A 1.4 Billion Birr Smile

Tadesse Tilahun, CEO of NOC Ethiopia, Discusses the 2019 Financial Performance of his Company, the State of the Oil Industry

Born in 1950 in Wollega, western Ethiopia, Tadesse Tilahun, a father of three, made tremendous strides in his career before becoming a Shareholder and General Manager of National Oil Ethiopia (NOC). After studying accounting in the School of Commerce and Addis Ababa University, he directly joined the Shell Group where he acquired professional trainings in several countries. At Shell, he served in many African countries at numerous managerial positions.

Operations, Oil and Chemical Marketing General Manager of Shell in Nigeria; Shell East Africa Hub Regional Supply and Operations Manager (based in Kenya and encompassing 11 countries); and Country Chairman and General Manager of Shell Ethiopia Limited are among his former posts at the Shell Group. Before he was invited to NOC, Tadesse had already accumulated deep expertise on the east African oil market. After being held for a long time by giant foreign companies like Total, Shell, Mobil and Agip, the Ethiopian oil market welcomed NOC as its first indigenous oil company in 2004. Right after establishment, NOC was burdened with the task of filling the market gap created when some of the foreign giants decided to leave Ethiopia owing to the air-thin profit margin. Although NOC’s shareholders include Sheikh Mohammad Hussein Ali Al Amoudi, Tadesse Tilahun, and Abinet Gebremeskel, it is Tadesse who propelled NOC to become the leading market-share holder in Ethiopia’s oil industry with his topnotch industry expertise.

Tadesse is a board member of Ethiopian Airlines and African Refiners and Distribution Companies Association (ARA). He was also president of Ethiopian Employers Association. Currently, he is the President of Ethiopian Oil Companies Association. In order to benefit from his over 40 years of experience, the Addis Ababa Chamber of Commerce has recently chosen him as an Honorary Goodwill Ambassador.

Tadesse is also a philanthropist. He established a foundation in honor of his late wife, Genet Hadgo in 2015, and supports needy families in education and agriculture. He was also a board chairman of Cheshire Services Ethiopia.
Tadesse argues that the rising numbers of local oil companies currently flocking into the oil industry lack the expertise and capital to address Ethiopia’s fast growing fuel demand. In his opinion, importing refined products is also not viable in the long run, unless the east Africa region establishes its own joint refinery plant. EBR’s Ashenafi Endale sat down with Tadesse to discuss the state of the Ethiopian oil industry and his company’s financial performance.

EBR: Can you briefly tell me your profile and how you become CEO of NOC?
Tadesse: Before I became CEO of NOC, I was the General Manager of Shell Ethiopia. I had worked in many African countries including Nigeria and Kenya. Kenya was Shell’s East Africa hub extending from Sudan to Mozambique. Finally, I settled in Ethiopia because my wife wanted to live here. By profession, I am an accountant.

As Board Chairperson of Africa Refiners Association (ARA), how do you evaluate Africa’s oil market dynamism?
Few weeks ago, we had a meeting with the African Union’s (AU) energy division about the progress achieved in oil exploration and extraction. Oil exploration is spreading in Africa, moving from northern Africa (Morocco, Libya, Egypt), to western Africa (Nigeria), and then to South Africa, Angola, Uganda and Sudan. Kenya also found oil recently near Lake Rudolf, which is close to Ethiopia and where the Omo River ends. Tanzania, Kenya and South Sudan have also found oil, and this could also happen in Ethiopia.

However, oil extraction and usage in these African states remains very challenging. In the past, Nigeria used to export crude oil to the United States and Europe. However, when the United States stopped importing crude oil, Nigeria lost [a big market]. Exporting crude oil to African countries is no more viable. As a result, Nigeria was forced to export its crude oil to the Middle East. But again, the Middle East is also not anymore viable for such business, since the market has already matured. Hence, oil dependent African economies, like Nigeria, are crumbling following the declining foreign currency earnings from crude oil exports. Uganda’s effort to export crude oil via Kenya, crossing over 1,000 kilometers was also not feasible.

Despite this fact, Africa’s oil demand, including Ethiopia’s, is fast growing. But the size of the economies on the continent makes refining crude oil challenging and less feasible. For instance, refineries in the Middle East refine over 400,000 barrels a day. Over USD10 billion is needed to install such refineries. This makes installing a refinery for each African country very difficult Further, since environmental, safety and quality requirements are already elevated in the global market, only big and experienced refineries can meet the current stringent worldwide demand.

After realizing that exporting crude is not viable, Dangote is currently massively investing in constructing a refinery in Nigeria with the capacity of 600,000 barrels a day. When finalized in 2022, it will address not only Nigeria’s but the entire west Africa region’s petroleum demand. In addition, synergetic African economies must jointly invest to develop common refineries, as developing them independently is too costly. In fact, this was the main agenda of the meeting we had with AU’s energy division.

Where would be the ideal location to install a refinery, for instance, in the case of the east African region?
Conceptually, the idea proposed by Ethiopia, Sudan, Uganda and Kenya to establish a refinery in Lamu, Kenya is a perfect arrangement. In fact, the most viable way is to build the refinery where the oil is found. Importing crude oil from a relatively distant location and refining it here, on the other hand, is not a viable option. I also heard that the Ethiopian government was planning to install a refinery in Modjo. This is also not a wise decision because you cannot import crude oil, process it here, and sell it at a cheaper price than the refined product directly imported from the Middle East.

Why has Ethiopia failed to install a joint venture refinery with other east African economies?
In the past, politics and national autonomy were the decisive factors to invest in such huge facilities. But currently, as all African states have agreed, this can no longer continue.

Ethiopia’s import of petroleum products is increasing substantially year after year. Which sector is consuming the lion’s share?
Ethiopia is a landlocked country, not by design but by our own fault. So, land transport is critical for connectivity. As a result, the transport sector is the main driver behind the increasing oil importation as well as consumption. Not only automobiles but trucks consume a significant portion, until they are replaced by rail transport. Aviation is the second largest oil consuming sector. Jet fuel is a widely consumed petroleum product in the country next to diesel. For instance, Ethiopian Airlines, which has a contract with NOC, consumes significant portions.

Ethiopia consumes only 15,000 tons of Liquefied Petroleum Gas (LPG) a year, while smaller countries like Kenya and Uganda individually consume over 400,000 tons of LPG annually. Large economies like South Africa and Egypt use gas and coal for their industries. Ethiopia also imports coal for cement industries. NOC, for instance, imports coal from South Africa, satisfying 13Pct of the national demand.

Do you think Ethiopia’s oil consumption, climbing year after year, is justifiable?
When NOC was established 15 years ago, Ethiopia’s petroleum products demand stood at 1.5 million metric tons, and has now climbed to four million metric tons. But, this is still minimal when compared to other African countries.
Egypt is the largest oil consumer in Africa. In fact, the four large economies in North Africa consume half of Africa’s oil demand, while sub-Saharan nations consume the rest.

Could fuel prices be cheaper if the country installs its own refinery?
Oil is supplied to Ethiopia through road transport after it reaches Djibouti Port, which is very costly. The best way to transport oil to a landlocked country like Ethiopia is through pipelines. On the other hand, the worst way of transporting oil is by using railway.

Taking this into account, it is easy to see why oil products are expensive in Ethiopia. It is mainly because of the lingering issues in the logistics system, and not because of the global market and international oil price. If Ethiopia buys oil from Djibouti Port transported through a pipeline, the oil price could reduce by half.

Ethiopia is currently investing in railways, which uses hydropower electricity as a source of energy. Electric powered vehicles are also replacing vehicles powered by fossil fuels, as we can see even in African countries like Rwanda. Taking this into consideration, do you think investing in a refinery is a viable solution?
No country in the world has a more convenient landscape for hydropower power generation than Ethiopia. It is also the most economically viable investment. As we can observe from hydropower projects currently being undertaken, it is the lack of proper project management that is hurting Ethiopia.

One of the reasons Ethiopia invests in railways is to import fuel in bulk from Djibouti Port to Modjo, near Addis Ababa. To your surprise, the rail wagons intended for transporting oil were imported ten years ago but we haven’t yet started transporting even a liter of oil through this method. Even after the new railway line was officially inaugurated, the wagons were not put to use as the railway line ends two kilometers before reaching Djibouti Port. In Ethiopia too, the railway line and the oil depot in Awash are not connected. In railway development endeavors, the failure in project management is similar to hydropower projects.

The number of indigenous oil distribution companies has mushroomed in Ethiopia, after the market share of the four foreign giants diminished. What drives this phenomenon?
The current oil distribution scheme was strategized and approved when Ethiopia established a refinery in Assab 65 years ago. The scheme was based on the thinking that government must handle the import of petroleum products while oil companies carry the distribution task to the end consumer. This mechanism is based on two elements. The first is that the prices of widely used petroleum products would be reduced substantially. The second is that the prices of lubricants must be higher to compensate the expected loss from the former. The justification being that the majority of the population buying petroleum products should pay less, while the few buying lubricants for their vehicles and machines should pay a higher price. So, oil companies are forced to compensate the cheap petroleum profit margin by selling more lubricants. All the past governments, including the Dergue and the current government have not tried to change this arrangement.

When the four foreign oil companies ceased operations in Ethiopia mainly in relation with the above factors, the government tried to attract more investors in the oil distribution sector by reducing the entry barriers. This was how things started going wrong. First, the profit margin from selling petroleum products is too insignificant to the extent that the business would become unviable by itself. Plus, the new oil companies have no financial capacity, knowledge, and organizational strength. They have poor human resource and weak structures. Most of the companies entered the oil distributing business thinking it is a newly flourishing business frontier.

But when things went in the opposite direction, some companies started blending petroleum products with other items and there was adulteration. We have been complaining on this issue to the government for a long time. I presented Tanzania’s laws that govern the sector to the Ethiopian government. If these wrong practices are not [managed], vehicles will increasingly be damaged and car accidents will skyrocket. Industrial machineries will also fail, because of adulterated diesel. I insisted that the government should stop this trend at once.

In addition to this wrongful act, oil companies started to use another loophole. Usually oil companies buy oil from the Ethiopian Petroleum Supply Enterprise (EPSE) on credit, payable 15 days after selling the products to the consumer. But they started diverting the money collected from consumers elsewhere. So, they could not repay the Enterprise. Since such companies have the support of officials, the influx of oil companies into the distribution business continues, even if the sector is not as such sufficiently profitable. Although the managers of four oil companies are currently in prison, it has come too late.

So, the business by itself was not meant to be viable. The oil companies entered without a genuine understanding of the sector. If you are going to profit from the oil distribution business, you must have many stations, as the profit margin is too thin. It is not a viable business with just a few stations. Government knows this and I believe they will find a solution for it.

Do you think the number of oil distribution companies and fuel stations in the country is enough to meet the demand?
No. They are still too few considering the current demand and the size of the economy. Kenya, with a population size of about 50 million, has over 2,500 fuel stations, while Ethiopia, with more than 110 million people and double the land mass of Kenya, has less than 1,000 stations. Ethiopia’s gross domestic product (GDP) is also expected to grow fast and road transport network is also expanding. The demand from the agriculture and construction sectors will also keep rising. So, we need more stations both in the countryside and urban areas.

Is the small profit margin the reason why the giant foreign oil companies left Ethiopia?
Companies like Shell, Mobil and Agip left because the profit margin from selling fuel was too small in Ethiopia. I believe this is the right decision. Shell is a very big organization but the profit margin in Ethiopia is not enough to maintain the organizational standard of such a huge company. Not only Ethiopia but they also left some other African countries because of similar reasons.

The profit margin in Ethiopia has never been right. We commissioned international consultants to study it and they provided their recommendations to the Ethiopian government. Then, the government slightly improved the margin last year. But what government increased is not close to what we asked. It is still not viable.

Is the profit margin from petroleum products in Ethiopia lower compared with other African nations?
The profit margin in Ethiopia is the lowest in Africa, as solidified with documented studies. The government has been regulating it blindfolded and it has recently started to improve the margin after rightly perceiving the devastating effect as witnessed in station expansion, or lack thereof. As the economy grows and market size expands, oil demand soars. But the numbers of oil stations are not increasing at the same pace. Currently, the government is begging us to open more and more stations. And I am asking them to increase the margin.

If you see the oil supply scheme in Kenya, a government enterprise similar to EPSE is not engaged in the importation of oil. Unlike Ethiopia, Kenya’s government only regulates contracts and price. Oil companies import and distribute the oil products, based on a tender process the government puts in place. I have been begging the Ethiopian government to change its scheme to something similar. We can import and supply oil while government regulates the business. The problem in Ethiopia is that government is engaged both in regulation and operation.

How could NOC survive under such circumstances and become a leader in the market?
NOC started with 11 stations on day one. Now we have 218 stations nationwide. Secondly, most of NOC’s employees are capable people who came from Shell, with me. Many people, while we were establishing NOC, believed local oil companies cannot survive in Africa and they said NOC’s fate will not be any different. But we managed to dominate the market in a short period of time.

This is because, firstly, many NOC stations can serve 12 cars at a time. Many oil companies are now trying to copy this. Secondly, products are always available, unless supply is disrupted from the source. Thirdly, we sell lubricants, and provide car wash, café, and supermarket services all at the station. Such a business model will have a greater return.

In addition, NOC has never paid dividends, like many international companies. We reinvest what we get. That is how we are building a big headquarters in Addis Ababa. Plus we also import coal, Liquefied petroleum gas (LPG) and other products, which are not regulated. That is how NOC has managed to survive.

How many stations do oil companies need to survive?
One can survive with ten stations. But this depends on the organizational capacity and structure of the company. If you have a large number of human resource and management, it costs you. Also, local oil companies in Ethiopia do not have robust management. They do not even have more than a single office for the manager and secretary. They also have very few stations.

But especially if you supply to the aviation sector, it is extremely difficult to survive with limited capacity. You have to take liability for each airplane you fill with fuel. We currently have an insurance coverage worth USD1.25 billion to cover our deal with Ethiopian Airlines. It is risky. In fact, the insurance premium is small when looking at the big picture of the networks we can access. You must maintain safety standards. Those small oil companies do not need such sophistication but they must have strong and professional management. Few like Gomeju and TAF are becoming capable now. They are graduating over the process.

What is the arrangement of purchasing oil on credit basis? What type of relations do the defaulting companies have with EPSE?
By the way, the problem created by those defaulting companies is affecting NOC. They complain to government that they are asked to pay in cash while NOC is taking oil on credit. The government is currently intervening. NOC has no problem buying with cash. But, the government has to improve the profit margin so we can access finance from banks. NOC has no cash problem. We pay over [three billion] birr to government every month. We cannot access all this money from our own pocket. So we must be supported by financial institutions. I told government officials ‘I have no objection with cash purchases. But that needs improving the margin for all. Then the strongest [and fittest] will survive.’

How much of NOC’s profits come from selling petroleum products?
Close to 60Pct of NOC’s total profits come from lubricants, LPG, coal and petroleum coke sales. We are the number one lubricant seller in Ethiopia. Our products are wanted in every factory, because of their high quality.

How about the supply of jet fuel?
We satisfy above 42Pct of the total jet fuel demand in the country. We supply about 53Pct of Ethiopian Airlines’ demand. The rest is coved by Total and Oil Libya.

Ethiopian Airlines was listed under companies that will be privatized, as part of the ongoing economic reforms with tendencies to shift to a more liberal economic environment. What is the decision of the board of Ethiopian airlines, of which you are a member?
From the board and management side of Ethiopian Airlines, we don’t have any interest to sell Ethiopian Airlines. What the government decides is another issue.

As President of the Oil Distributors Association, do you see a clean line between the regulatory body and operating companies?
There are problems on the regulatory side. We hired an international consultant to study this. The consultants recommended an independent authority to be established to regulate the oil sector, to report directly to the Prime Minister or Parliament. The existing regulatory structure is confusing because it has no centralized power. The Ministry of Water, Irrigation and Energy, Ministry of Trade and Industry, and the Ministry of Finance all have a say on the oil distribution business, in addition to EPSE. We have also advised the government on this and I think officials have accepted it. A regime that will govern the sector will be proclaimed very soon. There is going to be one authority in charge of the oil industry.

You are often mentioned as the main reason behind NOC’s success. Is there any magic bullet you have used as a strategy?
I know about the oil industry from a young age. The values we are implementing at NOC have lived with me for long, even before NOC was established. Good governance, corporate values, and people relations are the pillars, which lead to maximum performance. Success is nothing but the result of the relationship of an enterprise with all the people it deals with, internal as well as external.

Tell me about the progress of the company in the last ten years, and financial performance of the company in 2019?
We have 218 service stations and we deliver home-based services for over 1,000 customers including Ethiopian Airlines. We have 200 direct employees but we have indirectly created job opportunities for over 20,000 people. There are about 1,000 bulk fleet drivers and assistors.

Last year, we have a revenue of over forty billion birr. NOC was also one of the top five platinum tax paying companies. We paid over ETB800 million in taxes, of which ETB500 million was paid in the form of corporate tax. Our gross profit in the year was nearly ETB1.4 billion.

This year, we have planned to touch one billion birr in net profits but I don’t think we can meet that expectation because the business environment is not improving.

Do you get support from other companies of Sheik Mohammed Al Amoudi such as MIDROC?
NOC is an independent company and it has nothing to do with MIDROC. Sheik Mohammed Al Amoudi is just one of the shareholders of NOC. So, the company stands by itself and relies on nobody. We don’t even have foreign currency problems because we are in business with big companies. In addition, we are now in preparations to engage in the export of fuel products.

What are your future plans?
We have a plan to expand our business. Already we have opened a branch in Djibouti and our next step is to move to Kenya. In fact, we will invest in the entire east African market.

Do you have challenges in adopting and using new technologies?
Yes, we have. There is no system allowing customers to purchase our products or services using electronic payment systems in Ethiopia, though it is readily available in many African countries.

Tell me about the challenges of making companies transferable to generations
It is a lack of leadership skill and vision. If it is in the service sector, it all depends on people. So, they should have good relationships with others. The other challenge is related with project management.

How is the political instability affecting your business?
We have been greatly affected especially from the supply side. We couldn’t access products on time. We couldn’t even manage our stations. People were not even willing to speak to each other. There was a fear of the unknown. There was rioting and people took the law into their own hands; much damage has ensued. It was a difficult time. The government still needs to focus on ensuring peace and security, to improve the economy.

Have you observed any change on the ground following the recent reform activities of the government?
Ideas are coming up but in terms of delivery, little has been achieved. The government becomes credible when it enforces law and order. Without controlling the instability, it is hard to say that the economy is functioning properly. Law and order should be the priority to maintain peace and security in the country.

9th Year • Jan.16 – Feb.15 2020 • No. 82