Wednesday, February 8, 2023
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InterviewNavigating the volatile oil market

Navigating the volatile oil market

Saharla Abdullahi, director general of the Petroleum and Energy Authority

As a graduate of health science, her whole academic and professional background is in the health sector. She was a state minister for the Ministry of Health for four years before being appointed to oversee the Petroleum and Energy Authority.

Her appointment at the Authority comes at a time when the petroleum sector is in disarray both globally and in Ethiopia. As she assumed power, she had to deal with increasing petrol prices, exploding illicit transactions, and the introduction of fuel subsidies.

The Reporter’s Samuel Bogale sat down with Saharla Abdullahi, Director General of the Authority, to discuss her experiences, frustrations, and how the petroleum market has been doing as of late.

The Reporter: Your appointment coincided with a dramatic shift in the petroleum industry. This, I assume, would make regulatory work tougher. How is the job treating you?

Saharla Abdullahi: My background is different, and of course, this sector is very difficult to regulate. It has a backlog of so many difficulties. I was initially frustrated, but I believed that a small effort to correct the market would benefit the public. I’m now working on it with passion and happiness. The challenges are good to face, I believe, and earlier I was a state minister at the Ministry of Health during COVID-19, which was a very challenging time. I couldn’t even take a week to think about the industry because of how quickly I got into it.I didn’t have enough time to know more about the sector and investigate it, but I believe I have now mastered it.

Whether politically or economically, petroleum is a major global player. How are you assessing the effect that this sector has on the political economy of Ethiopia given that you are the one responsible for its regulation?

The government has been the sole importer of petroleum products for a long time. Some neighboring countries, like Kenya, involve the private sector. In these countries, 70 percent is imported by the private sector and 30 percent by the government. Indeed, their governments determine the monthly fuel prices and regulate the market. Making deals with sellers, carrying the burden of foreign exchange expenses, and more have always been the responsibility of the government.

In the context of our country, fuel is a strategic and political commodity. The fuel subsidy program has been here since the time of Emperor Haile Selassie, and the fuel price locally has never been determined by the international market. The fuel market stabilization fund, which was established to stabilize the market by subsidizing fuel, has been recording losses, especially in recent years. In recent years, the amount of money spent by the government through the stabilization fund has ranged between 10 and 15 billion birr. The government has spent a total of 187 billion in the form of subsidy up to this point, and that figure might potentially go much higher if the subsidies were stripped away.

How much of a load was taken off the government’s shoulders when the subsidy was removed?

When the targeted subsidy program started, the fuel price gap between the international market and the Ethiopian market was about 40 birr per liter. This gap in prices made it possible for a flourishing black market to develop, and gasoline was being transported illegally into the neighbouring countries. The major goal of implementing the subsidy scheme was to paralyze the illicit market while simultaneously easing the government’s financial strain. In June of last year, the government expended the highest amount of subsidies of 15 billion birr. This has now been reduced to three billion birr every month. The price gap with neighboring countries is likewise shrinking, and the only country with a somewhat larger price gap is Kenya.

Why doesn’t the government of Ethiopia let private companies import fuel? Is there anything being done to reverse this trend?

There is no plan currently. Even if we allow the private sector to import petroleum, the government will still need to allocate foreign currency. Kenya probably has no problem with foreign exchange because the private sector imports fuel. This will be very tough to execute in Ethiopia since we are aware of what is happening with the Franco Valuta. Several items have seen price fluctuations as a consequence of the Franco Valuta. We are aware of the disruption it caused in commodities such as edible oil and sugar. We don’t want to see a similar situation in the petroleum market. As the economy improves and the country’s fiscal situation improves, private sector will likely be permitted to import fuel.

How is the tax collection on the fuel price buildup going? 

There has never been any form of tax on fuel products, but following the decision by the Council of Ministers a year ago, we began adding taxes to the price buildup. During the first round of price revision, we implemented 25 percent; during the second, another 25 percent; and last month, we implemented 75 percent. During the first five months of last year, until the beginning of December, we collected approximately five billion Birr. The targeted fuel subsidy was under way in line with that. The public doesn’t understand how strategic the commodity is behind all these reforms. 

Is there a balance between fuel supply and demand in Ethiopia?

We know how much fuel is supplied to each area on a daily basis. There is no problem with the supply. The issue is rather one of a lack of a proper market. Everyone would have gotten their proper share of fuel if there were no parallel markets. The Somali region and most of the areas in Oromia have quotas allocated to them, so the traders in these places can’t order as much as they want, once it is loaded for them. Other regions would order anytime as long as they made payments since they don’t have quotas.

What is the current supply-to-demand ratio?

Every day, at least 9.2 million liters of diesel are supplied to the Ethiopian market. Most of the time, there are no issues with diesel, since its demand is quite the same. The daily demand for benzene is 2.4 million liters, although the supply is often less. Depending on the date, 2, 2.2, or 1.9 million liters of benzene are supplied every day. As the lion’s share of vehicles in the country use diesel, supply and demand issues are often not an issue.

Why is Ethiopia not importing the 2.4 million liters of benzene?

There are some logistical issues.

There is talk of a shortage in the southern part of Ethiopia, and retail fuel prices are skyrocketing in this area. Why is that happening?

The illicit market is growing increasingly appealing in this region. There are even some who seek to bribe the security forces and smuggle the fuel because of the magnitude of the challenges we have been experiencing. Several locations in Konso and Dilla have a significant level of smuggling, according to the information we get from the Customs Commission. When it comes to managing the illicit gasoline market, the regions are experiencing difficulties. If fuel stations are not selling fuel at the government-set price, it indicates that the regions are not fulfilling their responsibilities. This is a significant challenge we have been facing. Our capacity to deal with every problem is limited. Every new discovery we make is met with resistance from the regions. In Hawassa, fuel is sold like any other commodity, which poses a significant threat to safety and security. I see no way out if every structure, from the bottom to the top, is not sufficiently cooperative. We manually verify if the fuel is unloaded at the stations, just as we regularly verify whether the trucks loaded it at the port in Djibouti. In certain locations, however, the implementation of this system has encountered difficulties.

The Authority has worked with trade bureaus on a number of projects to stop the growth of illegal marketplaces, but it doesn’t look like any of them have worked.

As I already said, the regional authorities’ commitment is critical. Because the federal government has limited access, the regions must help in combating illicit trade. The environment was positive in tackling the illicit trade from last July, when the targeted subsidy scheme started, until October, when it steadily diminished. The illicit operations in Addis Abeba that we uncovered last month were meant to be discovered first by the Addis Abeba Trade Bureau. In terms of fuel trucks, around 1,500 of the total 3,700 vehicles have GPS technology installed, and we are tracking them remotely. Others will need to complete the installation soon. The deadline was in January; therefore, they must have completed it by now, since strict warnings have already been issued.

What will happen if they don’t install the GPS?

We gave this direction together with the Ministry of Trade and Regional Integration. They would be given a few more days to finish installing, and if they can’t do that, they will have to be banned from working in fuel transportation.

What if they agree and stop working? Isn’t their number already small?

The work will continue even with the limited trucks, despite the struggle. The public doesn’t already have enough fuel transported. We will have to be determined about taking this rule seriously as an Authority. We had agreed with the oil companies to finish installing them until the beginning of December last year, but there were some issues, so we extended the deadline. We have been meeting every month to discuss it. We have problems supplying jet fuel for aircraft, and the main reason for that is that trucks will load the fuel from depots in Djibouti and offload it here at airport depots. There is no chance for the trucks to leak like they are doing when offloading at gas stations.

It seems to be common knowledge among industry players that trade bureau officials are themselves involved in the illicit market. Did the authorities discover anything tangible?

We mostly work with security forces, and they update us with pictures when they find illegal activities. We have been fruitful mostly on the security side. It is difficult to assume that trade bureau officials are part of these illegal activities without evidence.

As you previously said, why do they not reveal illegal activities until the Authority discovers them?

We can’t make the trade bureaus responsible for that. They are under their own city and regional administrations and share parallel institutions with us. We engaged with the companies, requesting an explanation of our findings, and we took actions against them accordingly.

The number of gas stations in Ethiopia is very small compared to neighboring countries. What is the government planning in terms of expanding the gas stations? When was the last time a gas station was built in Addis Ababa?

There is a big problem in Addis Ababa that should be solved. There were some locations in Addis Ababa dedicated to gas station business as per our work with the city’s trade bureau. They are saturated indeed, but there are about 136 stations in the city, which could be a big number for a capital. The main problem lies on the outskirts of the city, as there are very few stations there. Also, the stations in the city are very old and small in size. We don’t have a standard to determine whether the gas stations are small or not in Ethiopia, but we have now prepared one that the Ethiopian Standards Agency is going to approve for us. We had a kind of list of requirements—not standards like in other countries that lists how far the stations should be from each other, how big they should be, and the requirements for companies to be established. The standard to be approved will determine what types of depots, stations, and retail shops should be built for each type of fuel product. One of the things this Authority is working on is a geographical survey for investors to check on where the stations are located and decide where their new investment should be to build the gas stations. On a country level, there are several activities we are undertaking with regards to expanding the existing gas stations and ensuring that they serve several vehicles; also, new stations are being built as well. We have seen the construction of about 50 to 60 gas stations during the last four months at most. We even gave a permit to some people last week to build a gas station. 

How is that happening when the existing stations are complaining of meager profit margins?

The facts on the ground and how they are presented are usually different. We can present the large number of requests we are receiving to get permits to build gas stations. What we were finding challenging was that there are some areas with less traffic but high interest in building gas stations, but we’ve banned those kinds of requests now. As an example, Moyale is a small town at the border of the country, but new gas stations are built frequently. This definitely follows the contraband activities.

So not all requests are genuine, and those 50 to 60 stations might not work legally?

We can indeed consider that, because they might have been built for other purposes as well. The question of profit margin makes sense for those working legally; it should have been adjusted, and it is done accordingly. We didn’t revise the oil companies’ profit margins as there were some issues to be resolved in advance. It was hurting the industry to make them continue making a gross profit of 10,000 birr after investing three million birr with loans. They were already losing hope that it would receive maximum attention for revision.

Are the vehicles using the targeted fuel subsidy scheme properly?

Yes, they are. The subsidies on the two main products, benzene and diesel, were six and eight Birr per liter, respectively, which were returned to the drivers in the form of cash back. As it was a small amount of money, the number of vehicles with an interest in enrolling in this scheme was small. But by the time the second price revision was done in September last year, the number of vehicles using the subsidy had reached 50,000 Birr, because the cash back for the subsidy was 15 and 17 Birr for a liter for the two products. From July until September, the daily subsidy cash back from the government’s coffers wasn’t over five or six million Birr. Surprisingly, this subsidy cashback reached 30 million Birr in one day. Around 16 billion birr was spent on general subsidies, with a further 4 billion birr spent on subsidy cash back to transportation providers. This growth is very concerning.

In terms of the number of vehicles enrolling in the subsidy, it has now reached 191,000 transport providers enrolled for the subsidy, up from 65,000 that were under this scheme by the end of last September. Several vehicles are now being registered because the amount of money is huge. I have received complaints that some vehicles even prefer to sit idle and live off the subsidy money rather than working, as it is a huge amount of money a day. We are informing the Ministry of Transport and Logistics about this issue so that it can take serious action.

How is it known for the Authority or the Ministry to know whether the vehicles are working or not after using the subsidy since there is no technology or the GPS rule placed as mandatory?

The information isn’t complete, indeed. It is not free from problems, as we are working manually, with no technology in place. This could be the reason for the mushrooming gas stations and subsidized vehicles. The Ministry is trying to get to the bottom of this fact through its branches in the regions. The minibuses cover 40 percent of the subsidized vehicles, while the taxi service providers are 12 percent. Observing the general practice of subsidy, three categories that the federal government closely monitors are those that use it properly: public buses, cross-country buses, and city buses. Minibuses, midi buses, and three wheel vehicles have problems serving the public properly, even though they are subsidized.

The Transport Ministry is responsible for ensuring the implementation of GPS technology for minibuses. We are aware that they went far on this project, and now the Information Network Security Administration (INSA) is informing us that they have technology to help on this, especially for the minibuses. I didn’t discuss it thoroughly with them, but it is a GPS-like technology that regulates tariffs for the minibuses. It is a technology that other countries use, so it shouldn’t be difficult to implement it locally. A discussion is underway to make sure it comes into use as soon as possible.

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