Thursday 7 June 2012

Petroleum Procurement


Introduction

The Commission of Inquiry into the Energy Regulation Board completed its work and presented their report to Cabinet for further action. Whilst the findings of the Commission were not made public it is worth noting the following:
·                The responsibility for the procurement of petroleum (both crude and petroleum products) is within the purview of the Ministry responsible for Energy
·                There is an on-going requirement for Zambia to import petroleum products to satisfy market demand. This particularly true for ultra-low sulphur diesel (diesel with sulphur content <500 ppm) which cannot be produced at the INDENI Refinery but is a preferred fuel for use in heavy diesel mining equipment in Zambia.
·                There is a need to import feedstock (crude oil mixed with finished products) as Zambia does not produce its own petroleum. The INDENI Refinery is not configured to process a pure crude into petroleum products and satisfy Zambian market demand unless more investments into this facility (such as the installation of a hydrocracker) are made.
·                The supply of petroleum into the Zambian market requires the involvement of two parastatals namely the INDENI Refinery (100% owned by Government of the Republic of Zambia (GRZ)) and TAZAMA Pipelines (2/3 owned by GRZ and 1/3 owned by the Government of the United Republic of Tanzania). Both these companies have supervisory Boards chaired by the Permanent Secretary of the Ministry responsible for Energy. 

The Committee indicated in their summary on report handover that they had exposed irregularities and corruption in the procurement process. The following are some the factors that need to be present to allow corruption to take place:
·                Inadequate institutional frameworks to handle the transaction
·                Insufficient accountability frameworks of supervision and accountability for those handling a transaction
·                A lack of transparency in the procurement, execution and management of a transaction

The Government through the Zambia Public Procurement Authority advertised two tenders: one for the supply of petroleum products and another for the supply of petroleum feedstock. Since the completion of the Committee’s report, we have not seen any changes in the institutional framework. It therefore would appear that there is still an environment in place which allows for corruption to take place. In this environment it may perhaps be the right time to ask the following questions:
1.       Is Government is the correct entity to control and execute the procurement of petroleum feedstock and products?
2.       Is sufficient attention being paid to best international practices in corporate governance to ensure that parastatals improve their performance and eradicate the potential for corruption?
3.       Is enough being done to secure the future sustainability of the Zambian economy in terms of petroleum supplies?

Petroleum Exploration

In 2009, the Petroleum (Exploration and Production) Act of 1986 was repealed and replaced with a new Act. This Act updated the precious Act to better reflect the changes in how this type of activity is now carried out worldwide. To a large extent the majority of new finds in the petroleum sector are happening in the shadow of the rise of the NOC (national oil company). Whilst the NLOC maintains majority shareholding in the petroleum resources, they work with international oil companies as technical partners to unlock their petroleum resources.  This kind of system works very well once the presence of commercial oil deposits have been established. It is much more difficult to create an environment in which exploration on a large scale is being carried out. Large amounts are being spent in exploration in Angola, Mozambique, Tanzania, Kenya and Uganda. Not a week passes by these days without news of new discoveries in all these countries. 

Whilst Zambia seems to have a system which supports mineral exploration, the same cannot be said for petroleum exploration. Successive regimes in this country have bemoaned the “high price” of fuel in Zambia but little attention is being paid to the best long term solution to this problem which would be the discovery and exploitation of our own petroleum resources. This may perhaps be due to the fact that investments of this nature may take as long as ten years for them to bear fruit and this may not sit well with short term political planning. A good example of this would be Ghana. The Kufuor regime spent large resources in the search for oil. This paid off but the benefits are now being seen by the opposition; in this case the regime of Professor John Atta Mills. First oil in Ghana coincided closely with the change of power and there have been challenges noted in how revenues from oil have been administered. Considering Zambia’s own experience with mineral revenues, it may be instructive to study legislation such as the Petroleum Revenue Management Act in Ghana.

Oil wealth has tended to have a mixed record in Africa, it is in the wider interest of this nation that if these resources are there, they should be exploited. Whilst there will be a long lead time to “first oil”, this time should be used to build up the relevant institutions so that the process of petroleum exploitation can be as transparent and inclusive as possible.

Parastatals

Perhaps the greatest challenge in our current environment is the operation of our parastatals. It is also apparent that privatisation is not being seen as a viable alternative to the operation of these entities. If we are committed to continuing to run these entities as businesses then there is a need to change the approach of how appointments to the respective supervisory Boards are made. There is nothing stopping appointing authorities from requesting search committees to receive applications from members of the public wishing to serve as Directors of state owned companies as a first step in the reform process. On average in the best run companies, it is not unusual to have a director serving for 15 years.  Perhaps our challenge is to create a process that will generate enough credibility such that Directors are allowed to contribute to the respective companies for this period of time.

The Contracts

Two companies have been reported in the press as being the preferred suppliers for the respective petroleum contracts. The structure of the Zambian market requires study and further monitoring to establish whether there is real competition in place. The award of a substantial contract for the import of petroleum products to a company which also has a presence in the retail and distribution market will put pressure on regulatory agencies to ensure that the servicing of this contract does not unduly give them over competitors. The need to ensure this will fall on both the Energy Regulation Board and the Competition and Consumer Protection Commission. There will be a need to strengthen and support the operations of these agencies if they are to effectively carry out this important task. There also appears to have been some shortcomings in the management of previous contracts and this may have contributed to the belief that there is corruption in the procurement of petroleum. Those discharging these contracts will need to ensure that everything that has been done will stand up to public scrutiny.              

Conclusion

There is an opportunity to set a new standard in the management of the petroleum procurement process, This may require Government to make decisions regarding the market structure of the petroleum industry and whether it is appropriate for them to take the lead in petroleum procurement. There will also be a need to strengthen the oversight, through boards, of parastatals. The energy sector has taken a beating in the press in which its management and regulation has been found wanting. What is not clear at this point is the measures both in the short and long term that will be instituted to bring back credibility to the operations for this sector. The public has heard enough about what is failing; it is now time to get the sector running in a form that will re-establish confidence. There is an expectation that there will be a steep rise in the price of petroleum in the next two years and we need to make decisions that will find us ready to deal with this eventuality when it arises. It may therefore not be advisable to build the expectations of the public that fuel prices will reduce when the cost of crude and petroleum products imported into Zambia is not something that the importer can control.