NPA Boss Speaks on Ghana’s Downstream Sector

Persistent fuel price increase in Ghana is a worrisome trend as it drives inflation and causes hardship for the people. Indeed some Ghanaians have called on government to reduce the burden. Is the government insensitive to the yearnings of Ghanaians? Offshore Africa’s Chief Editor Gilbert Da Costa, this week, sat down for more than an hour with Dr. Mustapha Abdul-Hamid, CEO of downstream regulator National Petroleum Authority (NPA), to dissect critical issues in the sector. The interview coincided with his first year anniversary in office. He spoke candidly, explaining government’s predicament. Sit back and enjoy.

You have been in the hot seat for exactly a year now. What is your overall impression of Ghana’s downstream industry, from a regulatory point of view? I think that our downstream petroleum industry is very well regulated. Since I came into office we have been to many West African countries and everywhere we have gone they have sought to sign Memoranda of Agreement with us to come and learn from us. In fact not just within the West African region; Lesotho just left, Kenya left several weeks ago. Our model is admired by many African countries and they think that it is a model that is worth emulating.

Having said that, I must admit also that there are challenges. Of course as a human institution there would be challenges. For example, the framework that enables us to regulate the downstream petroleum industry is the NPA Act of 2005 Act691. You will agree with me that between 2005 and now is a long time. As they say in Ghana a lot of water has passed under the bridge. So to that extent it is important to readjust the bridge to determine the flow of the water that passes under it. And therefore, we are in the process of reviewing the NPA Act to meet contemporary issues. Presently, the law cannot deal with the scope of evolution that have taken place in the petroleum downstream sector. So, putting all of it together I will say we are doing quite well and I am very satisfied with the operational structures that are in place for regulating the downstream petroleum industry.

Taking you up on what you just said about other countries showing a lot of interest in what you are doing. In your assessment, what do you think makes NPA's operations so attractive to other countries in Africa? Well two things, our model of distinguishing between bulk import distribution and export companies and oil marketing companies is not a distinction that exists in many countries. In most jurisdictions when they say an oil marketing company, it means a company that imports stocks and distributes petroleum products. But in our case we have neatly compartmentalized into two parts. Those that import and store are known as Bulk Import Distribution and Export Companies. They sell products to OMCs or Oil Marketing Companies who do the distribution. What it does is that it allows for focus and efficiency. Because if one company imports, stores and distributes it will be too much profile for the company. Therefore there will be a lot of inefficiencies with the system but the nature of our structure allows for efficiency.

Secondly, it gives efficiency to the company and allows the regulator to control properly. It also ensures better revenue for government. The BDCs pay appropriate taxes to the government, as well as the OMCs pay appropriate taxes to the government. Whereas if the two entities were one company they probably will pay the same tax or something to that effect. So, economically it is also good for us. Again this our concept of UPPF, the Universal Price and Petroleum Fund, is not a concept that also exists in many African countries. It is unique to a few countries, of which we are basically known as the flagship country for learning how UPPF operates. So, the Unified Petroleum Price Fund allows everybody across the country, no matter where they are to buy fuel at the same price. In other countries the further you live from the coast the more expensive fuel is. In our country, the five regions of the north are the poorest of our country. So, you can imagine that if on top of that poverty they were supposed to buy petroleum products at costs higher than those of us in the coast. It will cause double hardship for them. Hence the system is very well admired by all these our African neighbours, who are coming and seeking to learn from us.

You also mentioned that after years of operating the NPA law there is room for some changes to be made? Which aspects of the law are you looking at? When the National Petroleum Authority was established there were just about three BDCs in the country. Now we have 42. You will agree with me that the legal framework used for regulating three companies obviously will be inadequate for 42 companies. OMCs at that time may not have been more than 10 or 15. Today we have 172 Oil Marketing Companies. The scope has expanded and we have vibrant organisations that are superintending these two spheres. We have the CBOD which is the umbrella body overseeing BDCs. We have the association of Oil Marketing Companies. We also have the LPGMC. Now under CRM which we are rolling out soon, first of all the law that exists does not envisage CRM. The Cylinder Recirculation Model that is coming into place needs a legal regime to guard that process as well.

The world is talking about energy transition, a regulatory framework is needed to manage energy transition and integrate cleaner fuels in the country’s energy mix. Ghana is thinking about establishing a Petroleum Hub in the western enclave of the country. The project is about 60 billion dollars and we are going to be the regulator of that project as well which was not envisaged in 2005. Thus, there is need to refine the legal regime to accommodate the new developments. The high cost of petrol in Ghana has been attributed to high taxes and levies and sometimes we wonder whether it is sustainable. Whenever there is price increase on the international market or the cedi depreciates fuel price goes up. Is this sustainable or do we need a new model? All over the world; let me reduce it to basic purchase and sale transaction. If I want to sell mobile phones for example, Ghana doesn’t manufacture these phones. Let’s say they are manufactured in South Korea. When I go to South Korea and buy Samsung phones- 500 pieces and I pay $100 per piece, I am going to have to ship the products. So, I will pay freight cost. When I come to Ghana I am going to pay duties at our ports for these 500 pieces of mobile phones before I clear them. In pricing these mobile phones, therefore, I'm going to consider the original hundred dollars at which I bought the products. I am going to add the freight charges. I am going to add the taxes that I paid at the port to clear them and possibly add insurance cost. My selling price might jump up to $550.

Now this principle of marketing applies to every product, including petroleum products. So no matter what you do or say you cannot eliminate the cost of the product at the international market from the equation. It is the primary determinant of the cost of petroleum product. All across the world petroleum products have become expensive, even in the United States there is huge outcry. They have brought out their strategic reserves. They have done everything humanly possible to stabilize the prices, but the prices keep going up.

Another factor is that all over the world governments also put taxes and levies on petroleum products to raise money for development. That happens in the developed world but I'm arguing today, that in a developing economy like Ghana where 70% or 80% of the people do not pay taxes; putting taxes on petroleum products is even more imperative. There is no system in place to enable us collect taxes from the informal sector of the economy. 70% perhaps 80% of Ghana’s economy is informal and to the extent that we have serious challenges collecting taxes from the informal sector, petroleum taxation becomes a sure bet. Even so, what you call taxation as taxation on our petroleum products is just two cedis. In fact 1 cedi, 90 pesewas.

Now we will talk about levies and margins. There are levies, sanitation levy for example. Price Stabilization and Recovery Levy and Energy Debt Recovery Levy. We can quarrel about the levies, I don’t mind but margins. These margins are put on the petroleum products for specific projects. For example, the UPPF margin is what allows us to pay transporters across the country and say even though you have carried petroleum products from Accra to Wa, please don't put the cost of transporting the products over to Wa on the price of the products for the people of Wa. Just take it there and come to us for your money. Such a margin is crucial, there is no way we can dispense with the UPPF margin.

The other margin is fuel marking. We have the highest quality of fuel in West Africa, 50 ppm. Even our argument is that it is not really 50 ppm, it is much lower, sometimes 10 ppm or 12 ppm. At the pump, maximum is 22ppm. We don't even get anywhere near half of 50ppm. So our fuel quality is the highest. Across the West Africa region people are doing 1500 ppm, some are doing 3000 ppm, 5000 ppm and above. If we don't mark our fuel to distinguish it from low quality fuel that surrounds us, there is fear of adulteration.

You know the structure of the French economies. Many of them are still subsidizing fuel and because they are subsidizing. It will be relatively cheaper. In any event it is of a lower quality. On that score it will be cheaper than Ghana. We live under the threat of unbridled smuggling of less quality fuels and therefore less expensive fuels into our system. The fuel marking margin that we have put there allows us to mark our fuels to distinguish them from others and also ensures we collect adequate taxes. It is an important component of the price build up that in my opinion is non-negotiable. Indeed the Parliament of our country has found wisdom in these margins and has passed the legal instrument (LI), to give legal effect to the collection of these margins.

Nonetheless, I must admit that two things principally are responsible for the rising cost of fuel in Ghana. One, the dollar-cedi exchange rate and then the international prices. So, I have already argued that regarding international prices, there is nothing we can do about it. We can blame cedi depreciation on poor management of the economy. The truth of the matter is that our cedi is prone to fluctuations, because of the fundamental structure of our economy. We are mainly import based economy to the extent that our One District One Factory project is yet to come on stream which could have transformed Ghana to a net exporter rather than a net importer of goods. Our currency will be subject to fluctuations due to price changes on the international markets.

However NPA and the Ministry of Energy are on top of the situation. And we must give credit to the Minister of Energy, who has been forward-looking. He has negotiated with the Bank of Ghana, where we do periodic currency auctions that guarantee constant supply of the dollar particularly to our industry players for the purposes of importation. Thus, they are protected from unbridled fluctuation and depreciation of the cedi. The downstream petroleum industry alone accounts for about 20% of demand on the hard currency and that is huge. I need Ghanaians to appreciate that this special dispensation we have from the Bank of Ghana that allows us a certain ceiling in terms of the dollar cedi rate. It is a very laudable gesture, because manufacturers can also make the same argument about the importance of their sector. For instance, rice importers can make demand for such a dispensation. I don't want us to downplay the importance of what we have been able to arrange for the downstream petroleum industry. In spite of these things, because of the International world order the prices keep going up.

We intervened nearly three months ago to reduce our margins. We reduced the UPPF margin. Cumulatively we took out 15 pesewas from the price build-up. And we have said that we will continue to watch the market and if it is necessary at another point to intervene on other aspects of the taxes or levies. The Minister of Finance, I am aware is very worried. Last week, for example, I received several calls conveying his deep concern over this issue. Government is not insensitive to the suffering of the people. We will do what we can to alleviate the plight of Ghanaians. Do you also see the revival of TOR as a possible solution to the problem? Well of course, TOR is a national asset. I can assure you that this Minister for Energy basically regards TOR as his first born child. He is overprotective of TOR. The revival and survival of TOR is non-negotiable and everything we've been doing so far suggest that our interest is to revamp TOR. Beyond TOR, I just told you about the petroleum hub we are intending to develop in the western enclave; that also is supposed to have refineries of perhaps bigger capacities than TOR. So, Ghana having a refinery will help us to refine our own crude in the future and perhaps reduce the economics of scale that surrounds pricing.

Let’s talk about indigenous operators in the downstream. I have spoken to a couple of them and they are saying, we have enough operators for the downstream, we do not need foreign operators for the downstream. Do you agree with that or do you think there is still room for foreigners to be here? Well, my opinion doesn't matter anymore because the Government of Ghana made a pronouncement on this in 2018 through a cabinet decision that says the downstream should be run by Ghanaians. It is non-negotiable. I know foreign companies especially companies that have connections with their national governments have been protesting. Just today, I met some foreign investors and I made it clear to them that no country that I know whether it is Singapore or Malaysia or Thailand from the history of their development trajectories in economic books have been able to develop by just opening their doors to foreign intrusion.

All these economies developed by closing their economies for 10 or more years and focused on developing indigenous businesses. When their indigenous businesses had gotten to a point where they knew they could withstand foreign competition they opened their doors for foreign intrusion. We have to go on that path if we too want to be like Malaysia or Singapore. So we are unapologetic about the fact that as far as our downstream petroleum industry is concerned, our goal is to seek 100% local industry participation. There are some aspects of the downstream petroleum industry, properly so defined that are perhaps more capital intensive than local businesses could undertake. The establishment of refinery for example may involve heavy investment. So, in those areas we are allowing at least 49% shareholding by foreigners. But with regards to retailing of petroleum products, I don’t think that foreign companies should be included. There are already two giant retail companies in the market we are allowing them to stay. But quite frankly we are no longer letting new foreign entrants into the retail and distribution network of our petroleum downstream industry.

Some of the operators are really struggling, selling below their margins and all that. Do we keep things the way they are and say let the fittest survive? Or is there something NPA can do for the OMCs? I agree with you but at all material times we have involved the OMCs in whatever economic measures we have sought to put in place to alleviate the suffering of Ghanaians. They have at various points given up on some of their profits as their contribution to alleviate the suffering of Ghanaians. I understand the difficulty they are in. Sometimes you have a windfall for a period of time and when economic difficulties ensue you are able to shed some profits without necessarily compromising the survival of your business.

Can you give me an idea as to how much of a problem smuggling is in the industry. I mean is that a problem? Of course it is a problem. Remember in my earlier submission in this interview I told you that because we have the highest quality of fuel in the West Africa region. We are prone to the hazards of smuggling because people will be tempted to smuggle and they do all the time. Our security and Intelligence department is constantly putting a demand on our pegs in order to deploy people at our borders. We have collaboration with the navy, especially the Western Naval Command. It is a whole industry especially in the Western Region, the smuggling business is rife. There is a whole township in the Western Region, where they are manufacturing what they call denges. This is what they use to smuggle in these fuels and so on. It is a huge menace I must confess. And of course, because NPA has had an eye on that matter for a long time and together with collaboration with the army, navy, the marine police and national security, we have been able to drastically reduce these incidents.

Can you talk about the LPG market? We understand we are importing half for our domestic needs? Is that trend likely to continue or would we see some changes? We are hoping Ghana gas is able to expand and able to meet our domestic needs. Certainly that is the goal. Currently, Ghana Gas Company is producing 30% of the local market demand and so we are hoping that they would be able to ramp up. The last time we visited the place they told us they had expansion plans to raise up their production levels. There is a report that NPA granted waivers for sulfur levels for local refineries and people were raising questions, particularly at a time when people are asking for cleaner energy. Why was that the case? I told you earlier Tema Oil Refinery (TOR) is very important to this government and the need for us to protect it as a strategic national asset. It is as a result of our desire to protect TOR that we granted a special dispensation to TOR to produce at 1500 ppm. We have given them up to a certain period to invest and they need about US$ 450 million to be able to retool in such a way to be able to reduce it to 50 ppm.

Now that is a huge investment. In order they don’t collapse we directed TOR to produce at 1500 ppm. We would comingle with the 10 to 12 ppm that we import which constitutes over 90% of the import quota. When you comingle 10 or 12 with the 1500ppm you will get about 22 ppm which is still lower than the 50 ppm upper limit we have set. So basically what we are saying is we haven’t done anything above the 50 ppm we are talking about. How will the Petroleum hub project impact the downstream petroleum industry? It will have a huge effect on the downstream petroleum sector. The Petroleum Hub Project is a national economic project that is meant to answer several questions. One, it is meant to fit into Ghana’s role as headquarters for the African Continental Free Trade Area. The whole idea is to actualize Ghana’s position as the gateway to Africa. For us to move it from mere platitudes and sloganeering to concrete manifestation hence, we have to do the Petroleum hub development thing. So that the nation becomes a trading hub for petroleum products like some locations in the world. Currently the hubs we have for trading Petroleum products are Singapore, Rotterdam, Malaysia, United States and then the one in the Gulf. We don’t have a Petroleum hub in the entire African continent. We want to be pacesetters in this regard.

What message will you send to the people, on what to expect regarding petroleum prices in the coming months? We are a caring government and we are concerned about their welfare so we have shaved off some margins. If the phenomenon continues we might meet again and see what we can do to alleviate the suffering of the people. I am aware the Finance Minister is very concerned about the situation and is willing to intervene, if it is necessary to do so. The only assurance I can give you is to trust us. People should have confidence in government. We are watching the market and if it becomes necessary for us to intervene we would intervene. It is a very delicate situation, some people call it a catch 22 situation. For example right now fuel price is 11 cedis for petrol and 12 cedis for diesel. I told you the entire tax on petroleum is 1 cedi, 90 pesewas. If you shave off one cedi, ninety pesewas it doesn't bring the price down significantly. At the same time it will result in about 4 billion cedis loss of revenue. And the government will have to contemplate, do we hemorrhage 4 billion cedis, while we still haven’t addressed the complaints and suffering of the people? It is a delicate situation. Removing tax of about 4 or 5 cedis is quite significant; people would see there is a significant reduction in fuel price. However, removing taxes to the extent of 10 Cedis will be economically unwise. It will be an exercise in futility and will stifle national development. I am not an economist and I am sure Ghanaian economists would be able to put down the numbers and know the advantages and disadvantages.