What next after Shell is gone?

By Joan Akello

Since Shell Oil Products Africa (Shell) announced it was reviewing ownership options of its downstream businesses in 21 countries in Africa including Uganda, the question has been: Who will fill the gap?

Shell Uganda Country Chairman Ivan Kyayonka told The Independent on March 7 that several options were being considered.

Shell has been the dominant player in the Aviation Gas, Jet fuel and lubricants, and Liquefied Petroleum Gas and diesel both local and commercial. Most operators in the market have no resources or infrastructure to deal in them.

Shell’s looming departure was announced when Uganda was experiencing acute scarcity and escalating prices for oil products. After months of scarcity of aviation fuel, petrol and diesel were hit hard in March and April.

The trouble was blamed on downstream supply constraints, including lack of national reserves and problems on the Mombasa-Nairobi-Eldoret and Mombasa-Kisumu pipelines, and the persistent slide in value of the shilling against major currencies.

Oil sector players and consumers now worry that Shell’s departure could aggravate the twin woes on high price and scarcity.

Downstream business includes supplying, trading and shipping crude oil into Uganda and manufacturing and marketing fuels, lubricants, bitumen and liquefied petroleum gas for home, transport and industrial use. It includes petrochemicals for industrial customers, including the raw materials for plastics, coatings and detergents.

Reactions

The Commissioner of Petrol Supplies, Rev. Frank Tukwasibwe, while appearing before the Government Assurance Committee of Parliament in early April said that “the void that will be left by the company needs a firm contributor that has capacity to handle market demands and competitive prices.”

Mamadou Ngom, the Director General of Total Uganda said whoever takes over a business must have a reliable network. He said they need to supply the market adequately and fulfil commitment to ensure smooth continuity in the market and keep customers.

Mamadou said, however, that there are many players in the industry (about 87) yet business volumes have not really changed and multinational companies no longer accrue to large economies of scale because of rising unit costs.

Uganda has a highly unregulated oil sector where resources are controlled and distributed privately with minimal interference by government. As a result, prices are determined by their perception of the market forces of demand and supply. This has attracted myriad companies and independent dealers and promoted stiff competition.

Petrol dealers face challenges of smuggling, dumping, adulteration, and unreliable pumps.

Mamadou said adulterated products are usually sold at lower prices.

“This is unfair. Adulteration reduces profit margins of other companies because they have to undercut their prices too to attract and keep their customers,” he said.

Shell’s woes

Shell Uganda has for long been afflicted by declining profitability resulting from an invasion on market share by smaller, independent operators who have proved more adept at copping with supply constrains. Its woes have been compounded by internal inefficiency and irrational decision-making that have led Total Uganda to overtake it in the retail sector. As of April 2010, Total Uganda had themost petrol stations at 140, compared to Shell’s 120.

The latest sales figures from the Association of Petroleum Marketing Professionals, which are for February, indicate that Shell now has a fluctuating total market share of 34 percent compared to Total’s 24 percent. The rest is held by Gapco (7 percent), Kobil (5 percent), Engen (3 percent), and an estimated 31 percent held by myriad small operators. Under the very competitive environment, Shell has increasing found its downstream business no longer profitable but rather costly.

The Independents

The small operators, the so-called independents, are blamed for most of the malpractices. However, Shell’s departure is likely to lead to an increase in the influence of the independents.

Sales and market share figures fluctuate but an analysis of numbers from the Association of Petroleum Marketing Professionals, shows that they control about 40 percent of the market for diesel and petrol and up to 60 percent of kerosene. Together they control more market share than either Shell or Total.

The independents had 38 percent market share in January and 31% in February. Over the same period Shell had 34 percent and 31 percent and Total had 17 percent and 24 percent respectively. The independents are, therefore, leading the industry and setting the prices of the petroleum products. They also affect pump prices because they are quick to increase and decrease prices independently at any time. On April 6 one independent that we shall not name, reacted quickly to switch the price of a litre of petrol from Shs 3,500 it set on March 30 to Shs 3,100 but on April 9 it increased it to Shs 3,250. Over the same period, a Total station in the same area had Shs 2,800 for petrol on April 3 and Shs 2,900 on April 9.

Their impact is greater than the companies because they are many in number and reach out to many rural areas. However, their ability to fill the gap left by Shell is doubtful.

When Total recently took-over ownership of the downstream businesses of Caltex in both Kenya and Uganda, its market share grew. Mamadou says of the 54 employees of Caltex, 21 remained including those in top management while the 33 employees left. The impact on employee lay-offs in case of Shell is likely to be severe.

So far, Tamoil, the trade name on Oilinvest B. V. Group of Libya but based in the Netherlands, has been mentioned as possible aspirant for the Shell infrastructure. But a sector expert dismissed it because it is “too small” to acquire all Shell downstream infrastructure. The other option is for Shell to divest of its downstream assets piece-meal to various small players like Engen and Kobil.

As anxiety mounts over the fate of consumers without Shell, Total’s Mamadou sought to re-assure the public. “The crisis is almost over although there are supply constraints,” he said optimistically even as the dashboard lights for most motorists continue to indicate “empty”.