Last week, chieftains of the downstream oil and gas industry, the National Petroleum Authority, led by its new chief executive, Dr. Mustapha Hamid, unveiled a major shift in state policy with regards to the structure of the sector.
Addressing editors of media houses in Accra, they announced that going forward, the importation of refined petroleum products into Ghana, and their distribution and sales within the country will be exclusively reserved for Ghanaian enterprises. This means that foreign-owned bulk distribution companies (BDCs) and oil marketing companies (OMCs) will be required to cease their activities in those regards.
No specific timelines have yet been set for the implementation of this profound local participation policy and when it does commence it will be implemented in phases to ensure orderliness and that no stakeholders are unduly affected.
In effect this means ensuring that the supply of refined petroleum products is not disrupted and that exiting foreign BDCs and OMCs are not forced into rushed ‘fire sales’ of their assets which would prevent them from retrieving their full value.
However even though the impending new policy is bound to stir up intense protestations from foreign companies operating in Ghana’s downstream industry – and indeed the wider international downstream oil and gas industry – there will be plenty of unfolding commercial opportunities in the sector; foreign enterprises will still be allowed to invest in downstream activities that are infrastructure-driven, such as refineries, although with local partners serving at least as minority partners.
Thus, the new policy suggests that it has been decided on, as much by government’s desire to get foreign investors to focus on the provision of key infrastructure as by the desire to reserve marketing and sales of petroleum products for indigenous investors. It is instructive that local investors lack anywhere near sufficient capacity in the former, but have more than enough capacity in the latter.
This next step in government’s ongoing “oil nationalization” agenda may prove to be its best move so far, even though it will irk the international downstream oil and gas industry.
The move follows plans announced a couple of years ago to introduce local content and participation regulations for the downstream oil and gas sector as has been done for the upstream sector. Instructively the success of the upstream sector regulations almost immediately persuaded the solid mining industry to commence self -regulation with regards to local content which is similarly proving successful.
But the planned local participation regulations for the downstream oil and gas sector will bring the biggest shake up of all. It means major foreign market players such as Total and Vivo (operating under the Shell brand name) as well as South Africa’s Engen will be required to exit the retail oil and gas industry in Ghana although NPA chieftains say this will be done in a phased manner so as to make it convenient for all stakeholders in the industry.
Although the liberalization of the downstream sector over a decade ago created room for a sharp increase in indigenously owned OMCs which were enthusiastically, but responsibly licensed by the then newly created NPA, the only one that competes favourably with their foreign counterparts with regards to sales volumes and sheer visibility is Ghana Oil Company Limited (GOIL), the partly state-owned OMC which had been the flag bearer of indigenous participation in the sector since long before liberalization of the industry began.
However, since they were allowed into the market through a policy of affirmative action, indigenous OMCs have been noted for their willingness to open distribution outlets such as petrol stations in the rural hinterlands where hitherto, only GOIL was willing to set up shop.
Conversely all the foreign petroleum product marketing companies have preferred to restrict their operations to urban centres where sales volumes are the highest.
Indeed it is instructive that GOIL has been forced to adopt a deliberate corporate policy of siting retail outlets across rural Ghana in order to ensure that towns and villages in the hinterlands could access petroleum products – this in line with the development policy of its majority owners, the State – because if it had not, such places would have been deprived of access.
The entry of indigenous OMCs has changed all that however. Most indigenous OMCs have sought to establish retail outlets in rural areas across the country on a regional or national basis, seeing this as their best opportunity to quickly ramp up market share and consequent sales.
This has greatly supported GOILs hearty, but erstwhile inadequate efforts to go it alone in rural Ghana.
As of 2019 the overwhelming majority of the 91 licensed OMCs were indigenously owned and most of them operate in rural and semi-rural areas in addition to a smattering of outlets in the urban centres. However it is instructive that their contribution to the total number of retail outlets in Ghana (3,167 as at 2019) is much smaller.
Indeed, indigenous participation in the OMC sub sector of the downstream industry has been as much through franchise ownership using the brand names of the industry leading multinationals as it has been through direct, full ownership of their own branded petrol stations.
Actually though this will smoothen the impending switch over. The franchise petrol station owners will be well positioned to simply pay some level of compensation to the multinational brand owners and become full owners of the subsequently rebranded retail outlets.
But the biggest beneficiaries of the impending new policy – and deservedly so – will be the indigenous OMCs that have expanded quickly across rural Ghana but who continue to play second fiddle to the multinationals in urban Ghana, a situation which is preventing them from earning nearly as much as those multinationals do. Since product pricing in the industry is still partially regulated – in that the price build up for imported petroleum products, including the numerous taxes that account for some 40 percent of their sales prices computed by the state – this means that the foreign owned market players are allowed to
reap the biggest profits while their indigenous counterparts end up with smaller profits from smaller business volumes in their effort to ensure that petroleum products are available everywhere around the country including the rural hinterlands.
Importantly the indigenous OMCs have proven that they are product quality and price competitive against their foreign counterparts even though they suffer smaller economies of scale. Therefore the new policy will finally reward indigenous enterprises for their endevour having indirectly been financially penalized for their efforts so far.
Foreign companies have less of a presence in the BDC sector of activity – sometimes referred to as the midstream sector. BDCs are responsible for storage and distribution of petroleum products. Before the liberalization process the state owned Bulk Oil Storage and Transportation Company (BOST) was the only player in the industry. However the Ghana Chamber of Bulk Oil Distributors, as at 2019 had a membership of 23 BDCs that collectively account for 95 percent of petroleum supplied to the domestic market.
After Nigeria, Ghana is the second-largest consumer market for petroleum products in West Africa. The country is also emerging as a petroleum products hub with Ghana-domiciled companies shipping products across borders to markets in Burkina Faso, Togo and Cote d’Ivoire.
With their impending exit from the OMC and BDC sectors; foreign enterprises will have to turn their collective attentions to investments in infrastructure. Here, Ghana’s needs are enormous – particularly with regards to refining – and domestic investment capacity falls far short of what is needed. Indeed the diversion of foreign attention in this manner appears to be part of the rationale for the impending new policy.
The biggest and most obvious opportunity facing them is in the area of refining. The Energy Commission projects that the demand for petroleum products is rising by between 10 – 15 percent every year. . Historical observation shows that the consumption of petroleum products in Ghana is always mainly on gasoline, premix, residual fuel oil, premium oil, Kerosene, liquefied petroleum gas (LPG), heavy gasoline, naphtha, aviation turbine kerosene (ATK). Thus, in 2016 the economy of Ghana consumed 8% of LPG, 32% of gasoline, 53% of gas oil, 2% of premix, 0.2% of kerosene, 0.8% of residual fuel oil, 4% of aviation and turbine keroseneto mp.
Because of the lack of domestic refining capacity most of this is imported, putting pressure on the cedi’s exchange rate. As consumption exceeds domestic production – and what little local refining capacity is attuned to heavy crude brands rather than the sweet light crude that Ghana produces – the country relies almost entirely on imports of petroleum products, for refinery operations, and energy generation for both household and industrial use.
However total import of crude oil gas fallen sharply since 2016 (from almost 1.45 million tonnes in that year to around 233,000 tonnes in 2017) primarily as a result of local refining operations and the emergence of natural gas as a fuel for power generation stations.
But while this has been the primary driver behind the transformation of Ghana’s once perennial trade deficits into consistent trade surpluses, the stuttering performance of the country’s only refinery, Tema Oil Refinery (TOR) has made the importation bill for refined products inordinately high even as it stunts Ghana’s ambitions to be a petroleum products export hub for the West African sub region.
TOR has been operational since 1963 but is facing considerable challenges. Although it has a design capacity of 45,000 barrels per day, poor maintenance and operational inefficiencies have meant that it output has been considerably less for much of its history.It most recent problems have been the explosion of a furnace in 2017 forcing a complete shutdown; and following resumption of operations shortly afterwards its maximum capacity was reduced to 30,000 bpd. Still, further production shortages have come as a result of feedstock shortages including another complete shutdown in June 2018 when it ran out of crude oil and failed to secure funding to purchase more.
Government has since announced its intention to build a new 150,000 bpd refinery by 2022. This would enable Ghana meet its domestic demand and allow for significant export of refined products to the rest of the sub region but little has been achieved towards actualizing the project.
This presents huge investment opportunities for foreign investors including the multinationals about to be pushed out of their traditional OMC and BDC activities.
Other opportunities for such enterprises exist in the provision of storage facilities, pipelines, measurement and calibration equipment and the likes. Government will be hoping that its new policy redirects their investments in Ghana into such projects and infrastructure. Crucially, the new law will not be out of line with World Trade Organization rules which relate to merchandize trade rather than investment.
There is one foreseeable problem however: ECOWAS protocols. There are two Nigerian OMCs operating in Ghana and which are protected by ECOWAS rules on investment – African Petroleum and So Energy – and the impending policy could create a problem similar to the long standing dispute over Nigerians engaged in retail trade in Ghana.
However this problem could be easily overcome by offering them a special dispensation – after all their combined market share in Ghana is insignificant – or by establishing a new law stipulating that a certain (high) proportion of OMCs retail outlets must be sited in rural areas. Those Nigerian OMCs like their counterparts from other parts of the world would definitely fall short of this stipulation.
No timelines have as at yet been set for the new policy to commence but it already has the backing of cabinet and is sure to receive the support of Parliament and civil society too. Inevitably, the foreign investment community will oppose it but Ghana is expected to stick to its guns by taking the moral high ground which it is fully entitled to.