BDCs ‘fight’ dirty to the detriment of future fuel supply but regulator ignores
National Petroleum Authority hereinafter referred to as NPA is the body established under the national petroleum authority Act 691(2005) to regulate, oversee and monitor activities in the petroleum downstream industry and where applicable do so in pursuance of the prescribed petroleum pricing formula.
The following are some of the functions and objectives of the Authority:
- Section2 (2a) of Act 691 states that the Authority shall monitor ceilings on the price of petroleum products per the prescribed petroleum pricing formula.
A Bulk Distribution Company known as a BDC is a company that is licensed by the NPA to import or purchase petroleum products in bulk to supply petroleum products to oil marketing companies in smaller quantities.
Oil Marketing Companies known as OMCs or fueling stations are mandated by law to buy from these BDCs to sell to the final consumer.
It must be indicated at this point that, following the price deregulation policy in June 2015, the Authority has had less of a responsibility regarding this function because now, it is not NPA which determines the maximum price that BDCs and oil market companies (OMCs) have to sell their petroleum products, however, it is the market forces thus demand and supply.
This function even though watered down by the price deregulation regime, the Authority still requires the BDCs to provide its ceiling that is, the maximum price it will sell its petroleum products within a particular window which is observed by the BDCs and OMCs biweekly.
The BDC industry which is the focus of this discussion is now confronted with backbreaking price war among themselves to the extent that, they are forced by competition to sell their petroleum products at a loss at oftentimes.
Competition is worthy in so far as it benefits the end consumer and also keeps the supplier in the business. The price of oil in late 2008, collapsed from the July 2008 high of $147 to a December 2008 low of $32, primarily because the demand for oil dropped sharply around the world due to the economic decline which was speculated would turn out to be steep.
The impact of such a drastic reduction on prices makes the industry unappealing such that, there is likely to be less capital investment since every investor including Banks may not be prepared to employ the little capital in an industry where its returns are virtually losses. The consequences of such a move, unfortunately, will affect the end consumer as well as the financial institutions that are going to get their loans and monies locked up by the BDCs due to losses that are being accrued by some BDCs. From the perspective of the end consumer, supply will decrease because of less investment and prices will naturally pick up since demand will outweigh the declining supply.
A BDC is required to have a minimum working capital requirement of GH¢ 30 million and a minimum trade facility equivalent of US$ 60 million.
A reputable bank or banks licensed by the Bank of Ghana and in good standing must show their willingness to provide funding not less than US$ 60 million or its Ghana Cedi equivalent to whoever is applying to be in the BDC industry.
BDCs license upon acquisition is subject to yearly renewal of $400,000 which is paid to the National Petroleum Authority
By far, there is no need to point out that this is a capital intensive industry that must at least have some decent guaranteed returns on its investment.
Juxtaposing the same principle on the current issue about the BDCs industry, it is not far from the truth that some companies would begin folding up leaving out few who may not be able to meet the total demand of this country.
We are gradually generating a path for future fuel shortages which will serve the interest of no one.
The statistics by NPA shows that in 2018, BDCs supplied a total of both petrol (premium) and diesel (Gas oil) amounting to 3,355,044,700.00 litres with 38 out of 46 BDCs trading. Out of this volume, Tema oil refinery (TOR) supplied just 4,260,500 representing 0.13% with Go Energy topping the list with 19.06% followed by Juwel with 15% and Ebony with 9.08% market share.
Data from NPA for the first quarter of 2019 concerning the same petroleum products reflect as follows;
Total petroleum products supplied of both petrol (premium) and diesel (Gas oil) amounted to 863,295,600 litres with 34 BDCs out of 46 BDCs trading. Out of this volume, Tema oil refinery (TOR) supplied just 2,356,500 representing 0.3% with Go Energy topping the list with 20.1% followed by Blue ocean with 14.8% and Juwel with 14.0% market share.
It is clear from the above statistics that TOR which is a government institution plays a negligible role when it comes to the supply of these petroleum products.
This becomes a threat to the country’s energy security most especially when the majority of petroleum product supply is vested in the hands of private sectors. The energy security issues worsen when it is realized that, a few BDC giants with a strong vertical integration whether consciously or unconsciously purports to monopolize the market by selling at unrealistic prices which result in losses in the books of other BDCs without such similar strong vertical integration.
Even though the BDC industry business has its notorious and eye-catchy local content decorated in there, however, it is not too outrageous an assumption to suggest that some locals are likely to front for foreign investors who may have a competitive advantage over the others.
Before price deregulation, oil marketing companies which sell the final product to the end consumer makes a margin of about 47 pesewas per litre but due to excessive competition among the BDCs, these oil marketing companies get their petroleum product at a cheaper price such that, some are able to make margins close to 80 pesewas per litre.
As to whether this throat cutting competition even reflect in the pocket of the final consumer is another matter that may be looked into at another time but without a blink of an eye, the ordinary Ghanaian can attest that it is rare to find ex pump prices below 4.50 Ghc per litre on the market these days
Amidst of international prices(Platts) going up which constitutes almost 95% of BDCs product direct cost excluding other costs such as throughput, demurrage, and letter of credit, It is strange in this current dispensation to find other BDCs still reducing their prices whilst their cost price is moving up. Clearly selling below cost!
There are many ways BDCs trade products with their suppliers prices and some of these may include hedging against international price fluctuation or volatility, trigger pricing or averaging of daily closing prices of the international prices (platts- an international agency that assesses the value of petroleum products by each closing day based on demand and supply) plus or minus negotiated premium or discount respectively.
It is clear from our price simulations basis the above strategies that at most times no BDC could even be selling at a particular selling price without running at losses but yet still, some BDCs are forced by competition or maybe have decided to sell at those prices because competition has driven them there.
What at all is the role of the National petroleum authority vis a vis the current disheartening happenings in the BDC industry?
Under section 2(2e) of the NPA’s Act states that the authority is to protect the interests of consumers and petroleum service providers; Further under section 2(2i) of the NPAs Act states that the authority is to promote fair competition amongst petroleum service providers; Section 40 of NPA’s Act provides the following;
(1) The Board shall support commercial practices in the petroleum downstream industry which
(a) Serve the public interest,
(b) Achieve efficiency and cost reduction,
(c) ensure the continuous supply of petroleum products
The above functions require no extensive interpretation to conclude that it is one of the statutory duties of the Authority to encourage fair competition among petroleum service providers and above all to protect their interest as well.
The Authority must wake up and protect a decent margin for the BDCs to safeguard their investments by regulating the current unhealthy competition which threatens the continuous supply of petroleum products just as it is required of them by law.
It must be noted here that the government's decision to adopt price deregulation is an excellent idea since it has lessened so much burden on the government with regards to subsidies and forex losses.
It is therefore critical that the authority instead of just monitoring price ceiling submitted biweekly by the BDCs, the authority must look at a fair and decent price floor below which the market forces must not descend and must put in regulatory measures to ensure that this price floor is maintained at all times.
It is believed by the author of this write-up that such measures may ensure consistent fuel supply and at least make the industry stay attractive to many private businesses.
If the Authority is unperturbed about this current happening then the authority must equally ensure that this competition benefits all Ghanaians who buy fuel at the fueling stations across the country at the detriment of a collapsing BDC industry.