Business in Ghana

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IMANI Alert: Can the Tema Oil Refinery deliver today? A possible way out

Posted by Business in Ghana on September 7, 2014

The energy sector is undoubtedly the most essential sector if Ghana is to come out of its current economic atrophy.  President Mahama underscored this fact when he declared that the Atuabo Gas project in his view, is the game changer in Ghana’s energy mix and an attempt to resurrect the near moribund economy.  That the second Millennium Challenge Compact is dedicated to energy attests to the vision.

One essential player in the energy picture of this sector is the Tema Oil Refinery (TOR).  TOR was established by Ghana’s first President, Kwame Nkrumah with financial and technical support from Italian investors. TOR’s mandate at the onset was refining crude oil for Ghana and her neighbouring countries. TOR’s core business has over the years been broadened to include procurement, storage, refinery and distribution of crude oil. However many observers have argued that the ambitions of TOR whilst in keeping with a growing economy such as Ghana’s was not strategically anchored in a future vision for running it as a serious profitable business, hence its current near defunct and financially broke natural order.

We have seen successive governments design strategies some of which have involved large financial investments and bailouts of the institution-the result of which is the current recovery levy which became a public debate with various analyses emerging on how the country could generate value from such an economic venture. Such debates and discussions that did not bring closure to the TOR debacle, have resulted in the establishment of institutions such as Bulk Oil Distribution Companies (BOST), Bulk Distribution Companies and Oil Marketing Companies with various responsibilities and duties being assigned to each of these institutions to ensure that the procurement, refinery, storage and distribution of petroleum products within the supply chain are comprehensive to prevent frequent shortages. Recent developments have prompted further discussions of the revival of TOR and how to make it an efficient economic entity. However the following factors must be considered prior to undertaking such investment.

History

The Tema Oil Refinery’s role in Ghana’s history has been a tumultuous one. Set up during Kwame Nkrumah’s regime as the Ghanaian Italian Petroleum Company (GHAIP), it is a facility fitted to refine light and sweet crude oil at the most reasonable price. For many years, this meant that the Tema Oil Refinery imported and refined crude oil from Nigeria, our closest oil blessed neighbour at the time. Over the last five years however, activity at the Oil Refinery has steadily come to a halt. It has become an inefficient facility due in part to delayed or unattended maintenance. With the discovery of substantial oil reserves (of up to 800 million barrels) off the Ghanaian coast in 2007, it was expected that the Tema Oil Refinery would play a key role in the new-born oil industry. However, for TOR to be a significant player it requires a total of USD200 million, an amount it can only dream of at this stage. The facility itself has been a source of alleged massive corruption. Under the Kufuor administration it was a source of government debt of a disputed GHC 1.5 billion (the New Patriotic Party which was in power at the time has challenged this figure, stating instead that the debt totalled GHC 927 million.) This debt put the Ghana Commercial Bank, the main financiers of TOR on the verge of collapse. Even at its most efficient, the refinery can only cater for about 50% of the petroleum demand in Ghana.

The above situation led to a partial de-regulation of the downstream petroleum market through the introduction of Bulk Distribution Companies (BDCs) as earlier mentioned.

Some financial and media analysts have alleged that the challenges of TOR as evinced today are either self-afflicted or politically motivated, implying that there is some deliberate attempt by government and its acolytes in business to prevent the efficient operation of TOR so they can cash in on licensing BDCs and get kickbacks. For instance, it is alleged that Ghana National Petroleum Corporation, though a national institution, has refused to supply TOR with its share of oil as part of its carried interest in the jubilee fields. Assuming without admitting that that notion has merit, it is very important to situate the analysis within a very ‘sane’ economic perspective, for whether or not the petroleum sub-sector is highly privatised or government led, the inherent efficiencies and inefficiencies will be borne by the economy at large.

Economic and operational inefficiencies at TOR

It should be noted, that for any institution involved in the supply chain of petroleum products to resort to TOR for its refinery needs, it will consider some economic factors such as its ability to obtain in full with acceptable operational losses the quantity and quality of crude oil that it supplies TOR for refining. TOR must therefore demonstrate beyond any economic doubts, its economic and operational viability in this regard. The hard economic truth is that no ‘sane’ distributor in this country be it private or public (GNPC) will see an economically, operationally and competitively viable TOR and decide against the conventional economic wisdom of using some foreign refineries particularly when we are lifting crude oil from the shores of this country. Indeed the Chief Executive Officer of GNPC, Mr Alex Mould has consistently made this fundamental point. Other players in the industry have equally held and still hold the view. It is not possible for all these individuals and institutions to defy financial and economic reasoning particularly when they will stand to gain from decreased lead times for supplies, and carriage costs if they refine their crude in Ghana. The fundamental losses of TOR will have to be addressed through a comprehensive business strategy which makes economic and financial sense in its addition to value of the economy. It must be operationally and financial profitable.

The Africa Centre for Energy Policy, an independent energy-focused research institution has also mentioned in a report that, TOR should be allowed to refine crude oil ONLY if it would sell at a cheaper price than what is currently being imported into the country.

Many observers and sector analysts have also suggested the privatisation of the institution or in partnership with private investors. Whichever way, the operational inefficiencies must be fixed before any further engagements on resuscitation.

Where can government focus its attention to create value in the sector?

A general overview of the business of government in the sector reveals key advantages that government can take to ensure that it creates value in the form of jobs (employment), and return on investments.

An increase in investments in GOIL (an OMC) for instance could be considered by government assuming it has the resources today to resuscitate TOR. After all GOIL controls 20% of the downstream market. We stand to get more value as the opportunity cost of such a decision will far exceed investments in TOR at the current prevailing conditions. Indeed GOIL for instance has demonstrated potential for long term sustainability and value addition to the economy, following its corporate rebranding and restructuring. Given governments share in the entity, further investments to ensure expansion of its operations, could give the company a better competitive edge over other OMC’s in the industry. Comparing the financial viability of GOIL to that of TOR reveals more. TOR has been reeling under heavy debt and operational difficulties, having lost about $63 million since July 2012, and resorting to a government bailout with close to GHS 1 billion from the financially sapped Ghana Commercial Bank-debt financier of TOR.

Earlier this year, President John Mahama stated in his State of the Nation address that TOR was close to signing a Joint Venture agreement with Petro Saudi International, in order to revamp the operations of the refinery. It is however hoped that this impending arrangement does not suffer the same fate as the $900 million in financing that TOR had supposedly secured from BNP Paribas and Standard Chartered. Interestingly, the people of Ghana continue to be taxed by government on loans contracted by TOR, imputed in the price of petroleum products, and also pay the salaries of its workers although the facility is not operating. This cannot be acceptable even under the most dirigiste of economies anywhere on the globe. So why should we accept this in Ghana?

It is quite suspicious that in the face of all these facts and views from experts, there is the view that the government and some ‘cabals’ such as BDC’s and OMC’s are responsible for the non-functionality of TOR. Granted, the government cannot be exonerated from its role played in the current mishaps of TOR. Issues of ineffective deregulation of the petroleum sector, unnecessary assumption of subsidies, which it cannot absorb and pay on time (a condition which is significantly affecting the smooth operations of BDC’s and OMC’s in the industry), and direct political influences have significantly affected the operations of TOR in the past. It in no way implies that the absence of these factors will change the fortunes of TOR overnight. The resolve, which must be made is that, TOR is a business entity, and until we treat it as such, no business entity will want to transact business with it.  

For interviews, please call Patrick Stephenson on 0243336819.

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