Why global firms are exiting oil marketing

With the recent sale of Shell, only Total of the original “seven sisters” is left in the downstream petroleum marketing in the region. Since the coming of the oil industry in the early 1900s, Shell was always the most dominant marketer and brand.

The “get out of Africa” trend has seen Esso, Mobil, Caltex, Agip and BP, and now Shell, exit the region over the last 12 years. The international oil companies (IOCs) have often explained their withdrawal from Africa in well crafted boardroom language of “assets restructuring to get higher value for the shareholders”.

However, in essence the IOCs have withdrawn because they view the downstream marketing operations in Africa as marginal and of high commercial, regulatory and environmental risks.
The IOCs have been shifting their investments to the more profitable upstream oil and gas sector where as much as 80 per cent of IOCs profits are generated.

As the IOCs continue to exit marketing operations in Africa, they are at the same time re-entering the same continent via the upstream oil and gas exploration and production.

Total, the French company, seems the only IOC hooked to Africa and this is no surprise as generally the French involvement and affinity for Africa has always remained strong.

As the IOCs exit, European based petroleum commodity traders seem to be the ones interested in Africa in search for outlets for their oil commodities. One such trader is Vitol, which has acquired Shell assets in Africa on a joint venture basis.

Another commodity trader Transfigura has entered the continent through its marketing brand Puma by acquiring most of BP assets. It is Puma that has been seeking to buy out KenolKobil assets in the region.

The significance of these commodity traders is likely to survive until the next phase, when countries in the region have discovered own oil and reduced reliance on oil imports through increased local refining.
That is when national oil companies (NOCs) and indigenous firms shall be expected to significantly increase their participation and market shares.

Total seems the only IOC hooked to Africa and this is no surprise as generally the French affinity for Africa has always remained strong
The indigenous companies’ capacity to handle petroleum marketing has come of age as marketing technology and expertise are no longer IOC proprietary.

With a petroleum regulatory regime in place and with insistence on high standards, local brands should be able to effectively emerge to take up larger market shares.
However, if the indigenous companies wish to increase their market share significantly, they will require substantial capital injection. Time is ripe for the local oil enterprises to consider merging into fewer but stronger marketing entities.

There is no way having as many as fifty licensed oil companies in a small market will make a significant impact.
We have recently read in the media of high inventories of petroleum products (financed with scarce dollars) stuck in the refinery without takers.

Refinery production
A number of marketers have apparently decided to go slow on lifting products from refinery production, arguing that it is cheaper for them to import products. Government regulations require that marketers source about 40 per cent of their requirements from local refineries.
The same government is also authorising imports of surplus products when the refinery remains stuck with high stocks.

Due to shortage of storage space for these surplus imports, ships have a lot of foreign exchange in surplus inventories when central banks in the region are struggling to pump out dollars to support the shilling value against rapid devaluation and resultant inflation.
Oil imports account for about 25 per cent of our total import bill, and can have a huge impact on forex markets. The country should not be holding higher stocks than it actually needs.

The management of the country’s petroleum supply and demand should receive renewed focus to ensure prudence and responsibility.
If indeed it is government policy to have the refinery supply 40 per cent of the nation’s petroleum demands, then this production should be protected and freed into the market.

Mr Wachira is the director PetroleumFocus Consultants.