INDENI sources have warned of logistical nightmare in the energy sector as a result of mothballing Zambia’s only oil refinery.
The sources also stressed that mothballing Indeni “means jobs will be lost; an interesting start to an administration that promised to create more jobs.”
Speaking at the post-budget Town Hall Symposium at Mulungushi International Conference Centre in Lusaka recently, finance minister Situmbeko Musokotwane said the fuel situation in the country was a big mess as the government was subsidising it with about US $21 million a month.
“Now can you imagine if there were no such subsidies of $21 million a month, the issues of meal allowances, we would sort them out. But we have made choices. Personally, I don’t believe this is money that is well spent because we can do something better with that $21 million a month. But the good thing about fuel is that it may be possible to do adjustments on how we procure fuel so that even when we remove the subsidies the price will not escalate because we are targeting the wastage in the system,” said Dr Musokotwane. “So, it is possible to cut out the wastage in the way fuel is being procured. And when we cut away that wastage, we may be able to remove the subsides with just a minimal increment in the pump price. … So as a society we have to make choices. Do we want cheaper fuel? If the answer is yes, then of course it means that we don’t have to buy from Indeni. But if you want Indeni, it means you must accept more expensive fuel. These are choices we have to make. …You want the status-quo, fuel will remain expensive and at some point, we may have to reduce the subsidies and pass on the cost. You want fuel to be cheaper, then we will have to reorganise the manner by which we get fuel. Finished products and through the pipeline and not through the tankers…so these are choices that we have to make. Obviously, there will be some casualties because if you buy the finished products, it means Indeni cannot be as active as what it is now. In fact, it cannot refine because we will be buying from outside. So, there are people who are employed at Indeni. I think about 300 of them, what do we do with them? Should 300 people force all of us have expensive fuel or should we say let’s take care of you 300 people so that the whole country gets cheaper fuel?”
And last Friday, energy minister Peter Kapala placed Indeni on care and maintenance saying the government of President Hakainde Hichilema had begun the process of reforming the petroleum subsector.
“As you may be aware, the sector has been marred with a lot of inefficiencies which have increased the cost of the various petroleum products. The reforms are aimed at ensuring that there is adequate, reliable and affordable supply of petroleum products in the country. The overall objective of the reforms will be to increase security of supply of petroleum products in the country,” he said.
Kapala said the government had begun looking at modalities that would reduce the cost of transporting petroleum products and improve efficiency in delivering the products.
He said the government intends to implement under transportation the pumping of Low Sulphur Gasoil (LSG – Diesel) through TAZAMA pipelines as one of the reforms.
“Equally, products such as petrol, Jet A1, Liquified Petroleum Gas (LPG), kerosene and Heavy Fuel Oil (HFO) will be transported via road as they will no longer be produced by the refinery,” said Kapala. “The public must note that we have decided to put Indeni Refinery on care and maintenance which will result in having fewer employees working at Indeni while the other employees will be reassigned to manage fuel storage depots. Further, an option of voluntary separation will be given to employees. …Instituting the above reforms in the fuel supply and procurement will ensure security of supply of petroleum products leading to stability in the market. My government will promote with these reforms, transparency and private sector participation in the sector.”
Efforts to get comment on the development from Indeni managing director David Lungu, by press time, proved futile as his phone repeatedly went unanswered.
But high ranking refinery sources noted that “there has been talk of subsidies and figures bundied about without availing details of how this has happened. For those who may recall, fuel subsidies were scrapped in May 2013 – a good eight years ago. At what point were they reintroduced?”
“Of late, a lot has been said about the petroleum sub-sector of the country’s energy sector. Ultimately, a decision has been made concerning Indeni Petroleum Refinery Company Limited – mothball the plant after 48 years of operation.
Interestingly, the run up to this decision has been fueled by misinformation and outright disinformation,” sources said. “A flawed argument has been presented with Indeni being portrayed as obsolete; this has, unfortunately, been supported even by people who have had an opportunity to sit of the company’s board and are privy to how the plant has been renewed. One may recall that during the administrations of presidents Levy Mwanawasa and Rupiah Banda, the then shareholders – Total and GRZ – embarked on a serious drive to recapitalise the refinery and modernise operations.”
The sources explained that the modernisation of operations and upgrading of the plant has been ongoing since then.
“With that, one can only question the motives of those claiming that the refinery is obsolete. With this background, it is surprising that amounts of up to US $500 million have been bundied about as being required to ‘modernise Indeni’. What Indeni required is around US $200 million to procure and install a diesel hydrotreater or desulpheriser. This would have enabled the Refinery to produce LSG (low sulphur gasoil), thus eliminating the need to import this product,” they explained. “It appears this is what unsettled those with vested interests in the petroleum importation chain and it appears they have convinced the powers that be to scuttle the refinery altogether. What is most interesting is how the government has been convinced that a solution that was considered unsustainable as far back as 1969/1970 [importation of finished petroleum products via pipeline and road haulage] can work without compromising security of supply. Broadly, it appears that the bigger picture has not been taken into account. Obviously, mothballing Indeni means jobs will be lost; an interesting start to an administration that promised to create more jobs. Further, road haulage of fuel may prove to be a logistical nightmare. Data available from ERB (Energy Regulation Board) indicates that as at September, 2021, the country had a fleet of 838 licenced road tank vehicles (fuel tankers) and certified by other authorities like the Zambia Compulsory Standards Agency. Is this fleet adequate? We wait and see.”
The sources warned that closure of Indeni also means that Ndola Energy Company (NEC), which produces electricity using Heavy Fuel Oil (HFO), cannot run.
“In fact, this has been the case throughout this year. NEC’s outage has taken a good 110 megawatts of the national grid. On another front, the country is confronting not ‘if’ but when the fourth wave of COVID-19 will set,” they explained. “Indeni being offline means no production of LPG, a major product in the production of medical oxygen. One can argue that the country will import the product, and indeed quite so. For all practical purposes, how would we fare if sources of supply like South Africa decide to restrict exports of the product for them to deal with the impact of the fourth wave? Would one be wrong to assume that the country is being held to ransom by a clique with vested interests?”
They argued that “lies were bundied about including one the attributed the ‘high’ cost of fuel in the country to Indeni”.
“This, further, fed into a fallacious claim that Zambia was home to the highest fuel prices in the region. The nation was told that were Indeni to go, the country would have resources to reintroduce meal allowances for students sponsored by the Higher Education Loans and Scholarships Board – among other things. Granted, the owner of the refinery reserves the right to determine the fate of their investment. But should Zambians expect cheaper fuel? Hardly!” sources stressed. “What was kept away from the public is the fact that contrary to the popular narrative, Zambia ranks at number 34 worldwide in terms of fuel costs; in other words, Zambia’s pump prices are the 34th cheapest globally, and eighth cheapest in Africa (https://statisticstimes.com/economy/countries-by-petrol-prices-and-gdp-per-capita.php)
To illustrate, the price of petrol in Zambia is K17.62 against a global average of K28.82 (https://www.globalpetrolprices.com/Zambia/gasoline_prices/). For diesel, Zambia’s prices is K15.59 against a global average of K26.35 (https://www.globalpetrolprices.com/Zambia/diesel_prices/). Clearly, the argument that fuel in Zambia was the most expensive in the region was, and still is, a flawed one. This becomes more obvious when one considers that in setting the retail price [pump price], the Energy Regulation Board (ERB) uses a cost-plus model (CPM) – adopted in 2008.”
The sources said the CPM ensures the price paid at the pump incorporates all the costs incurred along the value chain, plus the applicable taxes/duties.
“According to ERB’s 2020 Energy Sector Report [available at www.erb.org.zm], CPM considers two factors: the wholesale price build up and the retail price build up. The cost elements up to the wholesale price include: (i). Cost-Insurance-Freight. The Cost-Insurance-Freight (CIF) of the petroleum feedstock cargo is the landed cost of the cargo at the port of Dar-es-Salaam. The quantities of the constituent components of the petroleum feedstock, which include crude oil, condensate, naphtha and diesel, are multiplied by the unit costs to derive the total monetary cost of the feedstock. The information is obtained from the supplier invoices which is based on the contract between government and the oil supplier and ultimately used to develop a profitability statement,” they explained. “(II) Ocean Losses
The normally acceptable loss incurred in the loading and offloading of petroleum feedstock and petroleum products from a vessel are set to 0.00 per cent. (III). Wharfage. The Tanzania Harbour Authority levies a statutory charge on the importation of petroleum products. At present, this is 1.25 per cent of the CIF Dar-es-Salaam cost.
(iv) Insurance. The insurance costs are set at 0.11 per cent of CIF. The insurance covers the cost of insuring the feedstock from the Dar-es-Salaam to Ndola. (v). TAZAMA Storage Fee. TAZAMA charges US $2 per metric tonne to the importer for any petroleum feedstock quantities that are stored at the Dar-es-Salaam tank farm on the last day of the month. The amount was agreed upon between TAZAMA and government. (vi). TAZAMA Pumping Fee. TAZAMA charges US $49/MT to the importer for transporting petroleum feedstock through the pipeline from the Dar-es-Salaam tank farm to the Refinery in Ndola. (vii). TAZAMA Pipeline Losses. Consumption and losses for TAZAMA are currently set at 1.00 per cent.
(viii). Agency Fee. The government appointed TAZAMA as agent to discharge specific duties in the procurement of petroleum feedstock. The Agency fee is currently US $5/MT, the fee is agreed between the government and agent.”
They explained that the key function of the agent, amongst others, is to ensure compliance by the supplier to the terms and conditions of the supply contract.
“(IX). Processing Fee. INDENI charges a processing fee of US $55.38/MT to the importer for refining (processing) petroleum feedstock. (X. Refinery Losses. Some petroleum feedstock quantities are lost during the refining process due to: (a). Normal processing losses; (b). Consumption, as some quantities are consumed as fuel in the process; and (c). The consumption and losses figure are set at 5.0 per cent. (XI). Terminal Losses. These are terminal losses as prescribed by international norms. A loss level of 0.5 per cent is allowed for petrol whilst a loss level of 0.5 per cent has been allowed for kerosene and jet A-1, 0.3 per cent for diesel and Heavy Fuel Oil (HFO) covering handling and storage losses. A loss of one per cent is provided for liquefied petroleum gas (LPG).
As can be seen, TAZAMA’s total share in the wholesale price build up is US $56/MT with Indeni’s being US $55.38/MT,” they disclosed. “The cost elements of the pump price are as follows: (I). Terminal Fee. The Ndola Fuel Terminal (NFT) charges a fee of K62.64/M3 or K0.063/litre on petrol, diesel and kerosene uplifts at the terminal. (II). Marking Fee. The price of petrol, diesel, kerosene and low Sulphur gasoil (LSG) incorporates a cost line referred to as the Marking Fee of K96.99/M3 or 0.097 ngwee/litre. The Marking Fee covers the cost of the chemicals used to mark petroleum products, the taxes on the chemicals and the staff costs of implementing the fuel marking programme. (III). Excise Duty.
The applicable excise duties are K2.07/litre on Petrol, K0.66/litre on Diesel, K0.66/litre on LSG while none is charged on Kerosene. (IV). Transport Cost. This is the charge that is applied in all towns to equalise the pump prices to the national uniform pump price.”
They explained that the ERB determines the amount of money an oil marketing company (OMC) can make on each unit of petrol, diesel, kerosene and LSG they distribute.
The OMC margin covers the costs of the OMC and allows the OMC to earn a reasonable return on its assets.
The current OMC margin is K0.89 per litre.
“The ERB determines the amount of money a service station owner can make on each unit of petrol, diesel, kerosene and LSG they retail. The dealer margin covers the costs of the dealer and allows the dealer to earn a reasonable return on its assets. Currently, the dealer margin is K0.65 per litre,” the sources outlined. “(VI). Strategic Reserves Fund. The Strategic Reserves Fund (SRF) cost-line of K0.15 per litre is currently applicable to petrol, diesel and kerosene. SRF is collected from consumers through OMCs for the purpose of: (a). Stabilising fuel prices. (b). Purchasing of Strategic Petroleum Reserves (SPRs). However, the SPRs have never been procured due to inadequate storage infrastructure. The Ministry of Energy (MoE) is currently building fuel depots. (c). Developing petroleum infrastructure particularly, construction of storage depots for the SPRs,” they explained. “ERB License Fees. The licence fees are set at 0.7 per cent of the OMC’s turnover. In the past, the fee was the principal source of funding for ERB but this changed effective 1st January, 2013 when the government started funding the Board through grants. Value Added Tax. The current applicable Value Added Tax (VAT) on petrol and diesel is 16 per cent. No VAT is applied on domestic kerosene.”
On subsidies, the sources said fuel subsidies were scrapped in May 2013, a good eight years ago.
“At what point were they reintroduced? If there has been any subsidy in the fuel chain, one can argue that it has been borne by consumers closest to the refinery. You may recall that before the implementation of the uniform pump price (UPP) mechanism, fuel prices increased the further one moved away from the Ndola [and generally the line of rail],” argued the sources.