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Dawn of an oil Era

Dawn of an oil Era

Tadesse Tilahun is the Chief Executive Officer of National Oil Company (NOC), one of the few and pioneer petroleum importing and distributing companies in Ethiopia. Before founding NOC in 2004 with two other shareholders, Tadesse has accumulated more than 40 years of professional experience in the oil industry. Among others he held positions as Finance Controller, Shell Ethiopia Limited; distribution Manager, Shell Ethiopia Limited; Planning & Economics Manager, Shell Ethiopia Limited; Operation Manger, Shell Ethiopia Limited; General Manager Operations, National Oil and Chemical Marketing Company –Nigeria; Shell East Africa Hub Regional Supply and Operations Manager (11 countries) operating from Kenya and Country Chairman and General Manager Shell Ethiopia Limited. Since its inception in 2004, NOC has captured confirm an overall market share of 37% with 180 service stations and broad base of corporate consumers across Ethiopia as of May, 2016. In light of the recent crude oil discovery, Asrat Seyoum of The Reporter caught up with Tadesse to explore what this success in Ogaden means to the Ethiopian oil sector. Excerpts:

The Reporter: As we know Western and Norther Africa regions are traditionally known for oil and gas production in the continent. However, recent discoveries in the eastern Africa block, including the very recent crude oil discovery in Ethiopia, are putting the region in the oil and gas map of the world. So, in this regard what do you see for the future of the Eastern African oil and gas sector?

Tadesse Tilahun: Just to give you a context regarding oil and gas exploration, production and distribution in Africa, traditionally countries in West, North and to some extent in Southern parts were the ones known for crude oil production and distribution in the global market. Since the emergence of crude production from the US, most of the crude oil export from these traditional producers in Africa has been diverted to the rest of the world mainly the Fareast. The opportunity that used to exist for crude producers to export their product to the US market, which is responsible for the overall consumption of close to 30 percent of the world’ soil production, is not there anymore. Hence, most traditional African crude oil producers have to compete to supply to the Fareast markets, now. Nevertheless, countries like Nigeria and Angola which are exporting crude oil to the Western countries face the challenge of importing refined petroleum products to their countries while being forced to offer their crude oil at a competitive price. As a result most of these nations are now concentrating on refining their petroleum products locally. For instance, Aliko Dangote’s crude oil refinery with a capacity of 600,000 bpd (by far the biggest in Africa) is expected to be commissioned within the coming two years. Once that is operational, not only Nigeria but countries around there region will be self-sufficient in petroleum production. This would largely change  the petroleum market in West Africa; and am sure the rest of the regions in the continent will follow. As you know, the refineries that used to exist in Africa were quite small and by now old; they either has to be rehabilitated or be replaced by new modern ones. Now, the new development is the Eastern Africa Region is coming into the oil production market. Countries like Uganda and Kenya are now eyeing oil production and export. The fact of the matter that is it is not going to be an easy industry to operate in the future. For instance, there are seasoned and big petroleum suppliers from the Middle East which already has considerable market share in the region. These Middle Eastern and Asian suppliers operate big and modern refineries giving them considerable cost advantage; so to compete, these nations in East Africa should be able to build refineries which can compete with these establishments. So, the choices available for these new crude producers are limited; they either have to collaborate and build big enough and competitive refineries or export their crude to the global market and keep importing refined products. This is not going to be easy since even the crude export from the region is not going to be that cost effective since most of these crude discoveries are in the hinterlands and they need to be transported to the port via pipeline or other mode of transportation. This is not going to be cheap; it is an expensive infrastructure. That is why I think, countries like Uganda and Kenya are taking their time to start their export; it will definitely be difficult. Ethiopia has now joined these countries especially with regard to natural gas. As you know, natural gas is found in big way in Mozambique and Tanzania. Fortunately, the Ethiopia natural gas potential in the Ogaden basin is closer to a port outlet: Port of Djibouti. That is why I expect Ethiopia’s natural gas export would come much faster than the crude oil.

As you know, Ethiopia has been prospecting for oil and gas in the Ogaden region for close to 70 years with no luck. Both the Russians and Americans had had their run in the Ogaden basin for many years without success. So, what do you think are the factor behind the Chinese success not only in finding considerable natural gas reserve but in terms of discovering crude oil?

As mentioned the search for crude oil in Ethiopia has been going on for many years: starting from the time of the Emperor. Crude oil exploration in Ogaden, Southern Ethiopia or Gambela regions have not been successful so far; or no commercially viable reserve was discovered. Regarding the recent find in Ogaden, I think first and for most, we have to appreciate Poly GCL for doing a remarkable job in discovering the first potentially viable crude oil reserve in Ethiopia. Although it has to be qualified by the Ministry of Mines and Petroleum and Natural Gas, I have learned that the Chinese company prospecting for natural gas in the Ogaden basin happened to come across the crude reserve. Actually, they discovered an oil flow in the well which they dag to prospect for natural gas. Now, they are yet to establish the commercial size of the crude reserve in the concession area and from there, it could be determined if it is sufficient to establish a refinery or pipeline for export. Currently, they are extracting 400bpd of crude oil as test production but that is not going to be very helpful with regard to establishing refinery or lay down a pipeline for export. In in the meantime, they have found a way to supply the product under test production to be used as coal for factories.

Clarify something for me; what do you mean by oil or gas reserve? Is it referring to the naturally existing potential of certain geographical location? Or does it depend on the level of the exploration work done or is it indicative of the natural potential?

You might have heard some parts of the world having bigger reserves of oil and gas, while in some not so much. For instance, Russia has the largest reserve of natural gas while crude reserves of large quantities are said to exist in the Middle East and Venezuela. This only means that in the other parts of the world enough exploration work might not have been done. Now, Tanzania has come on to quite sizable natural gas reserve and so does Mozambique. When it comes to Ethiopia, we have learned that there are natural gas reserves in association with so called the Adigrat Formation (a sedimentary formation named after Adigrat where it was first discovered) besides the well-known Ogaden basin. So, exploration work increases the chances of discovering additional reserve. In Ethiopia, as we open up the sector for more exploration we increase the chance to discover more reserves of natural gas and crude oil.

As you may have mentioned it before crude oil and natural gas exploration work has been conducted in Ethiopia including blocks in Ogaden, Gambela and the Omo valley. None of them were successful in ascertaining commercial reserves so far. What do you think are the implication of the recent discovery to the oil and gas exploration effort in Ethiopia?

No doubt this would create some interest. I am sure the recent discovery would attract many to come to Ethiopia and work. As you have mentioned, Ogaden basin is just one block with hydrocarbon potential. But there are others like the Gambela and Southern Ethiopia basins; we cannot really forget about these basins. Especially, the Gambela basin still holds a lot of hope since we have seen considerable discoveries and oil production in other side of the same system in South Sudan. So, I think there will be more interest to come to Ethiopia in terms of exploration of oil and gas. We also have to look for diligent companies to come and tap into this opportunity.

I know that you advocate a regional collaborative effort to establish an oil refinery facility in East African Region in due consideration to investment cost. How do you envision that?

There are two different way to look at the issue of refinery in Eastern African region. In the first place, the eastern Africa region is located close to the Middle East region where there are a number of big refineries and where refined petroleum products can be availed at a competitive price. First of all, I believe for a refinery of any size to succeed there should be a sustainable source of crude oil in the region. Now, having crude source and putting a refinery are totally different things. Crude refineries are not easy investments these days. This is because refineries have grown in complexity to commensurate with the highly differentiated petroleum products which are in demand now days. As I have mentioned before, Nigeria is working on refinery with a capacity to refine 600,000 bpd and if we wish to have a refinery of that scale in East African region we need to join hands. I think countries like Kenya, Uganda, Ethiopia and South Sudan have real chance of collaboration since they are in the same distribution envelope. It doesn’t matter if the crude source is Kenya or Ethiopia exporting crude is not going to fetch high value since it is expected to compete with mature supplier of the Middle East and the Gulf region. These suppliers will definitely provide the product at a very competitive price. Now, since exporting the crude is not going to be the cost effective option for producers of the region, they are left with the option of refining. If a regional refinery is able to supply refined petroleum products it could definitely compete with imported products from other regions. However, these refinery facilities have to be big enough to be able to tap into the economies of scale enjoyed by their competitors and really compete on the basis of cost of production. For any nation in the region, including Ethiopia, refinery will be a viable option if and only if there is a sustainable crude oil source. For instance, to establish a crude oil refinery in Ethiopia you have to have the crude oil source in the country since imported crude oil will drive the cost of the final products quite high. For instance, if one thinks of a pipeline to import crude oil to Ethiopia the infrastructure investment alone is going cost the country a fortune. Nevertheless, if Ethiopia has sustainable crude oil source having a refinery will only help the nation by substituting imports but would also have all the added values like employment creation and a number of petroleum by products.

Although it makes sense in theory, given the socio-economic and political realities of the Eastern African region, do you see any viability to this regional project?

I think people of this region would have to see this eventually since the rational is there to see for everyone. Uganda has been talking of crude production and export for quite some time now. The question is why they haven’t done it yet. It is simple; it is because it is not viable. No financier would provide them with the needed resources to get it off the ground because the economic rational is clear. I am sure at end of the day, it would be easier for Uganda to refine their crude and sell it their neighbors. Yes, Uganda could be a bit further for our market and their crude is said to be waxy, not easy to transport through pipeline. For Kenya, Ethiopia and South Sudan it seems really viable. In fact, I have discussed this with my counterpart in Kenya and we have an understanding that it is something viable. For instance, Kenya is also discovering their crude oil and the location of the oil basin is closer to the Ethiopia boarder and hence a refinery somewhere in Moyale or somewhere could really be accessible to the Ethiopian market. On the other hand, it would really be cost effective for them to join hands with Ethiopia for the development of the refinery. In general, I am sure most of the things we are mentioning will be dictated by the economic rational.

I understand your company NOC had had an interest in going into the refinery business some years back. However, given the absence of viable crude oil source and change in the global refinery business to more costly and complex operation, you have put this plan to hold. Now you are taking about regional refinery options with counterparts; any concrete deals in this regard?

Well, these are just private sector discussion at the moment. To really think about regional projects there must be intergovernmental discussion first. From my perspective, energy is a good starting point for economic integration in the continent. But, this needs a political discussion first and for most and then the private sector could follow suit. In fact, I am sure these intergovernmental talks are going on and once there are agreements, I am positive that the private sector would be very interested to invest. On the other hand, a project of this scale and viability will have a number of interested financiers.

With regard to natural gas, the company which has discovered crude oil in the Oganden basin is also reporting additional natural gas finds in its concession area which brings the total natural gas reserve up to 8 Trillion Cubic Feet (TCF). I want you to put things into perspective here; how do you see the natural gas reserve of Ethiopia in comparison with reserves in Tanzania or Mozambique?

There is widely available information as to which countries in the world are leading in terms of natural gas reserve. Nevertheless, what is being said about Tanzania’s reserve is quite encouraging. At this stage, I don’t think our natural gas find is at that level. But, mind you that our natural gas exploration is yet to develop. We have discussed above that the reserve of natural gas or crude oil could highly depend on the level of exploration work which has been done with regard to the identified potential. Also identified potential does necessarily mean existence a reserve. However, it is encouraging that we have started with this reserve size. I am sure as they go on they will expand their exploration work and dig many wells and that would increase the chance of discovering more reserve. I am positive that as exploration work progressed the reserve will reach a level which is satisfactory. But, for now, we have laid down the pipeline to port and start exporting to augment our foreign exchange earing capacity.

Although both Poly GCL and the government focus almost singularly on export market with reports of the Chinese market being the destination for Ethiopia’s natural gas export, there are some who suggest limited processing (Liquidified Petroleum Gas) and redirecting it to the local market could be beneficial. What do you think is the best course of action?

Whether it is meant for export or for local consumption, marketing natural gas requires heavy investment on transporting infrastructure. Now, the plan is to invest on pipeline to the Port of Djibouti where will be shipped to the export market. To divert natural gas to local market would also require similar type of infrastructure and heavy investment. However, if we are talking about LPG, it does not demand much investment. They could put up a small condensating plant to produce LPG for the local market. There were prior plans in Calub to erect similar condesating facility and supply theit to the local gas market, which did not materialize due to various factors. But, this is definitely a viable plan that they can explore in the future.

I understand that NOC is very much interest to work on LPG production and supply. And you had plans to do LPG at larger scale and supply the Ethiopian market, have there been talks in this regard in light of new discoveries in Ethiopia?

Currently, we are working with the Sudanese regarding LPG. We have sealed an agreement with port of Sudan in which we will access to import our own LPG using transporter vessels and transport it to Ethiopia using vehicles. We could not do this with Djibouti since the capacity of the storage tank is small and could not handle the kind of big vessels we are using to haul product to the port of entry. We do have some ideas as to how the capacity of the storage tanks could be increased in Djibouti and we are working on it with authorities there. For the time being, we will continue to supply LPG to the Ethiopian market using the port of Sudan.

Recently, local LPG markets in Ethiopia are being severely undersupplied and there is shortage of the product almost in every major town. In your view what is the problem with this largely unregulated LPG market?

Sincerely, that is my frustration too. If you take Kenya their annual consumption of LPD is more than 300,000 tons; the same is true for both Uganda and Tanzania. However, if you look at these countries’ population, they don’t come close to Ethiopia. Yes, in the past economic level of the country, the people were not that conducive to consume large amounts of LPG. But now that is changing. So, we need LPGs in our industries, homes, hospitals, hotels and the like. Perhaps one factor could be the fact that electricity is cheap in Ethiopia; but there are still many uses for LPG. So, my frustration is the local price of LPG is not at the level where it is affordable to the people. The only way prices could get down is when there is adequate supply of the product. So, what we are trying to do with the Port of Sudan is haul the LPG through heavy vessels so that the cost of transportation could be reduced, in turn damping the local selling price. In this regard, we have asked the port to give us sufficient surface to load our vehicles and in a timely manner. So, hopefully, in the next one year we will increase the supply of LPG sufficiently; perhaps get closer to the level of supply in Kenya and other Eastern African nations.

The downstream of the oil sector is also riddled with challenges. I understand profit margin has been one of challenges for oil distributors and dealers for many years. As a prominent sector operator you have been raising this issue with the government for quite some time now; are there going to be any changes in this regard?

As far oil industry is concerned, as you have mentioned you have upstream where you talk about crude oil, then the midstream concerning refineries and pipelines and you have the downstream where distribution of final product is happening. All this parts are equally important. In terms of downstream of oil industry, again if you take Kenya, you find well-developed oil distribution network across the nation with 2400 stations. In other words you find adequate petroleum products throughout the nation supporting their economic activity. In Ethiopia, with current level of economic growth we still need more distribution outlets and networks. For instance in the capital Addis Ababa, you see people lining up in petrol stations to buy fuel; that is costly waste of time and energy. To have adequate distribution networks we need to revisit the profit margin in the regulated oil markets. For the distribution and retail sector to grow, the investment has to be attractive enough to the private sector. Yes, on the surface, with the coming into business of few new distributors, it might appear as if the investment is attractive; but it really is not. Traditionally, this problem with the profit margin has led to bad practices in the distribution sector in quest of better return to the investment. For example, there was wide range of product adulterations in the industry: mixing the subsided kerosene with benzene and diesel. We are in fact working to correct this problem. This might have attracted its fair share of investors to come into the sector. But, now after continued discussion, the lifting of subsidy from Kerosene has illuminated this shady practice mostly. On the other hand, we are seeing a number of dealers leaving the industry or not being able to buy petroleum products from their distributors. In places like Addis Ababa, dealers have alternative business streams to augment their revenue and keep them going; but if you go out of towns there are limited opportunities to prosper on such petroleum related business and  most are closing shop. I must say, thus far, the government has not been paying enough attention to this. But, now I hope it has reached the policymakers ears and we expect to see changes. This week, we have met and presented our issues to the new trade minister and he has understood the problem and promised to look into it. But, nothing concrete yet.

Finally, with regard to recent crude oil discovery, opinion seems to be divided as to what it will bring. While some say the discovery came just in time to revive hope in the economy, others are yet concerned about natural resource being a curse given the fragile state of nation’s politics? What is your take on that?

In general, I am very optimistic of the future. I recognize we have been divided among ourselves in the past and to continue as a functioning unit, we need to find reconciliation among the various interest groups. As far as the natural resources and the mega projects which are under development are concerned, I think they are going to bring us fortunes we might not have imagined possible. When you look at the Great Ethiopian Renaissance Dam, the natural gas, the various sugar projects, they can easily alter our foreign exchange earning capacity for the better. This would further complement other sectors in the economy; I see a lot of opportunities for Ethiopia to become a major economic power house in Africa in short span of time. So, all in all, I am very much optimistic.