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Cablegate: Benzene Fuel Supply Bottleneck Squeezes Market

VZCZCXRO1933
PP RUEHROV
DE RUEHDS #3298/01 3441421
ZNR UUUUU ZZH
P 091421Z DEC 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 3018
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RHMFIUU/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 04 ADDIS ABABA 003298

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR ENRG ET
SUBJECT: BENZENE FUEL SUPPLY BOTTLENECK SQUEEZES MARKET

REF: ADDIS 2569;
ADDIS 2816

-------
SUMMARY
-------

1. (SBU) The Government of Ethiopia's (GoE) decision to require
regular benzene to be blended with ethanol has led to severe benzene
fuel supply gaps, exacerbating an already inefficient fuel supply
chain. The ethanol blending program has hampered the GoE's ability
to maintain adequate benzene fuel supply to its fast growing urban
centers, leaving private motorists and the public transportation
sector to fight long lines and more often face empty pumps at fuel
stations. The benzene fuel shortage appears to be affecting all
sectors of the Ethiopian economy and more recently has put GoE
officials on a collision course with the domestic fuel retailers and
transnational oil company fuel suppliers. To date, diesel supply
has not been affected. This latest fuel supply crisis provides yet
another example of how state-oriented GoE economic policies continue
to impede market stability and broader economic growth. END
SUMMARY.

----------------------------
GOE POLICIES LEAVE PUMPS DRY
----------------------------

2. (SBU) In recent months, the GoE has enacted several fuel policy
actions that have made regular benzene fuel supply problematic.
First, the GoE's move to require transnational oil companies
operating in Ethiopia to blend regular benzene fuel with five
percent ethanol before delivery to the domestic retail market seems
to have contributed to an acute supply gap. Motorists have been
facing one to three hour traffic queues and barren fuel pumps at
local fueling stations. The fuel blending directive, which was
endorsed by the Council of Ministers in September 2007, authorized
the Ministry of Trade and Industry (MOTI) to force all domestic fuel
retailers and private transnational oil company suppliers to begin
selling a fuel blend of 95 percent regular benzene and five percent
Ethanol starting September 2008. In addition, the government as
recently as November 21, 2008 threatened license seizures of all
domestic fuel retailers found not to be adequately stocked with the
new blended fuel. While the blending program is a cost savings
initiative replacing five percent of the country's imported benzene
bill with domestically produced Ethanol, the GoE's license seizure
directive aims to break the loggerhead between the fuel retailers,
transport companies and transnational oil company suppliers of
blended fuel.

3. (SBU) According to the General Manager of Kobil, a Kenya based
transnational oil company operating in Ethiopia, the GoE's recent
directives further establish Ethiopia as having one of the most
tightly regulated oil and fuel trading markets in the world. Over
the last several years, the GoE has instituted fuel regulations such
as: 1) strict price controls on the fuel and lubricant market by
MOTI, 2) GoE regulation of fuel transportation logistics and costs,
3) GoE monopoly control of importation of all oil and fuel products,
and 4) GoE oversight of fuel quality. In addition, the blending
directive has largely resulted in general confusion among domestic
fuel retailers concerning the roll-out and supply cost agreements
with the transnational oil company fuel suppliers and government
regulated fuel transport companies. Currently, the GoE imports all
domestic fuel needs with its limited supply of hard foreign
currency, allowing transnational oil companies to purchase the
imported fuel in local currency (Ref A). Oil companies deliver,
process, and sell the imported fuel products to a largely
mom-and-pop domestic retail market that sells to the public under
transnational oil company logos.

-------------------------------------------
COST-SAVING ETHANOL PROGRAM INCREASES COSTS
-------------------------------------------

4. (SBU) The ethanol blending fuel program which was implemented as
a cost saving effort to reduce the GoE's soaring fuel bill has
increased costs for retailers, suppliers and transporters of fuel.
Retailers have alleged that they have observed measurable losses in
fuel stock deliveries since the GoE directed oil companies to blend
regular benzene fuel and ethanol before delivery to local retail
depots. Fuel retailers and suppliers both blame the temperature
differences between the government-designated blending facility in
Salulta (20 km outside Addis Ababa) and the retail market in Addis
Ababa as the culprit behind the perceived volume losses.
Apparently, the volume of the blended liquid fuel expands in warming
temperatures and contracts in cooler temperatures resulting in a
perceived volume change. Neither retailers nor suppliers have been
able to resolve this discrepancy. In addition, petroleum

ADDIS ABAB 00003298 002 OF 004


transporters argue that the new urban supply route linking the
blending facility in Salulta to the Addis Ababa leaves their trucks
stuck in traffic most of the day and has significantly impacted
their ability to remain profitable. Transporters of fuel have
formally appealed to MOTI to enact a 300 percent wage increase (from
USD 2.5 cents to USD 7.5 cents per km traveled) for their transport
services to carry fuel to retailers.

----------------------------------------
FUEL RETAILERS SAY NO TO INCREASED COSTS
----------------------------------------

5. (SBU) Fuel retailers have formally protested the entire fuel
blending program and for many weeks refused to accept regular
delivery of benzene fuel from domestic oil companies since September
2008. Fuel retailers blame domestic oil company suppliers for not
providing them with the requisite volume of fuel determined in
purchase agreements. According to press accounts, the Dealers
Association, who represents retailers, warned all concerned parties
in a letter to MOTI, dated October 21, 2008, that they would not be
able to operate their fuel retail facilities if they incurred losses
due to perceived fuel stock degradation upon delivery. A local
Total company fuel retailer explained to EconOff that retailers have
the right to refuse fuel delivery if they believe any loss or
unwarranted tampering of product has occurred. However, if loss due
to volume contraction from temperature changes occurs, retailers
would be forced to absorb the costs if they want to keep their
stations stocked. Additionally, retailers who are already operating
on a thin margin (USD 0.03 per cubic meter sold - set through
government regulations) may face certain closure if they accept
losses. The retailer operating under the Total Oil company brand
estimates that his business would lose roughly one percent of his
yearly purchases of benzene stock as a result of fuel stock loss at
the time of delivery.

-------------------------------------
EASY TARGET: BIG OIL PROFITS SQUEEZED
-------------------------------------

6. (SBU) The transnational fuel suppliers seem to have gotten caught
in the cross hairs of the recent GoE directive and fuel retailers'
unwillingness and inability to realize losses in fuel stocks at
delivery. According to Kobil Ethiopia's General Manager, most
transnational oil companies operating in Ethiopia have decided to
absorb the costs associated with loss in fuel inventory coming to
market from the blending facility in Salulta. Retailers cannot
realize any additional squeeze on their limited profits of USD 0.03
per cubic meter of fuel sold. The Kobil representative explained to
EconOff that oil companies in Ethiopia can earn roughly USD 5 per
cubic meter of fuel sold compared to as much as USD 200 per cubic
meter sold in neighboring Uganda. According to the Kobil
representative, the additional costs resulting from fuel stock loss
after blending will continue to peel away their already small
margins and make operations unsustainable. Transnational oil
companies have a choice to either continue absorbing the additional
costs associated with this blending directive or worse consider the
prospect of a complete pull out of the Ethiopian market. As
recently as November 14, 2008, after 60 years of presence in the
country, Royal Dutch Shell Oil Company pulled out of Ethiopia
following the departure of Mobile and Agip oil companies, three and
six years ago, respectively. Libya Oil Holding Ltd has assumed
control of 100 percent of Shell's downstream oil products marketing
business and its 142 employees in Ethiopia.

7. (SBU) To date, only the National Oil Company (NOC) fuel retailers
have been able to provide a steady supply of blended benzene and
ethanol fuel products to the local market. While there has been a
visible shuttering of doors of the other oil companies and local
fuel retailers, NOC has struggled to meet the soaring demand for
benzene fuel. NOC retailers have battled to fight back the
seemingly endless lines of cars at their area retail depots. It is
to be noted that NOC is owned and managed by the Midroc Ethiopia
Investment group. The Midroc group is run by Sheikh Mohammed
al-Amoudi, the single largest private investor in Ethiopia.
According to a rival fuel retailer, most NOC retailers have more
financial flexibility at their disposal and credit facilities as a
result of the parent oil company's close relationship with the GoE
and Commercial Bank of Ethiopia. As recently as December 07, 2008,
Ethiopian media outlets reported that NOC clinched two lucrative GoE
contracts with a combined worth of USD 73 million. NOC defeated all
other oil company bids to supply Ethiopian Roads Authority (ERA)
with asphalt at a cost of USD 30 million and Ethiopian Electric
Power Corporation (EEPCO) with diesel fuel at a cost of USD 42.8
million.

--------------------------------------------
GOE BLAMES LOGISTICS AND AFFIRMS FUEL POLICY

ADDIS ABAB 00003298 003 OF 004


--------------------------------------------

8. (SBU) The GoE denies that there is a fuel supply shortfall
in-country or any suggestion that its benzene and ethanol fuel
blending program is the cause for the fuel shortage. Ato Yeshitla
from MoTI's commercial office told EconOff that he believes that the
problem is not related to an import gap or the ethanol blending
program, but instead is related to resolvable logistical
disagreements between the suppliers and retail companies. In
addition, EPE points to congestion of the heavily used ports and
roads network and the lack of transport capacity as major factors in
exacerbating domestic fuel supply backlogs. The GoE is confident
that the benzene supply shortage can be corrected with its recent
policy directive, which forces a compromise between retailers and
suppliers by threatening license seizures for non-compliant fueling
stations. In a recent meeting at MOTI, an unnamed GoE official
expressed disappointment at the fuel suppliers and retailers for not
being able to resolve their dispute. According to an official from
one of the transnational oil companies present in the meeting, the
MOTI official pointed out that the government was providing the
market a great service by importing all of the fuel and could not
understand why suppliers and retailers were quibbling about pricing.


-------------------------------------
GOE SETS PRICES AND FUEL SUPPLY CHAIN
-------------------------------------

9. (SBU) The GoE uses a heavy hand in the management of fuel prices
and the supply chain in Ethiopia. MOTI is authorized to adjust fuel
prices on a monthly basis to reflect exogenous and endogenous
trends; however does not allow oil companies to capture additional
profits from increased world oil prices (Ref B). The GoE also
captures roughly 15 of the state-authorized 30 percent profit
margins that oil companies could realize while selling lubricants.
The lubricants business can be very lucrative and has in large part
kept many retailers and suppliers in business in spite of razor thin
margins on fuel sales. On the supply side, EPE imports the bulk of
petroleum products from the Gulf countries with diesel accounting
for 90 percent of the total import stock. Also, EPE imports roughly
80 percent of its required regular benzene from Sudan, with the
balance coming from the Gulf market. The GoE also sets the
transport costs and quality standards for imported fuel. EPE
collects petroleum imports at the ports of Sudan and Djibouti where
transnational oil companies prepare the product for delivery and
blending just outside of Addis Ababa. To date, there has not been a
slowdown in the volume of fuel and oil imports to Ethiopia.
Ethiopia imported 1.88 million tons of fuel in 2007, at a cost of
USD 1.55 billion, up 17 percent from the previous year. In 2008,
EPE plans to import as much as 2.15 million tons of fuel.

10. (SBU) There are six oil companies operating in Ethiopia who are
responsible for transporting the fuel coming from the ports to their
depots in the country: 1) National Oil Company (NOC), 2) Libya Oil
Holding Ltd, 3) Total, 4) Kobil, 5) Yetebaberut, and 6) Nile
Petroleum Company. The oil companies are held responsible for any
loss of fuel stock during the delivery and blending process. The
transnational oil companies transport regular benzene to the
blending center at Salulta, which is currently managed and operated
by Sudan based Nile Petroleum Company. The Nile Petroleum Company
is tasked by the GoE with blending the imported benzene with the
required five percent Ethanol before fuel hits Addis Ababa and other
local markets. The GoE is the monopoly supplier of ethanol to Nile
Petroleum Enterprise, selling the product at a fixed price.
Currently, the GoE's blending program uses about one third of its
existing ethanol capacity. In the next 5 years, the GoE plans to
increase ethanol production capacity fourfold to 130 million liters
per annum at four domestic sugar factories in order to meet demands
for its fuel blending program. According to the Ministry of Mines
and Energy, although Fincha sugar factory is the only producer of
Ethanol to date, Methara, Wonji, and Tendaho sugar factories will
soon come on line.

-------
COMMENT
-------

11. (SBU) The GoE's statist fuel policies have complicated an
already inefficient fuel market and have managed not to address the
real benzene fuel supply bottleneck, which has pitted retailers,
suppliers and transporters of fuel against one another. The GoE's
November 21, 2008 move to pull the licenses of all non-compliant
fuel retailers has gotten fuel flowing again, but at the expense of
oil company margins. Although oil companies have acquiesced to the
GoE's policy in the short-term, this latest action cannot
indefinitely force retailers and transnational oil companies, who by
their own admission are operating at a loss, to continue to do

ADDIS ABAB 00003298 004 OF 004


business in Ethiopia if fuel policies do not change. Despite the
steady flow of fuel from foreign suppliers, the GoE may be suffering
from a crisis of confidence among domestic retailers, oil company
suppliers and a public who cannot understand why pumps continue to
run dry and why they continue to pay relatively the same price at
the pump in spite of almost 60 percent declines in world oil prices.
The current dispute may result in future benzene shortages, retail
fuel hoarding among motorists and, worse, the departure of existing
private transnational oil companies from Ethiopia. Post will
continue to monitor the ongoing fuel crisis. END COMMENT.
Yamamoto

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