The National Petroleum Authority says it will not use regulations to insulate existing bulk oil distribution companies (BDCs) and oil marketing companies (OMCs) from competition.
Consequently, the authority has served notice that it will continue to license new companies to operate in the downstream, petroleum sector until market forces dictate otherwise.
The Director of Public Relations at the NPA, Mr Michael Yaro Kasambata, told the GRAPHIC BUSINESS that the decision to continuously open up the flood gates to new entrants was to allow for competition in that segment of the market, with the hope that it will engineer efficiency and drive down prices to the benefit of customers.
Given that the country now operates a liberalised structure in the downstream sector, Mr Kasambata said it would be wrong to restrict entry.
“In a deregulated market certain, you do not restrict market entry; you allow competition and customers to determine the number of companies that can operate” he told the paper on April 6.
The Chief Executive Officer of the Chamber of Bulk Oil Distributors, Mr Senyo Hosi, said his outfit agreed with the NPA’s position.
He meanwhile explained that the authority needed to ensure that new entrants meet the requirements needed for entry and also operation.
However, the Managing Director of ZEN Petroleum, Mr William Tewiah, said it was necessary for the NPA to put a ceiling on new entrants to allow for proper regulation.
Given the limited nature of the authority’s regulatory ambit, Mr Tewiah said allowing more companies into the OMC and BDC business could spell doom for the entire downstream sector.
“It is like a school; if you have 10 students, you are able to control and discipline them but if you have 1,000 students, you certainly cannot enforce the discipline you need,” he explained.
Jostle for survival
Currently, about 30 companies have been licensed to operate as BDCs, with majority of them struggling to earn just 0.5 per cent as market share.
The same applies to the OMC business, where some 185 companies are jostling for the fuel supply pie.
Although the numbers appear huge for a market of Ghana’s size, Mr Kasambata said the regulator would be stifling competition and its attendant consequences if it placed a moratorium on licensing.
“In this liberal market, the business models of OMCs and BDCs will determine if they will stay in business or fold up.”
“If you are not pricing competitively and consumers shun your products, you will fall out but if you are pricing well and you are getting the numbers that you need to stay efficient and profitable, then you will remain in business,” he added.
However, while admitting that pricing could help push some of the companies out of business, the ZEN Petroleum MD said the tendency by non-performing companies to engage in illegalities was high, hence the need for the authority to legally phase them out.
“I think NPA should raise the criteria for entry and limit the numbers. If you do not do that but allow everybody to enter, then those that will not get business to do can just engage in something else just to stay in business,” Mr Tewiah said.
His company, which is one of the OMCs, is among the top 10 marketers in the business, with a firm grip on supplies to mining firms in and outside the country.
Complementing deregulation
After years of operating a controlled regime that allowed for government subsidies on fuel, the country, in mid-2015, liberalised the downstream petroleum sector to pave the way for market forces to determine prices.
Following the gesture, OMCs were allowed to determine the price at which a litre of diesel, petrol and premixed fuel, among other products are retailed to consumers.
Last month, the NPA Act was amended to regularise the deregulation and criminalise government’s intervention in the pricing mechanism.
That is a positive move for the industry, Mr Kasambata said, adding that it needed to complement with another free entry policy for new OMCs and BDCs for the policy to properly achieve its objective.
“I think we have not gotten to the point where we have to use instruments, directives and regulations to restrict market entry,” he said, declining to say what would cause the authority to tow that line.
“Companies are primarily for profit and so if you are in business and you are not making profit, why will you stay? So, for that you will not see NPA direct that you cannot come in.”
“It’s a free market and if that is the case, we will just be there to license people.”
“We cannot use laws to protect existing companies by not allowing new ones to come in,” he added.
As of September last year, data from the authority showed that three BDCs – Rhema Energy, XF Petroleum and Engineers and Redfins – supplied no product over the last nine months.
As a result, none of them had a market share.