by Lindsay King

OIL & GAS

Fueled up

fuel.jpg

Fuel Distribution in a democratic South Africa

South Africa’s first BEE fuel distributions company is celebrating its 20th anniversary this year. This in itself is a huge milestone with regard to transformation, even though much work still need to be done in the oil and gas industry to include more black-owned businesses and black executives in the upper echelons.

Taking us on a post-apartheid journey of transformation in this sector, is Afric Oil Chief Executive Officer, Tseke Nkadimeng, the man who has spent the last few years leading the turnaround strategy of the company, which was on the verge of closure due to poor financial performance. By accomplishing this mammoth task, Nkadimeng’s contribution to the sector is sure to be recorded in history as far as transforming the country's oil and gas industry goes.

Twenty-one years down the line, considering our past injustices, and looking at the challenges black-owned companies in this industry had to overcome, Nkadimeng says oil is a global business, so most of the challenges are global-related. However South Africa has unique challenges such as the lack of access to land, and domination by global major players who still hog the majority of local infrastructure and house the major skills. The petrol and diesel sector is also highly regulated all over the world, and there are also motor manufacturers who have their own agendas in terms of how the evolution of new types of petrol and diesel should be.

“In South Africa, there’s a bit of disconnect in terms of fuel evolution environmental concerns and what we are currently using. The origin of that disconnect stretches back to the sixties, when the South African oil and gas industry was highly reliant on Government for direction, due to fuel sanctions at that time. It was a relationship which evolved into a friendship and has grown into a ‘boys club’ kind of arrangement.

"One other past challenge was accessing credit facilities from major players. From our own experience, in 2009, Afric Oil was faced with very limited credit access due to the changing economic climate globally. This led to Afric Oil being unable to grant credit to its own customers, who then defaulted and nearly put the business into liquidation.

“We were faced with this situation where we either close or rebuild and change the business model of the company. I’m not a quitter, so in 2009 we started to rebuild and we’ve now reached the stage where we have managed to go back to operating on a credit system—although it’s now a better-managed credit,” says Nkadimeng.

However, today’s challenges are slightly different, and according to Nkadimeng uncertainty in Government policy direction is one of the biggest problems. “As much as price is still controlled by the government, the industry is bleeding because they are importing a lot of things at a high cost where they could actually be producing these things in South Africa but to produce that you need to invest in upgrades and commit more capital and government must create a space for you to recover the investments, but Government has other social priorities like building houses. So there is that friction at the moment and it affects us because we are still highly reliant on the large industry players for our own distribution. So that’s been challenging for us and I think the sooner the industry starts talking effectively with government, the better.”

Sustainability is a big part of Nkadimeng’s thinking and he’s a firm believer in the fact that the small business sector plays a critical role in terms of absorbing unemployed people right now but which, with the right support, can graduate into the employers themselves.

Growth is a major challenge within the industry, and Nkadimeng highlights credit management as the most difficult challenge, given that the industry is largely turnoverbased and is small on profit. What consumers are not realising is that even though they are buying a litre of petrol at R11, the service station owner is only making five cents on that litre, and the amount of stock holding required can sometimes be onerous such as a service station making 200 000 litres per months will require about R2,5 million in facilities and this sometimes can be significant for small players.

“The pump price also includes large government contribution sometimes even 50% of the full petrol price and hence as a distributor the focus is on generating a lot of efficiencies to survive in the industry, otherwise you are being pressured from both sites of working capital costs and need to generate decent profit.”

Looking at the lessons learnt from the past, in a market that is going up and down in terms of prices, drive for efficiency means a life-line otherwise losses are significant. The challenge is managing that as well as costs to enable keeping head above water. So, there is a huge need to balance cash flow and credit lines, says Nkadimeng.

One of the obstacles/challenges faced by smaller companies in the industry is the fact that most of the infrastructure is owned by the multinationals or the state. He says for a long time, BEE players such as Afric Oil have been fighting to enter this part of the value chain without much success. This part of the industry is still dominated by the major players—Shell, BP, Total, Chevron, Engen, Sasol and to a large extent PetroSA.

“These players currently control the three key components of the oil and petroleum value chain—sourcing, refining and storage. The major companies control all key crude oil refineries (Natref & Sapref), synthetic refinery utilising natural gas (Mossref) and synthetic refinery currently utilising coal in Secunda. The refineries produce ‘white fuels’ (petrol, jet fuel, illuminating paraffin and liquefied petroleum gas) and ‘black fuels’ (bitumen, fuel oil products and lubricants). These refineries supply almost all the petroleum requirements needed in the South African market, therefore placing the entire security of supply in the hands of few global players. Unfortunately, with the exception of PetroSA, black participation at this level of the industry is non-existent. I believe that a political will is required to make significant and strategic changes—starting at Transnet which owns most the facilities.”

So has enough transformation in the fuel distribution industry been taking place? Nkadimeng says there is still lot of work to be done. He believes that small black-owned companies in the knowledge- and capital-intensive industry face the same issues—insufficient access to infrastructure, finance and markets—today as they did two decades ago or before the transformation agenda was initiated.

“Transformation has also fallen short of the targets set by the Liquid Fuels Charter which was negotiated between Government and industry stakeholders, and signed in 2000. An example of the short fall is that in 2010, only 19% of the industry was held by historically disadvantaged South Africans (HDSAs) as opposed to the 25% ownership level targeted.

“More telling is that Black Economic Empowerment (BEE) companies currently hold less than 5% of the total fuel market share in South Africa. The industry is also lacking on women empowerment with less than 7% participation,” he told BBQ.

What can be done to improve BEE in your industry? His advice to improve BEE in the sector is that the industry needs to start aligning the Liquid Fuels Charter to the DTI’s BEE codes. And he believes that transformation will also come with black players buying up or holding strategic infrastructure on the value chain, such as well-located refining and storage facilities. In this regard, Afric Oil and other empowerment players have been pushing for more local recognition in the storage side of the oil industry.

“The current industry charter has good intentions to bridge the gap for BEE players, but it has unfortunately produced very little results to date.”

Looking at the big current trends in fuel distribution that will impact the future of oil in SA, Nkadimeng, who among others completed both his B.Compt and Honours degrees through correspondence with Unisa, says the exit of the majors is the big talking point, and those who plug the gap will have a major impact on the sector. “It would be preferred if the gap is plugged by local players as it will create localisation in the sector. However the is reality that oil traders might move into the space because of their financial position.”

In conclusion, he says both government and Transnet—which controls most of the petroleum facilities—have major roles to play in ensuring that BEE companies play a significant role throughout the value chain process of the petroleum industry.

“They can open up facilities to existing and new entrants which could change the face of the oil industry and ensure that black entrepreneurs are not only confined to running filling stations and forecourts for ever.”

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