Gold-For-Oil: The harbinger of fuel shortages and government debts to come

During the Easter holidays, GOIL, the leading Oil Marketing Company (OMC) in Ghana, recorded shortages of gasoline at some of its major fuel station outlets across the country. Management of the firm, through a press release, attributed the problem to operational challenges that were occasioned by supply disruption.

This is not surprising considering the outlook of the current downstream petroleum

Read full articleindustry and the potential impact of the Gold-for-Oil (G4O) policy, on the entire value chain. Apart from the obvious meddling, interference, and direct control by the government and its parastatal agencies, two major risks the industry faces are the threat of fuel shortage across the country and possible trade debt accumulation by the state, through BOST (bulk oil storage terminals) to the international oil suppliers (IOTs).

Not long after the start of the program, I predicted the possibility of fuel shortages, and with GOIL leading the pack, one would not be surprised to see other OMCs following suit in the coming days. The G4O program was originally initiated by the government to ease pressure on Ghana’s foreign exchange reserves, address the country’s balance of payments, and deals with the incessant exchange rate depreciation that often bedevils the country. It was first announced by the Vice President of the Republic in November 2022.

However, it began effective implementation in January 2023, when the first consignment of some 41,000 MT of white products was received at the Tema port. This was characterized by some level of pandemonium and uncertainty, with days of lengthy discussions in the media landscape by various actors and key industry players. The obvious concern for stakeholders was to know the magnitude of disruption the policy would cause.

Even though received with mixed feelings, the G4O program can very much achieve its aim of freeing up the forex space, leading to a lower rate of currency depreciation and other economic incidentals in the short run.

However, a critical assessment of the program and the possible risk of supply shortages and their potential impact on consumers and the economy must be looked into. Supply shortages can undo whatever gains that could be achieved by the G4O policy. In fact, supply shortage is grave and undesirable because the whole of Ghana’s economy is hinged on oil. There will be great financial losses for businesses and the economy because it hinders firms from providing essential services.

Supply disruptions will precipitate shortages, which will further drive petroleum prices up per the basic demand-supply economic axiom. The ripple effect will be an increase in the general prices of goods and services bringing us back to square one.

For years, effective forex management has been the industry’s major problem. Taking into account the huge size of our petroleum import commodity cost on the import bill, it would be prudent for the government, through the Bank of Ghana (BOG), to institute the right measures to enable the preservation of enough forex at an affordable rate; for the BDCs when their supply contract payments with the IOTs are due.

With the current forex demand of about $400,000,000 by the BDCs every month, BOG should take charge of every gold sale outside the country through the government’s existing domestic gold purchasing program and create a dedicated vault for receiving forex, earmarked specifically for petroleum import supply.

My view is that until major structural and operational changes are made for the downstream sector by NPA and key players are assigned different roles backed by the requisite legislative instruments, the BDCs must be allowed to perform their current role and operations under the current deregulated, free market era; as they have served the country well since they took over the supply of fuel in 2007. The BDCs have consistently imported fuel to meet Ghana’s energy and fuel needs; which is a contrast with the situation when the state used to be in charge.

Back then, the country was plagued with shortages and other supply problems. G4O’s impact on the operations and economic viability of the BDCs will result in huge job losses and a supply vacuum the government cannot fill. My initial verdict on the G4O was that it could disrupt supply by causing apathy among the BDCs when importing; which would subsequently lead to supply shortages. This forecast was made based on two reasons.

First, upon inception of the program, the BDCs may instinctively want to wait for the policy to take full effect or mature in order to observe all the possible changes that will accompany it before making purchasing decisions on whether to import or not. While they look on and conduct their market assessments, they may import less or delay their import decisions completely. With this, some of the market demand will go unfilled, leading to the imminent risk of a fuel shortage. Could that be a consequence of the shortages that Goil recorded in some of its branches during the Easter?

In addition, the recent news of some BDCs refusing to renew their licenses, even though it was denied by the CEO of the Chamber for Bulk Oil Distributing Companies (CBOD), Mr. Patrick Kwaku Ofori, is expected to happen in the mid to long run because BOST will eventually set in to take over the BDCs importation job per the current arrangement, structure and operational framework of the G4O program.

Secondly, from an operational standpoint, the government may not be effective in instituting the right measures that will ensure a smooth and continuous supply of fuel into the country to meet real demand every time while keeping the strategic stock reserves at their required levels at the same time. To be precise, would BOST be up to the task of effectively planning, organizing, controlling, and managing the supply chain so that accurate forecasts and stock levels are monitored across the country, taking into consideration the applicable lead times so that any shortage risks are averted? I ask this, with all due respect, because the slightest inefficiency or glitch with the G4O program will have sharp and dire consequences on the whole value chain across the country.

I dare say the odds are high with BOST running the program inefficiently; which will create other knock-on effects that can bring the industry to its knees. Most African state-run enterprises are known to be unproductive and mostly operated with a lot of inefficiencies. This is predominantly caused by the risk of politicization, cronyism, and partialism. With BOST given the authority to sell directly to the OMCs, the OMCs will, in no time, start owing BOST.

Eventually, the Government, through BOST, will also be riddled with ballooning debt to the IOTs, and by that time too, most BDCs might have scaled down their operations drastically, folded up, or diversified their investment into different portfolios due to the current market uncertainties. This will have a debilitating impact on the downstream market and bring it to a possible collapse. BOST, the bulk supply company to execute the G4O agenda, is currently on track of reporting profits after years of recording losses even to a point of possible insolvency as of 2017.

The temptation of cronyism, mismanagement, politicization, and operational inefficiencies resulting in trade losses can take BOST back to the era of debt, which will jeopardize the whole downstream sector.

Additionally, the G4O policy framework put out before the program began does not properly reflect and sync with the operational dynamics and conventions of the industry. It creates regulatory and operational policy inconsistencies that are distortive to the market. The policy requires that the BDCs who buy from BOST pay within 15 days of loading on a cash basis or by letter of credit.

This will be challenging for the BDCs because the average turnaround time for BDCs in the industry is mostly 30 days. And so, in no time, most BDCs participating in the program will accrue debts with BOST. In return, BOST will end up owing the IOTs, and their inability to pay will bring about judgment debt and possible trade disputes at the International Court of Arbitration. At best, BOST should increase the credit payment days from 15 to 30, even as they enjoy 60 credit days with the IOTs. This is to align with the conventional 30-day supply and sales cycle that governs the industry.

Also, BOST should just sell directly to the BDCs so that the BDCs in turn, will sell to the OMCs in order to bring some level of market security and assurance to the BDCs. This arrangement will be in line with the current provisions of the NPA Act 691, 2005. By that, the current structure may not be disrupted and the BDCs can operate within their distributor’s margin as the OMCs offtake from them instead of directly from BOST.

Then again, it’s my view that, until Tema Oil Refinery (TOR) comes back on stream to provide refined petroleum products for the country, importation of white products will continue, and it is the duty of the government to create the business environment needed for the uninterrupted supply or importation of petroleum products. The government by itself should not take up the role of fuel importation. This is because the government always comes into business operations with its inefficiencies, which is why in a liberalized free market like ours, the state must stay out and allow the free market to operate.

After the BDCs took over the supply of fuel in the country over the past 15 years, the country has enjoyed a stable supply of fuel. The private bulk storage depots, aka Tank Farms, also came in to augment the infrastructural deficit in the value chain and have served the country well together with the BDCs. Upon the institutionalization of the price deregulation regime, the government has accrued no fiscal debt except for RFO and Premix subsidies. And so, one can conclude that the deregulation regime has been successful to a large extent.

It is therefore necessary for Government to continue to promote and enhance the private sector participation to keep the industry thriving. Government, through NPA, must act quickly to put the right measures in place, with the involvement of all stakeholders, so that the BDCs and private depots do not collapse because BOST alone cannot achieve and sustain the full supply of the country’s fuel demand for a longer period. Fuel importation left to BOST alone, through the G4O program, BDCs and tank farm businesses will collapse. BOG should just strive to provide enough forex to the BDCs at a similar rate given to BOST in order to keep the market competition open.

To put my point into perspective, the private BDCs started bearing the brunt of the G4O program not long after it had started. For instance, on 31st March, a cargo vessel by the name GH Parks due to discharge 42, 000 MT of gasoil belonging to some private BDCs had to be forced out of berth by NPA for a G4O vessel, Madelin Grace, carrying 41, 000 MT of same gasoil, to assume anchorage and berth even though the G4O vessel was not yet on the berthing schedule at the time.

The sudden takeover of the main fuel discharge facility, the CBM, by BOST without recourse to the scheduled laycan is tantamount to the anti-competitive use of public infrastructure. When this continues, it will cost the BDCs huge demurrage fees at the port and great disruption to their operations, further crippling the private sector side of the industry. In effect, the program will not support private sector growth and will arm BOST with an unfair advantage to abuse public infrastructure to the disadvantage of the private BDCs.

Obviously, there will be no way the BDCs can face any competition from the government. Per the current outlook, most of them will scale down or shut down operations completely by the end of the year should the G4O policy, in its current form, succeed. So, we can see clearly a situation where BOST would deprive the BDCs of access to major industrial facilities like storage tanks, loading gantries, CBM, the Jetty, etc. resulting in biased usage against the private BDCs.

The use of APD depot tanks and loading gantries together with other state facilities under BOST would be riddled with corruption, favoritism, cronyism, and flagrant abuse compromising the role of BOST in the industry.
That notwithstanding, BOST, originally mandated to provide the needed infrastructural backbone for the industry and keep the nation’s strategic reserves will be a player and a referee at the same time per its role in the G4O. It will run into unsustainable debt because the industry is inherent with numerous credit imbalances per the current contract supply payment convention. In fact, at every point in time, both the OMCs and the BDCs are in debt vertically along the chain with their suppliers in some way or another.

In practice, OMCs have 30 days of payment credit with the BDCs, and the BDCs, in turn, have up to 90 days with the IOTs, so the BDCs are always in debt with the IOTs. When BOST assumes the full role of fuel supply through the G4O program, they will inherit this debt risk from the BDCs and begin a debt-accumulating cycle with the IOTs. This can even be compounded in the event of any mismanagement and the government, through BOST, will owe the IOTs billions of dollars, which can cripple the industry.

This will, in effect, create serious supply disruptions, which will be accompanied by fuel shortages at the pump. The impact on the real and productive sectors of the economy will be dire as petroleum drives all the other sectors of the economy, including agriculture, energy production, transportation, workplace productivity, and more. This will undo whatever gains the G4O might seek to achieve; should it happen.

At best, the government should completely stay out of the supply importation business, reduce taxes on petroleum products, review some of the levies, and just empower BOG to make the necessary arrangements for the supply of forex to the BDCs. The prevailing issue of BOG not getting enough forex to supply the BDCs can be solved if proper checks are put in place to ensure that all the proceeds of gold sold outside the country are accounted for and the right foreign exchange is accrued at dedicated BOG accounts for petroleum imports.

To recap, the major problem for the BDCs has been the lack of enough forex at competitive rates, resulting in forex losses and thus forward pricing of petroleum products, pushing petroleum prices higher almost every time during the pricing window. The government, through BOG, has the responsibility of providing enough US dollars at a rate adequate to convert the domestic sales proceeds of the BDCs in Ghana cedis into USD; in order to meet the supply contract price of the IOTs when import payments are due.

Review of the policy

Recently, the Vice President mentioned that the government will save 4.8 billion USD annually when the policy is successfully implemented. This amount is actually Ghana’s current estimated annual petroleum import bill. Per this statement does the government seek to achieve a 100 percent supply with the gold for oil policy?

Secondly, will the government actually save 4.8 billion USD in foreign exchange annually, as purported by the Vice President? In my opinion, I think that is misleading because, at best, what will happen is that, the government will create a forex space that will mitigate the spiraling exchange rate depreciation.

However, to say that the government will save some 4.8 billion USD means that either the cost of importing fuel is some higher X amount and through the G4O program, the cost will now be less by 4.8 billion USD amount; which is not the case. The 4.8 billion USD is the estimated cost of imports for the year, and if fuel imports are to be paid with gold, no savings will be made. We would rather be creating forex demand space for BOG, which admittedly can stem the highly volatile exchange rate depreciation the country faces. This, however, is not equivalent to the government saving money.

Thirdly, the policy framework states that the number of BDCs and OMCs who buy from BOST under the program will be controlled. What are the prequalification criteria and the operating principles put in place to stem nepotism and cronyism? Will these qualification criteria be spelled out clearly and made available to all interested parties? What is the assurance that BOST will operate on a level playing field and treat all qualifying players equally; so those seemingly non-aligning OMCs to the current government are not neglected and squeezed out of business? What are the possibilities of BOST abusing the CBM in the process and the possible conflict of interest and unfair regulation by the regulator, the NPA, in determining the price BOST sells under the G4O program?

Fourth, to what extent will the policy affect the current deregulation regime, and after the policy matures, what will be the exact role of the BDCs in Ghana? With the ability for BOST to sell directly to the OMCs and the target to achieve 100% supply by the end of the year, will the era of the BDCs die out and will that warrant a review or amendment of the current regulatory act 691 for proper operational restructuring?

Fifth, on the pricing of the petroleum products to the BDCs and OMCs under the G4O program, will the NPA publish prices and sell at uniform prices to all service providers, or they will practice price discrimination? Will that create undue advantages for some OMCs especially GOIL, that can result in unfair market competition? Does the direct role of NPA in the G4O program amount to a conflict of interest, and how will that affect its regulatory role?

To conclude, I would say the government should not take up the role of fuel importation into the country because it will be the recipe for fuel shortages and extra government debts to come. But if NPA still deems it necessary and would operate per the current G4O framework, I suggest a review of the framework, a standard operating principle (SOP) developed and made clearer and consistent with the deregulation regime.

Recommendations

First, the government should establish a market penetration cap for the program; and that should be nothing more than 50%. The remaining half, assuredly through MOUs, should be left for the private BDCs to take up.

Secondly, under the G4O program, BOST should only sell to the BDCs so that the BDCs can continue effective operations within their distributor’s margin.
Third, the 15-day payment credit should be increased to a minimum of 30 days so that the BDCs can properly turn around in full cycles in order not to incur debts with BOST.

Fourth, NPA must publish all offtake prices explicitly to ensure fairness, equity, and market competitiveness.