While the Somali public is heavily engaged in debating tomorrow’s opportunity with regards to Oil Exploration, the imminent one today in the Petroleum Downstream sector is barely looked at.
A broad definition of the Petroleum Downstream sector is any activity related to the refining of crude oil and marketing & distribution of petroleum products.
Somalia never had a Petroleum Refinery and hence was always reliant on fuel imports. A situation that could potentially change once the Petroleum Upstream sector is developed. Again, an opportunity of tomorrow that requires a well-functioning marketing & distribution system. What characterizes the Somalia petroleum marketing & distribution system today? And more importantly, how should a Somali fuel company develop its marketing & distribution to serve a growing market?
The bad side of an unregulated market
The above two questions shall be answered successively. Mogadishu, Berbera, Kismayo or Bossaso, all have in common that no governmental regulation with regards to fuel specification exists. Hence, it is up to the fuel importers whether to import cleaner fuel or not. Fuel specification is not only critical because of environmental concerns, but also to protect fuel consumers engines not to get damaged. Incomplete combustion, clogging filters, carbon deposits on injectors, corrosion and many more issues that cause performance weaknesses & shorten the usable life of the engine.
A critical aspect of low fuel quality is Sulphur content, which when cut boosts efficiency. These technical aspects, however, are embedded in the political & economic environment. To provide a better picture, look at Mogadishu, where the highest fuel requirement lies. Only since the Federal Government of Somalia slowly brought back security to the capital, we saw the first gas filling stations to be opened in 2013.
However, still up to today you find on street corners Somali women selling fuel in jerry cans as a legacy of the past. Nonetheless, the introduction of gas filling stations improved fuel quality offerings due to less contamination and a controlled supply chain. In addition, higher turnover allows up to 20% lower prices at gas stations. The growing market penetration of diverse gas filling companies tells a story of businesses seizing opportunities. What is lacking here though is a regulated market to ensure safety, quality standards & investment attractiveness?
Value addition through Integration
Ideally, the Somali women can be employed at gas filling stations not fearing theft, fire outbreaks, and generating income. Consumers can buy reliable cleaner fuel for their cars. Fuel companies can provide value-added services such as car washing, grocery, lubricants, etc. All of which can be further supported by the right government policies in terms of investment security & attractiveness. Having an integrated value chain from importation to wholesale & retail provides economies of scale. Not only is such a fuel company more profitable, but it also brings down costs for the entire market.
Competition is the keyword of the game and while globally most companies have vertical integration, they now focus on harnessing, with Artificial Intelligence, their data sets in order to gain efficiencies. The Somali Downstream market, however, is still in the market making phase, meaning opening a gas station, distribution network, pricing services, engineering, all provide profitable opportunities.
The most effective way of regulation is raising awareness. A not often heard statement, but imagine the Somalia Government educating the fuel consumers on quality, prices & locations to help consumers making informed decisions regarding fuel purchases. This, in turn, will affect the value proposition of fuel retailers. At last, any government providing such kind of services is in a better position to put implement a legal framework that facilitates prosperous activities & reduces harmful aspects.
Currently, most Somali fuel importers purchase the lowest fuel quality available in the market mainly due to price competition. It is no surprise then that sanctioned Iranian fuel is imported as cargo ship tracking reveals. This not only endangers the reputation of Somali fuel importers but also proves their shortsighted view.Mohamed Said – Biofuels Expert
Price risk is not to be feared but to be managed
Clearly the marketing & distribution sector fall not short of opportunities. Turning to the importing side of the equation. Currently, most Somali fuel importers purchase the lowest fuel quality available in the market mainly due to price competition. It is no surprise then that sanctioned Iranian fuel is imported as cargo ship tracking reveals. This not only endangers the reputation of Somali fuel importers but also proves their shortsighted view.
The lack of trading knowledge with regards to the international petroleum pricing mechanism and the insufficient banking & financing system to facilitate imports, limit the potential to purchase cleaner fuels at larger quantities from international trading companies. This would not only optimize freight costs but also open opportunities to better market imported fuel via wholesale & retail.
Currently, Somali fuel importers are heavily exposed to price risks as they purchase their cargos at spot prices. Moreover, several importers pool together their orders which further complicate stock management. Hence, it happens regularly that stocks run out because of delayed orders & uncontrollable exposure to difficulties arising from Ship-to-Ship (STS) transfer to load Iranian fuel.
All can be improved by simply purchasing via in Tank transfer (ITT) at various Somali ports at an agreed price, while one larger importer manages the price risk for the others and imports larger quantities. Again, this is a pure business sense that benefits all stakeholders and requires the initiative of one larger importer to convince others to follow suit. In any case, a regulated market would anyway limit many of the current importers. Thus, making the step ahead to purchase from international petroleum companies is the right move to do.
Win-Win-Win for society, government & businesses
In conclusion, the imminent opportunities are purely business-related and have little exposure to foreign interests. Whether the UAE, USA, Qatar, Ethiopia, or any other country, none of them have an interest in the marketing & distribution of petroleum products in Somalia. Hence, Somalis can only blame themselves for not seizing these opportunities. In fact, a thriving downstream sector enables other economic activities to flourish which then means the government is receiving higher tax revenues. Thus, it can provide more services by strengthening its institutions. Tomorrow’s opportunity becomes today’s and the time will be ready to seize it. So let’s start today!
The writer is Biofuels Expert and can be reached on firstname.lastname@example.org or @Karshee_Said