Previously dominated by multinational firms, Ghana’s oil distribution and retail sector, consisting mainly of bulk delivery companies (BDCs) and oil marketing companies (OMCs), has seen a dramatic rise in domestic participation in recent years. Prior to having its own crude processing facilities before the commissioning of the Tema Oil Refinery (TOR) in 1960, Ghana was fully dependent on imports of refined petroleum that tended to be distributed internally by the local branches of multinationals such as Shell, Texaco, BP, Mobil and Total, with the state-owned Ghana Oil Marketing Company serving as the lone local representative When the National Petroleum Authority (NPA) was established in 2005 as a dedicated regulatory body overseeing the downstream sector, the promotion of local involvement was made a key priority. Section 12 of the NPA’s act states that “any new licences issued to a person engaging in a business or commercial activity in the downstream industry must be a citizen of Ghana,” and that any foreign individual or company in a registered joint venture must provide evidence that at least half the shares are held by a Ghanaian citizen or company before a licence is issued. According to local press, by 2013, wholly owned indigenous companies were responsible for 70% of petroleum products – which mainly include diesel, petrol, kerosene and liquefied petroleum gas (LPG) – marketed and distributed. This is a significant increase from 2001, when six of the 14 OMCs operating in the country were multinationals that accounted for 72% market share. TOO MANY?: The ease with which local firms have been able to join the sector is certainly a plus for the country, although the proliferation of new participants has prompted concerns over market inefficiencies, as well as quality and safety monitoring. According to listings provided by the NPA, there are currently 82 licensed OMCs, a relatively high figure for a country with only around 3025 filling stations. There has also been a marked increase in the amount of registered transport operators, to 24, who together operate a fleet of around 2552 bulk road vehicles. “Amidst operating cost pressures, it is difficult for OMCs to maintain standards as, to offset tight margins, one needs to operate at a larger scale,” Kwaku Agyemang-Duah, CEO of the Association of Oil Marketing Companies of Ghana, told OBG.
In terms of trying to ensure that prospective entities attain a minimum scale and remain active, licensed OMCs are required under NPA licensing requirements to operate at least five state-of-the-art service stations for the sale of petroleum products. For William Kodwo Tewiah, managing director of Zen Petroleum, this presents an inconvenience, as his strategy is based on maintaining a physical presence and to sell only at mining sites, where he is permitted to charge a premium to those seeking higher-quality fuel. “Acquiring a filling station or finding a good site to build one is not easy, as land is expensive and the paperwork process is very slow,” he said.
Among the margin strains cited by Agyemang-Duah are high taxes and rising labour, construction and collaboration costs. But more recently, depreciation of Ghana’s currency has presented a challenge that is further intensifying cost pressure, as much of the OMCs’ core equipment, such as pumps, are imported and paid for in US dollars, the value of which has been rapidly appreciating against the cedi over the past 24 months.
Foreign exchange losses have emerged as a significant issue for the government, as around 80% of product consumption is imported, according to the NPA. This is partly due to the TOR, which could supply about 60% of the country’s needs, but which rarely operates close to capacity. As cost recovery is contractual, Sheila Addo, the NPA’s head of planning and research, told OBG that the NPA is working on a proposal with the Ministry of Finance to mitigate these losses moving forward.
A ceiling price under which various products must be retailed is set by the NPA, an intervention which Tewiah believes limits competition. “Most retailers end up charging the ceiling, and cut corners to meet margins rather than competing on quality or efficiency,” he said. Agyemang-Duah similarly advocates for the ceiling to be removed, arguing that price deregulation would bring about much needed market consolidation. According to Harriette Amissah-Arthur, executive partner at Arthur Energy Advisors, quality monitoring through the establishment and enforcement of minimum criteria related to on-site inspections and metrics such as customer complaints could do more to help improve market efficiency.
The current NPA pricing formula takes into account product costs, exchange rates, taxes and margins; is applied bi-weekly; and is set according to recognised benchmarks. The ceiling price is driven by the principle of cost recovery for all investments made to procure, refine, transport and market petroleum products, while also taking into account the import parity principle in factoring in the exchange rate and local taxes. The majority of specifications for fuel are set by the Ghana Standards Authority, with the NPA able to set some standards related to the sulphur content of diesel.
Bulk Delivery Challenges
BDCs are granted a provisional licence for two years, at a cost of GHS780,000 ($297,336), after which point the NPA can withdraw the licence if the BDC has not met requirements, including a mandate to secure a five-year lease on a storage facility as well as operate 40,000 sq metres of tank space. Moses Asaga, the NPA’s CEO, told OBG that so far only five of the BDCs have met these specifications on their own, while others are granted waivers if they can collocate and lease some of the excess storage available at the TOR and the state-owned Bulk Oil Storage and Transportation Company.
BDCs are currently facing a challenging set of financial and monetary pressures. They are rather susceptible to cash flow lags, with payment terms for clients extending as far as 180 days. As a result of recently imposed foreign exchange controls, BDCs must also, for the time being, purchase imported refined petroleum in US dollars, while receiving payments locally in cedis. As local banks are no longer permitted to lend to BDCs in dollars, they must then be purchased on the open market, often at a higher cost.
Shifting To Gas
Given the limited amount of crude that can be supplied domestically from TOR – which is roughly around 20% of total consumption – some supply challenges may continue to endure over the medium term. But there is a bright spot on the horizon, as domestic gas production moves forward, potentially allowing for an increase in LPG output. LPG, which has some key advantages over many household and vehicular fuels, has been a priority for the government, which has sought to encourage consumption.
Bearing in mind the country’s economic growth projections, demand for petroleum products of all types is set to grow, which means that the scope for high returns in the downstream and distribution segment is significant. Competition remains high, which may lead to consolidation in the future, but demand will likely continue to exceed supply for many years. As a result, ensuring appropriate regulations for operators and improving demand-side management will be crucial.
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