The decision, announced last week by chieftains of the National Petroleum Authority to reserve the distribution and sale of petroleum and gas products to indigenous enterprises – the latest step in government’s ongoing “oil nationalization” agenda – may prove to be its best move so far, even though it will inevitably irk the international downstream oil and gas industry which has been taking undue advantage of Ghana’s openness to foreign enterprises without accompanying prudent rules of conduct for decades.
The move follows plans announced a couple of years ago to introduce local content and participation regulations for the downstream oil and gas sector as has been done for the upstream sector.
But the new plans go much further than the original ones which basically called for some level of indigenous equity ownership in oil marketing companies (OMCs) and Bulk Distribution Companies (BDCs) which could have been achieved by foreign owned enterprises selling some of their shares to Ghanaian either through public listings on the Ghana Stock Exchange or by private placement. Indeed, under those proposed regulations, new foreign investors would still have been able to gain entry into the Ghanaian market as long as they secured a requisite level of indigenous partnership.
However the new plan is far more nationalistic. Simply put OMC and BDC activities will be strictly reserved for indigenous companies. No level of foreign participation in the distribution and sale of petroleum products will be allowed whatsoever.
Furthermore, while downstream activities that require the acquisition and installation of infrastructure – such as refineries for instance – will remain open to foreign enterprises, they will be required to partner local investors as equity stakeholders, even if as minority shareholders, but with very significant equity stakes.
This means major foreign market players such as Total and Vivo (operating under the Shell brand name) as well as South Africa’s Engen will be required to exit the retail oil and gas industry in Ghana this will be done in a phased manner so as to make the process orderly and without loss of value to the exiting enterprises – in short, they will not be bullied into fire sales.
Simply put the impending policy is well justified.
Since they were allowed into the market through a policy of affirmative action, indigenous OMCs have been noted for their willingness to open distribution outlets such as petrol stations in the rural hinterlands where hitherto, only the largely State owned GOIL was willing to set up shop. Conversely all the foreign petroleum product marketing companies have preferred to restrict their operations to urban centres where sales volumes are the highest.
Since product pricing in the industry is still partially regulated – in that the price build up for imported petroleum products, including the numerous taxes that account for some 40 percent of their sales prices is computed by the state – this means that the foreign owned market players are allowed to reap the biggest profits while their indigenous counterparts end up with smaller profits from smaller business volumes in their effort to ensure that petroleum products are available everywhere around the country including the rural hinterlands.
Importantly the indigenous OMCs and BNDCs have proven that they are product quality and price competitive against their foreign counterparts even though they suffer smaller economies of scale.
Therefore the new policy will finally reward indigenous enterprises for their endevour having indirectly been financially penalized for their efforts so far.
Crucially, the new law will not be out of line with World Trade Organization rules which relate to merchandize trade rather than investment.
There is one foreseeable problem however: ECOWAS protocols. There are two Nigerian OMCs operating in Ghana and which are protected by ECOWAS rules on investment – African Petroleum and So Energy – and the impending policy could create a problem similar to the long standing dispute over Nigerians engaged in retail trade in Ghana. However this problem could be easily overcome by offering them a special dispensation – after all their combined market share in Ghana is insignificant – or by establishing a new law stipulating that a certain (high) proportion of OMCs retail outlets must be sited in rural areas. Those Nigerian OMCs like their counterparts from other parts of the world would definitely fall short of this stipulation.
Inevitably, the foreign investment community will oppose it but Ghana should stick to its guns by taking the moral high ground, which it is fully entitled to.
Discussion about this post