Policy initiatives bolster petroleum sector

The past year has seen the petroleum downstream sector go through a major revolution, lead stanchly a successful price deregulation, Mr. Moses Asaga the CEO of the National Petroleum Authority (NPA) has said.

Speaking at a Petroleum downstream industry meeting in Accra last week, Mr. Asaga said price deregulation has among other things eliminated subsidies, improved the liquidity of importers, and renewed investor confidence.

A difficult decision by the NPA to start implementation of the Petroleum Product price deregulation on 16th June 2015 has resulted in a turnaround of fortunes for players in the industry - particularly state-owned entities like BOST, TOR and Goil -- and has introduced keen competition among service providers, ultimately benefitting the consumer.

Mr. Asaga is confident that policy initiatives once implemented will help place the sector on an excellent footing.

For more than a decade, a process to deregulate the domestic petroleum sector has remained uncompleted. This is because successive governments have not been able to muster the necessary political courage to implement it fully.

At best, the policy has been implemented on a piecemeal basis. In the process, Tema Oil Refinery (TOR), Ghana National Petroleum Corporation (GNPC), and the National Petroleum Authority (NPA) have maintained their dominance over importation and retail price-setting. On the whole, ex-pump prices have not been allowed to fully reflect industry costs.

This implies that governments have been subsidizing petroleum products, ostensibly intended to cushion consumers and the economy against price shocks.

A conducive market environment was therefore created for the state oil companies, the Bulk Oil Storage and Transportation Company, and GOIL -- leading to enhanced commercial fortunes since they have a guaranteed off-taker for their products.

In the lead-up to implementation of the price deregulation, the Ministry of Petroleum and the NPA came up with a plan themed ‘Strategic Alliance’ that boosted BOST’s operations.

Under that strategic alliance, the ministry and NPA granted BOST an oil trading company licence (OTC) to enable it import crude oil and finished products in order to expand the company’s market share and guarantee security of supply for petroleum products in the economy.

A BDC licence was also granted to GOIL under its subsidiary company GO Energy, which became an off-taker of finished petroleum products imported into the country by BOST for distribution to GOIL’s retail outlets.

An additional release was granted to BOST in the form of export and re-export permit that allowed it to export its products to neighbouring countries in addition to holding strategic stocks, thus making it a more viable business entity.

That led to BOST’s decision to reactivate its Bolgatanga Depot in the Upper East Region to enable it export products to neighbouring Burkina Faso and the Sahelian region.

Industry watchers have attributed the Tema Oil Refinery’s turnaround to the cost recovery regime that the new initiative allows its management -- led by its CEO Mr. Kwame Awuah Darko -- to take in far-reaching decisions that have greatly impacted on the company’s fortunes.

The feat comes after seven years of inactivity and inability to make profit by the state oil refinery, forcing government to encourage the importation of refined petroleum products into the country.

President Mahama, who reposed confidence in Awuah Darko by putting him in charge of the two struggling entities – BOST and TOR, has expressed satisfaction at the level of work being done.

Speaking at the University of Cape Coast as part of his ‘Accounting to the People Tour’, the president said considering the current operation and storage capacity of the Bulk Oil Storage and Transportation Company Limited (BOST), as well as the revamped Tema Oil Refinery (TOR), nothing can stop the country from exporting oil to its neighbours.

BOST’s contract with neighbouring Cote d’Ivoire, in which the Ghanaian company is expected to supply about 35, 000 of petroleum products, is good news, he said.

Another challenge government faced was the debt owed to BDCs, which posed liquidity challenges for them, and resulted in supply constraints, creation of shortages, and smuggling petroleum products.

The deregulation process has kick-started clearing of the outstanding debt and is also helping government to no longer subsidise the cost of fuel to pile up additional domestic debt.

The deregulation has solved most of the challenges faced by the NPA, including pressure from government in respect of the petroleum subsidy’s removal and IMF expectations of allowing the price mechanism to determine petroleum prices.

It has also helped to improve relationships and buried unnecessary suspicions by the BDCs and OMCs in respect of the price build up, opined Dr. Raziel Obeng-Okon, an economist and lecturer at GIMPA in an op-ed Impacts of Petroleum Deregulation recently.

The Bulk Distribution Companies (BDCs)

The BDCs were successful in convincing government and the NPA to remove the Price Stabilisation Margins of ¢0.3720 on super and ¢0.2812 on diesel per litre when the deregulation was about to start on June 16, 2015.

Competition has become very intense within the BDCs market space because of differences in prices depending on the source of import by the BDCs. This has helped the OMCs to bargain well and purchase more from those with better ex-refinery prices.

The deregulation is beneficial to government because it ensures the payment of its outstanding debt to the BDCs, as well as ensuring that government no longer subsidises the cost of fuel. It is also in line with Ghana’s IMF programme, which recognises the removal of subsidies on petroleum pricing through deregulation.

Under the deregulation, the BDCs have been successful in convincing government and the NPA to remove the Price Stabilisation Margins from the pricing formula. The deregulation has also improved the liquidity position of the BDCs through the reduction of credit days for OMCs.

Competition among BDCs has reduced the ex-refinery prices for the OMCs, and thus lowered prices for the final consumer. In spite of the benefits from deregulation, liquidity challenges continue to impact negatively on OMCs due to short credit days from BDCs and the payments of SPT within 2 weeks on supplies. The regulator needs to monitor the quality of petroleum products as consumers shift their attention to only the price, industry watchers say.