IMANI Alert: Play with Fuel Supply, Play With Fire

Tuesday, July 14, 2009

If less than catastrophic ocean conditions can send a country’s fuel supply completely awry then you can safely conclude that there are considerable underlying problems with the country’s petroleum procurement sector.

If less than catastrophic ocean conditions can send a country’s fuel supply completely awry then you can safely conclude that there are considerable underlying problems with the country’s petroleum procurement sector.

There is no doubt that Ghana isn’t bearing the costs of adjustment from a totally controlled petroleum market to a partially deregulated one well, at all. But rather than scale back on deregulation, as our pro-communist friends have advised, we argue for more of it, and for greater speed in the process.

In the first place, when you look closely at the arguments of those who argue for a halt to the liberalisation trend, too many holes become visible. The notion that we can diplomatically charm Venezuela to provide us with oil at sub-market prices is weak. Venezuela’s state-run petroleum giant, PDVSA, is struggling to maintain output, while falling world prices threaten the conglomerate’s ability to fund the myriad of social schemes it has been saddled with under the country’s new Bolivarian order. At any rate, the bulk of that country’s oil is of the heavy variety, which our primitive refinery cannot stomach.

Libya’s oil sector is in the middle of a major modernisation exercise after years of capital and technological underinvestment because of decades of Western sanctions. The new guard in the oil sector is less amenable than the old lot when it comes to satisfying Brother Leader’s continental whims, and at any rate, Brother Leader himself has become savvier about the real potency of petro-politics: always better to pocket open market prices and use the money for geopolitical posturing than to dish the black stuff around like so much candy.

Which is why the Administration prudently went back to Nigeria for concessionary crude oil trading. Problem though is that Nigeria is suffering from its own spate of declining output due to escalating distribution problems and, above all, to instability in the Niger Delta, which is stifling new and crucial expansion-focussed investments in shallow waters (the juiciest part of the country’s oil pie). So there is something of a cloud over NNPC’s (the Nigerian National Petroleum Corporation) capacity to deliver reliably on politically driven commercial obligations.

All the above points serve to underlie the reason behind a dramatic transformation of Ghana’s oil sector: the near-complete domination of the private sector in the bulk product carriage sector, at the expense of TOR.

Technocrat after technocrat at TOR has counselled that piecemeal reforms won’t work, yet political managers fail to heed this glaring reality. Nicking and Tucking at TOR’s seams will not work; it will merely postpone the inevitable, which is the eventual collapse of the country’s state-run international oil trading. TOR has to be completely recapitalised and reformed in order for it to become more nimble and competitive in its area of core competence: crude refining. It is currently more of a broker and a warehousing/logistics operator, and not a good one at that.

Sourcing serious investment will require reform not just at TOR but throughout the entire supply chain, and must begin with complete rationalisation and liberalisation. While the current murkiness in the sector persists, it will be crude logic, no pun intended, to expect that private refineries will save the situation. A useless burden will simply be transferred from a feckless state to a hapless private sector.

But what is wrong with private sector operators dominating both the international trading and local distribution. Nothing much, in principle. There is an issue however with capacity adjustment. If the system is not conducive to the enhancement of capacity amongst the private players, as they lumber in to fill the role vacated by the state trading system, you can expect bottlenecks in deliveries like what we are witnessing now, offshore storms or no offshore storms.

Capacity adjustment issues on the part of new private players range from access to foreign exchange, credit standing with banks (remember that government borrows easier than even the most credit worthy private firms in most markets), lower tolerance for storage deficit and inventory stagnation, and greater risk aversion to spare capacity, all the way to high transaction costs associated with low-volume trading and a lack of experience with dealing with counterparty risks (i.e. trading partners across the ocean).

A private trader will not, and sometimes cannot, augment capacity if market rules are unclear. So long as these importers and distributors are unclear about the pace of full reform, and therefore of the sustainability of full cost recovery, and while they are importing on non-concessionary terms from highly traded markets like North West Europe and the Mediterranean, you can forget about any effort on their part to invest in the infrastructure, including spare storage and pipelines, that will ensure the smooth supply of fuel – whether crude or refined. Not when these spot traders are bearing the full rigours of short contracts and other supply risks.

In a certain sense the current hybrid system may prove even less adaptive during periods of supply stress than the erstwhile fully regulated downstream sector. If our goal is to let vigorous competition set fair prices, we better hurry and see to that, or we can continue to muddle through with a mixed system that impoverishes the capitalists and doles out untold misery to the masses.

IMANI Analysts: Kofi Bentil, Bright Simons & Franklin Cudjoe