Not more than 10 oil suppliers were operational in Ethiopia a decade ago. Now that is just history. The number has now tripled, reaching 33 as of December 2019. Not only this, the ownership structure of these companies has also changed greatly. While oil suppliers established a decade ago were largely owned by foreigners or big corporate, they are now being replaced by locals. But making a profit and staying afloat has not been easy for the majority of them, largely because of the low profit margin set by the government and shortage of forex needed to import lubricants and bitumen. EBR’s Ashenafi Endale explores.
One of the thriving business fields proving viable in Ethiopia regardless of strong and direct government regulation, is the distribution, transport and retail of refined fuel, where supply is creating a bubble of new businesses, even though they are way behind addressing the nation’s huge fuel demand. However, how a strictly state-regulated industry with a very low profit margin could become such an attractive business front for local companies is questionable, as the number of indigenous oil companies in Ethiopia has now reached 33, up from less than five a decade ago. Together with the French oil company Total, the new giants, namely Oil Libya, Yetebaberut and National Oil Corporation (NOC), currently control 90Pct of the oil business in the country. Foreign giants like Shell, Agip and Mobil, which stayed in Ethiopia for over half a century decided to seize their Ethiopian operations in Ethiopia a decade ago.
Tebarek Oil is amongst the small indigenous oil companies formed six years ago to fill the void left by the foreign giants. Established as a sister company of Africa Metals with five million Birr capital, Tebarek Oil was registered as the 13th oil company in Ethiopia. But, the road ahead was not as per the expectations of the company’s founders.
“When we started the business six years ago, we expected a return on investment in a few years’ time. But we are yet to do so,” says Akrem Jemal, General Manager of Tebarek. His company currently supplies 60 trucks of petroleum monthly, much less than NOC’s 100 trucks daily. Even though its capital has reached ETB150 million, Tebarek’s2018/19 net profit stood at ETB600,000 while its sales revenue has eclipsedETB600 million, according to Akrem, whose company is also under preparation to open three more stations in Addis Ababa in the next four months.
“Our profit is dwindling year-after-year largely because we are unable to import and sell lubricants—our major source of income, more profitable than oil sales,” says Akrem. “As we cannot survive from only the profit we get from selling fuel, we usually use money from our sister company to cover the salaries of our station workers.”
Although industry insiders suggest that the oil retail business is not profitable, new entrants are rising in number. Actually, the number of oil companies doubled over the past three years. Various justifications are given for the mushrooming of oil companies, in addition to the government’s decision to attract local operators to replace the foreign giants.
The first measurement taken by the government to attract local companies is the easing of strict requirements implemented by the Ethiopian Petroleum Supply Enterprise (EPSE), the only entity with a mandate of importing oil, since 2014. Previously, companies were obliged to build their own depots with a minimum capacity of five million liters of fuel, in addition to having at least five fuel stations. This was reduced to only half a million liters and two stations, which should grow to six in five years. The depot size requirement shrunk after the Enterprise increased its own reserve capacity.
Such a move has enabled oil companies to take the oil from EPSE depots in regional states when there is a shortage. The oil companies, by depositing ETB16 million as a guarantee, can take fuel worth up to ETB100 million to be paid within 15 days at 12.5Pct interest—almost two times higher than the saving interest rate offered by commercial banks. Besides paying at least ETB18,000 in interest daily, oil companies are expected to collect the money on time from their stations.
If oil companies fail to serve their credit for a month, the EPSE will cut their supply. But usually, EPSE keeps supplying the oil despite the unpaid credit, as ordered by the Ministry of Water, Energy and Irrigation. In order to avoid credit default, oil companies keep working even under difficult circumstances like the political unrest over the past few years, which immensely have affected their business. “It takes a minimum of one month to bring back money from the stations operating in regions. On the other hand, oil stations owned by third parties use the money for other purposes and do not pay on time,” explains Akrem.
Eshetu Zeleke, with decades of experience at Shell and Oil Libya, says EPSE used to give oil on credit without guarantee, until it recently woke up. “Some companies are established to intentionally exploit that loophole. They took oil way above their asset value.”
Of course, EPSE is complaining that the default rate of oil companies is increasing. Most of the new oil companies take fuel on loan from EPSE, expecting to pay back after selling the fuel at their retail stations. However, most oil companies have accumulated debt, leading them to close their company, transfer their stations to other oil companies, and entirely leave the market. Some oil companies have taken up to ETB700 million of fuel on credit but have failed to repay EPSE even after selling the fuel.
Oil companies like Genet, Blen and Ertale, for instance, failed to repay their credit and are currently closed, while Nile Petroleum is excused as its non-payment was due to the stations’ failure to repay. EPSE has currently sued Genet, Blen and Ertale for failing to reimburse ETB200 million. The three have close to 20 stations, combined. Established with a registered capital of ETB53 million in 2017, Genet Petroleum claims investing close to ETB700 million in constructing stations.
Another reason for the rise in the number of oil companies is the increasing demand for bitumen (range), lubricants and car oils. The demand for such products is increasing exponentially, ensuing the fast-growing car population, and has now reached almost one million. Half of oil companies’ profit comes from the sales of such items, which the oil companies have the right to import and sell without the involvement of EPSE as long as they can access the foreign currency.
Additionally, about 40Pct of the companies’ profit comes from the provision of VAT-exempted services like car washing, café and supermarket. The profits from oil and petroleum sales are not more than five percent of the total, according to Akrem. “The side businesses, particularly the import and sale of car oils, are what attract most business people to join the oil business. It has almost completely stopped over the last two years, after the National Bank of Ethiopia (NBE) removed the items from the nation’s priority import list,” he says.
The other reason for the influx of oil companies is the profit margin amendment made by the Ministry of Trade and Industry (MoTI) in April 2018 after a long expectation and cut-throat struggle by distributors, transporters and developers of stations. In April 2018, the last time the Ministry revised petroleum products prices, the profit margin of oil companies was increased by ETB0.007 per liter, while the increment for fuel transport ranged from ETB0.10 to 0.15 per kilometer depending on the type of road. Additionally, stations’ margin increased by 220Pct from seven to fifteen cents.
Despite such increases, oil companies still complain the profit margin is far behind the minimum profit needed to stay in the business. “The margin for both distributor and station owners’ is better now. They can improve their net profit if they can reduce overhead costs with good management. However, it is still difficult to recover one’s investment within a few years,” argues Aregawi Yiheyis, General Manager of Yeshi PLC, which is supplying three million liters of oil annually to stations.
Akrem agrees. “The oil sector requires a long-term investment but the margin is still the lowest in Africa. The margin in Kenya is double compared with Ethiopia’s,” he says.
As of now, an oil company gets ETB5,500 to 6,000 gross profit from a single truck with a capacity of 47,500 liters. Before the profit-margin revisions by MoTI, it was ETB3,000. Oil stations, which cash-in between half a million Birr to one million Birr per day, get a ETB7,000 profit from a single truck.
Such an increase in profit, coupled with the rising demand for fuel, driven by the fast-growing car population, has encouraged many to join the oil distribution industry. The fuel demand from industrial generators is also increasing as electricity supply fluctuation worsens.
Ethiopia’s total import of petroleum products doubled from 1.9 million metric tons in 2011/12 to 3.9 million metric tons in 2018/19, while the import bill tripled from ETB27 to 76 billion. Diesel constitutes close to 75Pct of the yearly imported oil in Ethiopia due to the vehicle population. Precipitated by the increase in demand for oil, 12 depots are now under construction by EPSE, while the design is finalized to construct another depot inDukem within five years.
Be that as it may, proposals were made by a group of investors to establish a fuel refining plant, in addition to the ongoing efforts to explore natural gas in Ogaden, one of the five confirmed fossil fuel reserve sites within Ethiopia. “Various foreign and domestic oil companies have submitted proposals to install refinery plants for crude oil in Ethiopia before. However, price fluctuations in the international market affect the viability of such plants. Investors came when the price is around USD120 per barrel and they were discouraged when the price falls below USD100,” says Demelash Alemu, advisor to EPSE’s CEO. “Economic expansion and a growing population significantly increase the import of petroleum products. Government decided to ease the requirements and encourage local oil companies in order to address the highly increasing demand.”
A fuel pipeline connecting Ethiopia to Djibouti is also in the works. However, EPSE’s plan to blend benzene with ethanol failed because a number of sugar projects could not be finalized on time. Nile and Oil Libya have already installed blending plants. This is expected to improve oil companies’ profit, reduce imported petroleum volumes, and also contribute to carbon emission reductions.
Oil companies raise two factors currently affecting their business. The first is the absence of e-commerce, which allows digital payments and reduces overhead costs. “If fuel buyers can use their cards to pay and refuel by themselves at fuel stations, this would reduce the burden of hiring manpower, reduce overhead costs, and increase the profit margin of oil companies,” says Akrem, who currently pays close to ETB170,000 per month for his 16 employees working under day and night shifts.
The second problem is government’s reluctance to give plots for the construction of fuel stations. Even though owning numerous stations is advisable for oil companies in Ethiopia for a sizable profit return, this has remained difficult. The number of fuel stations in Ethiopia, a nation with over 100 million people and with acute energy demand, stood at 800, of which 100 are in Addis Ababa, home to over half a million vehicles. This is in sharp contrast with Kenya, which has over 2,000 fuel stations for only 40 million people.
“Accessing land is no simpler than the old days, says Aregawi, whose company planned to construct 11 stations over the past five years, but managed to build only six. “Acquiring land is difficult, costing ETB20 million, on average, and takes a long time to recover the investment. Constructing a station with a good canopy costs ETB12 million, while it takes ETB60 million to purchase a completed one.”
However, the Addis Ababa City Administration recently allocated 16 plots dedicated to the construction of new oil stations. Regional states must also follow suit,” Aregawi recommends.
9th Year • Jan.16 – Feb.15 2020 • No. 82
This article has been edited after it was asserted that our statement identifying Genet Gebregziabher and Tewodros Yeshiwas as founders of Genet Petroleum was found to be erroneous. We apologize to our readers for the mistake and the inconvenience we may have caused.