Do low fuel distribution margins handicap Ethiopia’s supply?

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Jerome Dechamps,
Jerome Dechamps, Executive Vice President Mediterranean and Indian Ocean Division, Marketing and Services Director of Total Africa

Total Ethiopia inaugurated its brand new 8-million litre Fuels and LPG Depot in Dukam town. This represents an investment of more than 270 Million ETB.  This occasion provided  a good opportunity to visit the depot but also understand better the current situation of the fuel distribution in the country.

Capital sat down with Jerome Dechamps Executive Vice President Mediterranean and Indian Ocean Division, Marketing and Services Director of Total Africa and talked about the current situation the sector is facing in the country. Excerpts; 

 Capital: In January 2015, the government adjusted fuel profit margins. Do you feel any more changes are needed?

Jerome Dechamps: The January 2015 adjustment was minor and Ethiopia continues to have very low profit margins across its supply chain. After this increase the combined profit margin for Oil marketers and Station dealers became 1% of the pump price:  0.55 % for Oil Marketers and 0.43 % for stations dealers (for Gasoline). However the margin represents more than 10% in most other countries.  For your information, this is the only revenue that we get from fuel sales. And this revenue has to cover all our operational costs and investments. It is clear that this amount is not enough for us to operate in a sustainable manner and invest in new stations.  Today Ethiopia has still by far the lowest oil distribution margins in Africa for both the Oil Marketers and the station dealers. The gross profit margin of Gasoil for Oil Marketers and station dealers is 0.086 and 0.0715 Birr per liter respectively. According to an independent consultant study commissioned by Major Oil Marketers in Ethiopia (NOC, Oilibya, Total and YBP), the profit margin is by far the lowest in Africa. The study compares Ethiopia with other countries like Malawi, South Africa,  Kenya, Senegal and Zambia. Let’s look at neighboring Kenya where the Gasoline and Gasoil profit margin for Oil Marketers is 1.51 ETB/Lit for each product. That is 16 times higher for Gasoline and 17 times higher for Gasoil than Ethiopia.  This very low profit margin leads to a lack of funds for reinvestment into the industry such as for depots like this one and in the country’s gas station network.  While Kenya is less than half the size of Ethiopia in both population and landmass, it has a network of about 1,500 gas stations.  Ethiopia only has about 700 stations.  This is directly linked to the minimal profit margins that have deterred investors from expanding the Ethiopian oil distribution and selling businesses.

Total depot in Dukem
Total depot in Dukem

Capital:   In the past, Oil Marketers were blamed for unequal and inconsistent distribution practices.  What has changed? 

Dechamps: The previous problem occurred at the industry level from the lack of operational depots in the country, limitation of logistics capacity (in terms of number of trucks) and supply interruptions.  We are part of the country supply chain. If there is a problem in one area of the supply chain, the market and the distribution will be affected immediately. To tackle this problem we increased our fleet. In addition to that and in anticipation of an increase in margins, we have  built a depot in Dukem .  If there is a flood or road problem in Djibouti corridor we can better serve our Addis Ababa customers by using the stock of this depot. So we are doing our part to close the gap.  This is Total Ethiopia’s contribution to improve and secure the supply of the country.

Capital: Dukam depot is very near to the new railway which is going to start operation soon.  Is there any chance to have this depot connected to the railway?

Dechamps:  Our depot is located less than 1 km from the railway line like Horizon depot in Djibouti.  Currently 99 percent of the railway has been completed and it will be operational very soon.  The fuel rail wagons have also been purchased and are ready for use.  We are working closely with the relevant authorities and believe that the railway could be connected to Horizon Terminal in Djibouti, our Dukem depot, to the neighboring NOC depot and to the EPSE depot in Awash.  These connections could be achieved in a short timeframe, once the infrastructure is in place, providing a very flexible and reliable supply hub for the country. The extra capacity of our depot can also be used by other players in the fuel industry.  The railway will reduce significantly the prevalent transit loss of fuel and contamination of fuel along the Djibouti corridor and will save FOREX for the country as the railway uses electric power instead of fuel. It will also reduce carbon emissions and reduce transport accident on the roads by decreasing road exposure.

Capital: Do you plan to construct another depot in the near future?

Dechamps: To date, we’ve spent 270 million ETB on this depot which is our contribution to the smooth supply of fuel for the country.   But with the current profit margin levels, there is no funding available for another one right now.  However, the country definitely needs more operational depots in place to meet its growing fuel demand.  Demand grows at about 10% per year while the storage capacity in the country is limited with no profit margin to cover the operational costs of depots.

Capital: Do you have any hope that the government will soon increase the profit margin?

Dechamps: Yes, we do.  The fuel distribution industry has been closely working with the different relevant government bodies for many years and it is getting better understanding from authorities recently. As professionals of this sector, the industry provides factual figures and analysis transparently to the authorities in order to help them decide based on facts and positive benchmarked experience from other countries.  We hope that the decision to increase margin will be made very soon.

We believe that people who are close to the issue will eventually see that a margin increase is in the interest of the country:  it is a win-win solution that will create incentives to build depots and service stations that are badly needed to meet the sharp fuel demand increase.  This would create jobs all over the country.  For example, one gas station usually employs 30 people. With fuel margins up to the average of the region, the industry has the potential to create approximately 300 stations in the next 5 years which could create about 10,000 jobs.  Additionally, other businesses will benefit from the expansion of the industry like building contractors who will have more projects available.  On top of this, as you know, in the absence of stations in some areas, the public is exposed to higher prices, contaminated fuel and unsafe practices from intermediary traders who take advantage of lack of access to fuel stations in outlying areas.  These sales also represent undeclared tax revenues for the Authorities.

Capital: Adulteration, (mixing other types of fuel like kerosene with gasoil and gasoline) is a big problem in the country.  What are you doing to tackle it? Based on official figures it is observed that some Oil Marketers have more sales of Kerosene compared to other fuel grades. What is your assessment?

Dechamps: We work closely with the government ministry who is in charge of making sure that the rules are respected and to take the appropriate corresponding measures.

Adulteration has appeared because some unscrupulous players are mixing kerosene, which is 4.18 ETB/litre and 1.73 ETB/liter cheaper compared with gasoline and gasoil respectively, to cash in the price difference. They are doing so with the excuse of low profit margin; but for us adulteration is not acceptable. Adulteration raises several problems: It can badly damage industrial machineries, vehicle engines, etc… It generates pollution and, it also prevents kerosene from going to the poorest people in the country who badly need it in their daily lives.  The undeclared revenues also lower tax collections for the government.

On the official statistics, we also observed that some companies have a much greater market share on kerosene than on Gasoil and Gasoline: this is not normal and should be investigated.

Some simple solutions have been implemented in other countries to prevent this problem where kerosene has a different color.  This makes it easy for both the customer and the authorities to detect when mixed with other fuels. Another alternative could be to match the price of kerosene with Gasoil. Doing so, there will be no more incentive for adulteration.

To do our part, we have invested in the Fuel Doctor initiative which is a special vehicle equipped with the necessary equipment to analyze fuels.  It currently circulates throughout the Total station network, testing our products randomly, to ensure they meet the necessary quality standards.

Capital: Any last comment?

Dechamps: Total Ethiopia has been working in the Ethiopian fuel industry for 66 years and is committed to Ethiopia for the long term.

While fuel margins remained very low, Total has invested more than 1 billion ETB over the last 5 years in new stations, in airport refueling facilities and today, in this state-of-the-art depot.  This has been in the best interests of Ethiopia and its population.  We believe that this and similar industry efforts will eventually be recognized and that margins will be increased, as they are regularly in other countries.

Today, we are, like other distribution companies in Ethiopia, clearly reaching the limits of our financial capacity. This is why we trust that a margin increase will take place soon as it is necessary to run the business in a sustainable manner and to encourage the construction of the necessary stations and depots to meet the fuel demand increase.

We are also a socially responsible company as we are involved in many initiatives across the country in many areas. We are involved in road safety initiatives such as a high-tech driving simulator we imported to train our fuel trucks drivers and an awareness program for elementary-aged children about road safety.  We launched the Total Startupper challenge that offers both financial and professional coaching support to young and talented Ethiopian entrepreneurs.  We have participated in health programs like the fight against Malaria and HIV/AIDS in Ethiopia.   We continue to contribute to higher education in Ethiopia in the form of partnerships with major universities like Addis Ababa University and Bahir Dar University and through donations of school materials, books, laboratory equipment, computers and servers and school facilities improvements to these and other universities and schools.  TOTAL Ethiopia is also contributing to provide access to clean water for the society.

These actions together with the grand opening of this state-of-the-art depot today are the best illustration of Total’s commitment to Ethiopia and its population.