Ghana's government liberalises downstream markets, creating new opporunities

Ghana’s downstream sector is going through a period of flux, with the most significant change of recent months coming in June 2015, when the government decided to give more control to market participants to set prices for consumer fuels. The gradual removal of control over downstream markets has long been in the making – and is in line with what is happening in other African markets like Nigeria and Egypt – yet is controversial, due to the concerns of highly price-sensitive consumers reliant on these products.

The issue is acute because despite its hydrocarbons wealth, due to a lack of infrastructural capacity, Ghana is reliant on energy imports. Tema Oil Refinery is not large enough to supply all market needs and struggles to operate at full or even partial capacity, due to maintenance and technical issues, as well as prohibitive costs for importing crude oil for feedstock. Gas transport and processing infrastructure has been subject to similar external pressures.

Actors

Ghana’s downstream is open to private sector participants in several categories. Oil trading companies (OTCs) import but cannot store or distribute, and therefore do so on behalf of bulk distribution companies (BDCs). BDCs are licensed to import crude oil and finished products, store and distribute to oil marketing companies (OMCs). There are public and private actors performing similar functions. The Ghana National Petroleum Corporation (GNPC) and the Bulk Oil Storage and Transportation Company (BOST) also act as importers. They act as OTCs, and therefore import on behalf of BDCs, which in turn sell to OMCs. One of the main OMCs is the Ghana Oil Company, which is owned by the government and owns the country’s largest network of filling stations.

For the past decade the regulator, the National Petroleum Authority (NPA), has been in charge of setting prices. It also licences BDCs and OMCs and is the final authority for any downstream activity in Ghana. The NPA was created in 2005 by an act of parliament that also mandated a gradual deregulation, setting in motion some of the reforms seen in 2015.

Since the sector opened up to private sector participation the number of investors has mushroomed, with the roster of BDCs jumping from an initial group of four to 30, and OMCs from 10 to 120. According to the Association of Oil Marketing Companies the market is now fragmented, with leaders capturing a share of between 11% and 13%. Prices are effective for two-week periods, after which a new price is set.

The NPA is required to licence all comers deemed capable of providing the service, though on May 1, 2015 there was a freeze on new ones for filling stations, pending a cross-country mapping of them by the NPA. In a notice on its website the regulator cited an uneven distribution of filling stations. There are 20 between Paga and Bolgatanga, for example – two remote towns 44 km apart. The agency noted that there are “no massive commercial activities” in either town. The regulator’s plan is to use geographic information systems technology to create a detailed map of the existing filling stations. In the past, regulations have incentivised OMCs to build filling stations regardless of market needs – licencing requirements mandated that each build at least five. In total there are around 3400 in the country, according to the Association of Oil Marketing Companies.

Balancing Interests

The system as designed regulates prices to ensure affordable fuels for consumers, as well as full cost recovery plus a profit for the commercial side, with the government subsidising a portion if necessary. State subsidies were a regular feature until June 2015, when price deregulation commenced. The NPA was still unable to completely eliminate an element of government intervention due to the steady drop in the value of the Ghanaian cedi. The pace of the cedi’s decline in recent years – it fell by 26% against the dollar over the first half of 2015 – has created two-week windows in which it fell fast enough to wipe out margins for private investors and create losses, due to the difference in its value when importers and marketers paid for products and when they sold them. That situation had been avoided from July 2014 to February 2015, but since then has been a recurring problem, NPA officials told OBG.

According to the Association of Oil Marketing Companies, most arrangements expose OMCs to further currency losses, as the system requires them to pay for their product within 15 days when collections can take up to 60 days. With lending at rates above 20%, bank financing is not considered a feasible option to compensate. The government recognises the problems inherent in the market, and in past years has compensated companies on an annual basis for their currency-based losses. As of May 1, 2015, the NPA was in arrears to BDCs by more than $800m, according to the regulator’s website. The agency confirmed that the BDCs had submitted currency loss claims to NPA for 2014 consideration, but an announcement on payouts to them has not yet been made.

New System

Under the new system announced in June 2015, the government will no longer set prices for consumer fuels every two weeks, instead leaving BDCs and OMCs to do so, albeit according to the existing formula that the NPA had used. It was designed to allow downstream companies to be profitable, and is based on global commodity prices and the value of the cedi. The two-week window will also be preserved, meaning that BDCs and OMCs will submit their rates to the NPA ahead of those periods for approval, and are free to charge less than the formula implies if they wish. The first two-week window under the system, beginning June 16, was a transition period, however, in which the NPA, BDCs and OMCs agreed on a partial adjustment that brought prices up by 4% but still short of full market rates. That would have necessitated a 14% jump. For the early July 2015 pricing window a boost of at least 15% was expected.

Further potential steps raised in local press reports include moving to shorter price-setting windows, and removing elements of the price-setting formula. For now, however, a scenario is not envisioned in the short or medium terms in which prices are set completely free of guidelines. The formula and windows will remain, according to the NPA. The expectation is, however, that market competition will force prices lower. “Fiscal pressures are pushing government out of subsidy for the sector, but I think the success of this can only be supported by relatively weak crude oil prices,” said Sampson Akligoh, managing director of the Accra-based investment firm Investcorp.

Further Liberalisation

There has been widespread support among BDCs and OMCs for further liberalisation, and Ghana was also encouraged to do so by the IMF, which has advocated it in part to lower government expenditure on consumer fuels and redirect that money to other areas of state spending.