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Big Oil in full retreat from downstream African retail markets

Sunday January 31 2010
china

The PetroChina’s Daqing oil field in China’s northeastern Heilongjiang province. The Big Five continue to invest where downstream markets are growing and profitable like China and other Far East economies. Picture: File

There have been rumours of yet another international oil company withdrawing from African downstream business. Big Oil withdrawals from Africa have always been expected, the question was which big player and when. Exit from Africa is now established as part of Big Oil’s readjustment to changing global oil business realities.

By Big Oil we refer mainly to ExxonMobil, Chevron, Shell, BP and Total who are the global “Big Five” of today. These giant companies used to control about 70 per cent of all global oil supplies in the 1970s, but today they control just about 5 per cent of global reserves.

The Big Five’s global business models are continually changing, mainly to accommodate domestication of oil supply control by national oil companies, and also in the face of volatile oil prices that leave them vulnerable to unpredictable cash flows.

Over the years, the Big Five have restructured their business to focus on regions and business segments with the highest market growth, where returns on investment are higher, and where political and business risks are lower. That is why we find them mainly focusing on upstream oil and gas exploration and production where about 80 per cent of their profits are registered.

They have selectively withdrawn from their branded downstream marketing where returns in some regions are low and the risks considered high. However, where downstream markets are growing and profitable — China and other Far East economies — the Big Five continue to invest.

Whenever there is a global oil price jolt, these companies go through a financial and business reappraisal and restructuring. The previous major reappraisal was when Big Oil went through mega-mergers in the late 1990s after the collapse in oil prices prompted in the wake of the meltdown in Far East financial markets.

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The collapse of oil prices to about $40 per barrel in early 2009 after the prices peaked at over $140 per barrel in mid-2008 is what is thought to be prompting the Big Five to restructure their businesses.

With reduced global oil demand, a weakened global economy and volatile oil prices, the multinationals are reconsolidating their balance sheets to maintain shareholders value by shedding assets that are marginal and where costs and risks are high.

The Africa downstream business is the key first casualty of this restructuring. The downstream business in Africa is marginal for various reasons. In some African countries where prices are still government controlled, margins are not always sufficient as price adjustments are not fully reflected and sometimes are delayed.

Where in Africa pricing is free market, unfair competition has resulted in reduced gross margins especially for multinationals, who have higher operating costs than their local competitors. I say “unfair competition” because we have low-cost local marketers who do not fully invest in compliance with regulatory requirements, especially in standards and practices. Unfair again because in some markets malpractices still occur where tax evasion gives unfair market advantages.

In evaluating Africa, the Big Five will normally selectively maintain their downstream presence in countries like Egypt, the Maghreb countries and South Africa, where regulatory regimes are more effective and predictable, and where business/political risks are lower.

We need to note that Big Oil will continue to be interested in oil and gas exploration and production in Africa, and indeed the Big Five and others continue to expand their presence in Africa in upstream activities. This is especially marked in the expanding oil reserves off the Atlantic coast of Africa. It is the branded marketing presence of Big Oil that will continue to diminish in Africa.

Total’s tolerance

However, Total is one big multinational that will probably be in Africa for a long time to come. Total shares in a special way the French affinity and tolerance for all that is African, and today it is the number one brand in terms of market share in Africa. The American giants, who are now virtually out of the Africa downstream business, had the least tolerance for Africa.

What about here in East Africa? Big Oil continues to exit from the region as part of their overall corporate strategy because it shares many of specific factors driving Big Oil’s exit from Africa.

Through market liberalisation in the 1990s, governments in East Africa have enabled many local players to join the market, making the business very competitive. When market players increase and business volumes remain about the same, inefficiencies kick in and unit costs go up and this hurts the higher-cost marketers most. Over the years, the multinationals have witnessed a decline in their profits in the region.

They have also for many years since sector liberalisation complained of the market competition being unfair. This, they argue, is because a number of local market players do not fully comply with regulatory requirements, which the multinationals are obligated to comply with by their code of ethics. Compliance carries with it higher business costs.

There are cases of local players engaging in malpractices — exports diversion, product adulteration, import duty under-declaration — that result in their not paying full taxes, making their products cheaper in the market.

However, with strong competition, fair or unfair, the result has been generally lower market prices for consumers.

Many wonder what will become of the oil sector in the region when Big Oil’s presence is reduced. It all depends on how effectively the petroleum regulatory agencies in the region manage the sector. The ERC in Kenya, Ewura in Tanzania, and the Petroleum Supply Department in Uganda will need to establish effective regulations that ensure that the highest petroleum standards and practices are in place and enforced, and that fair competition is protected. Only then can we say with certainty that the exit of Big Oil will not leave behind a vacuum, for it is generally accepted that the multinationals have fostered professionalism in the oil sector.

A number of key Indian petroleum players like Reliance Industries (read Gapco), Essar and Bharat will be ready to step in if and when Big Oil exits the East African region. Others who may be keen are the continental marketers like Engen of South Africa and Tamoil of Libya. There is no reason why local national oil corporations or indeed local marketing companies cannot marshal local capital to enter the market.

George Wachira is managing director of Petroleum Focus Consultants. E-mail: [email protected]

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