators to improve upon their performance, the NPA, as the regulator, working with industry, should put in place performance rating of operators, taking into account all the key performance indicators. This is because with the current system where NPA only publishes prices of operators, it is unconsciously sending the message to the public that the price of petroleum product is the most critical issue and that issues such as the product quality, the accuracy of the delivery of the fuel pumps, customer service quality and Health and Safety, among others, do not matter much.
Therefore, to ensure that the operators work to protect consumer’s interest adequately in a deregulated environment, the regulator should publish performance results of operators, taking into account all the other key performance indicators.
Advertisement
This will help in ensuring that some service providers do not for example, sell low quality products at cheap prices or operate low standard facilities that pose danger to lives and properties, just because they are offering the cheapest prices.
Ensuring regulatory clarity
In a deregulated environment, regulatory clarity is key. This is very important to ensure that there is no ambiguity in interpretation of guidelines. Therefore, the NPA should do well to ensure that the guidelines are as simple, clear and unambiguous as possible.
For instance, whenever NPA comes out with new regulations or requirements, do those regulations or requirements affect only new entrants or existing ones or both? For example, currently the NPA has raised the minimum number of outlets one should have to be licensed as an OMC to seven service stations. What exactly does this mean? Is it the case that only new entrants must have at least seven service stations or that existing OMCs with less than seven stations must meet the number before their licences are renewed?
Again, one of the regulations or requirements is that for a company to be licensed as an OMC or BDC it must show evidence of local partnership of at least 50 per cent to be held by Ghanaian citizens. What exactly does this mean? Is this applicable only to new entrants or existing entrants must meet this requirement before their licences are renewed?
Advertisement
It is important for there to be regulatory clarity to promote easy compliance and also engender trust and confidence in the regulator.
Encouraging consolidation
The NPA should also vigorously pursue consolidation measures in the industry. It is true it has done well by encouraging indigenous private participation in the industry and this should continue.
However, the industry is currently made up of a lot of players with very weak financial and infrastructure base and also very small market share. This situation makes them very vulnerable for takeover by foreign players, who are good at beating the system by getting unpatriotic local people to front for them.
Thus, if this issue is not quickly addressed frontally, the gains made so far by having indigenous players controlling greater market share now will be lost with time to foreign players, which will take us back to the era before deregulation when multinationals controlled a bigger market share.
Advertisement
Therefore, the NPA should use ingenuous regulatory measures with some incentives to make the existing small indigenous players see the need to come together to form bigger entities.
Again, the number of stations requirement for new entrants should be raised from the current seven stations to at least 15 stations but with preference given to Ghanaian partnerships. Additionally, the requirements should include demonstrable evidence of experience or track record of management team.
To ensure that we grow strong indigenous companies, the NPA should also consider reviewing the provisions of the OMC licence to put in place seamless backward vertical integration. Thus, an OMC should be able to source products directly from an OTC to supply its stations if it has the capacity to pay the OTC without having to necessarily pass through another BDC or set up a new entity all together to use it as the vehicle for a BDC licence. This process further leads to the creation of splinter and smaller entities. In other countries, OMCs own their own petroleum storage depots. In fact, even some years ago in Ghana, some of the major OMCs had their own depots.
Therefore, I think the decision to form a separate entity or not should purely be a matter of corporate strategy for the OMC, rather than regulatory requirement. The BDC segment of the business, in my view, is not the type that one will say is a different and distinct line of business from the OMC business to warrant that a whole new entity be necessarily created by an OMC, especially now that there is no more under-recovery due to the implementation of the price deregulation policy.
I strongly believe that if this chain is broken, a lot of savings will be made and passed on to the consumer.
What the NPA can do to facilitate the implementation of this suggestion is to encourage operators that will concentrate on providing only depot infrastructure services. This way, an OMC that is capable of sourcing its own products directly from an OTC simply pays storage fee (throughput fee) to the terminal or depot operator for storing its product.
We have got to a point where we need to have strong indigenous private operators with the capacity to expand their operations to the West African subregion in the near future and the regulator’s rule is key in achieving this objective.
To be continued
- Written by Michael Bozumbil, in his capacity as the Lead Consultant of Wellspring Petroleum Services Ltd, a petroleum business consultancy firm.
He is also the CEO of PETROSOL, an Oil Marketing Company.
He dedicates this write-up to his late big brother, Joseph Azumah Bozumbil, an award-winning Shell Retailer, who brought him into the petroleum industry about 20 years ago.