Mushrooming Oil Suppliers

Not more than 10 oil suppliers were operational in Ethiopia a decade ago. Now that is just history with the number almost quadrupling to 42 in November 2021. Not only this, the ownership structure of these companies has also changed greatly. While oil suppliers established decades ago were largely foreign-owned or big corporates, they are now being replaced by those owned by Ethiopians. But making a profit and staying afloat has not been easy for the majority of them, largely due to the low profit margin set by the government and shortage of forex needed to import lubricants and bitumen, which are more profitable. EBR reprints an updated version of an article published in February 2020, EBR 82.

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 almost quadrupled in recent years—up from less than five, more than a decade ago. Together with the French oil company TotalEnergies, the new giants, namely OLA Energy (formerly OiLibya), Yetebaberut, and National Oil Corporation – Ethiopia (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 cease their Ethiopian operations around a decade ago.

Tebarek Oil is amongst the small indigenous oil companies formed eight years ago to fill the void left by the foreign giants. Established as a sister company of Africa Metals with ETB5 million in capital, the company 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 [eight] 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 supplies 60 trucks of petroleum monthly, much less than NOC’s 100 trucks daily. Even though its capital has reached ETB150 million, Tebarek’s FY2018/19 net profit stood at ETB600,000 while its sales revenue eclipsed ETB600 million, representing a margin of one per cent profit from the total revenue. Even though this margin is too low, the company has plans to expand the number of fuel stations in Addis Ababa and other parts of the country.

“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 fuel sales,” says Akrem. “As we cannot make decent income from the sale of 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 has more than doubled over the past five 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 and Energy. In order to avoid credit default, oil companies keep working even under difficult circumstances like the political unrest over the past few years, which has immensely affected their business. “It takes a minimum of one month to bring back money from the regional stations. 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 OiLibya, says EPSE used to give oil on a credit basis without guarantee, until recently. “Some companies are established to intentionally exploit that loophole. They took oil way above their asset value.”

Of course, EPSE complained 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.

Several oil companies have totally failed to repay their credit and have subsequently been closed, while few are excused as their non-payment was due to the failure of third party owned stations’ failure to repay. EPSE has sued those fuel companies which used the money they should have paid to the EPSE, for another investment.

In addition to the rising number of cars that has created huge demand for fuel, the increasing demand for bitumen (range), lubricants, and engine oils is also a factor that has called for an increased number of oil companies in the country. The demand for such products is exponentially increasing, ensuing the fast-growing car population, and has now surpassed a million, a figure that doubled in five years. Half of oil companies’ profit comes from the sale 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 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 engine oils, are what attracts most businesspeople to join the sector. It has almost completely stopped over the last few years ago, after the National Bank of Ethiopia (NBE) removed the items from the nation’s priority import list,” he says.

Following a strike warning unless tariffs are modified, liquid freight owner’s association received a favorable reaction from the government and tariff raises are expected in the near term. The Ministry of Transport and Logistics performed a study and submitted its findings as well as the new adjustment to the Ministry of Trade and Regional Integration.

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 has been 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.

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 has been worsening over the past couple of years.

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. 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 in Dukem within five years.

Precipitated by the number of vehicles which doubled in five years; and also the global oil price hike due to the Russian – Ukraine war, Ethiopia’s oil import is expected to increase to more than USD5.6 billion in 2022, double the USD2.82 billion import bill registered in 2019.

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.”

For long, 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. This problem is currently getting solutions since the drive for digital payment in Ethiopia is happening faster than what one thought it would be. “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 was paying close to ETB170,000 per month for his 16 employees working under day and night shifts in 2020. The push for such options even though is important to cut costs, needs reconsideration for its contributions for unemployment. Such practice is the case in advanced economies where labor is expensive and not abundantly available.

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. There are 42 oil companies in Ethiopia and close to 1,200 fuel stations operating in the country, serving the nation’s 115 million people and over 1.3 million registered vehicles according to the Petroleum & Energy Authority (PEA). This is comparable to Kenya’s over 1,800 fuel stations operated by more than 70 registered oil marketing companies that are involved in the supply, distribution, and sales of petroleum products including petrol, diesel, kerosene, lubricants, and LPG, according to the Kenyan Energy and Petroleum Regulatory Authority.

“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 cost. Constructing a station with a good canopy costs ETB12 million, while it takes ETB60 million to purchase a completed one.” With these figures two years old, one can only imagine inflationary pressure on building fueling stations currently.

To curb the shortage of fuel stations, the Addis Ababa City Administration has allocated 16 plots dedicated to the construction of new oil stations in 2020. This will help to increase the number of fuel stations in the city to 116. However, compared to the number and growth of vehicles in the city, it will only meet a small percentage of the growing demand. As the problem is worsening in the regions, there is a growing demand to provide land for fuel stations. There are nearly 1.3 million vehicles registered in Ethiopia. EBR

10th Year •June 2022 • No. 108

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