Factors to consider in improving zambia’s
petroleum product supply chain – some thoughts
Often time, we read in the media various stories about challenges the country faces in enjoying sustained petroleum product supply. This comes against a backdrop of world crude oil price movements which fall and rise are supposed to be passed on to the Zambian consumer. Crude oil compares favourably over other energy sources because of its availability, relative cost, capacity for integration in world technologies, transportation convenience, has no effect on cropland and is an efficient form. Now, where does Zambia’s petroleum product supply chain stand in all this? What are the factors that impact the sustainability of supplies for the economy to operate assuredly? I would like to share with you some of my personal thoughts.
For some time now, the nature of petroleum procurement and supply in Zambia has been a topical debate such that various reasons have been cited about areas of inefficiencies in feedstock procurement, transportation by Tazama pipeline, refining by Indeni, distribution arrangements, a monopoly competition market structure, and government role! In the end, the public is still left not fully convinced that our procurement and supply model is ideal. This is because despite firm explanations by the authorities, the motoring public and industry at large are left none the wiser when the Zambia faces continued challenges in petroleum product procurement. The final consumer (segmented into economic sub-sectors of reseller/motoring public, industry, manufacturing, mines, transport and aviation) all worry about product availability and price!
2. NATURE OF THE PETROLEUM
2.1 Petroleum products come from various types of crude oils which are scarce mineral resources composed of a mixture of hydrocarbons. World traders source crude oils as a commodity by engaging in bidding for futures contracts and as a result, prices are set according to supply and demand conditions. The key determinants for world crude prices are current production, oil reserves and demand. Consequently, forecasting the Zambian national petroleum demand is an important exercise.
Zambia usually selects and then procures a median or average crude oil in addition to gas oil and other condensates so that the ultimate crude oil composition (as co-mingled feedstock) pumped through the Tazama pipeline meets Indeni refinery configuration. Crude oils like Arab medium, Iranian light, Murban or Oman have been imported in the past. After refining, key customer products to consider are petrol (to fuel spark vehicle engines), diesel (to fuel compression engines), kerosene (mainly as for jet engines) and fuel oil (for industrial & residential furnaces).
2.2 Different crude oil types are characterised mainly by viscosity and density. Odour and colour are additional features. On a commercial basis, the essential categories to consider are:
• Light/sweet crudes –these are in high demand and are quoted world-wide because of lower levels of impurities like sulphur and vanadium, thus easier to refine. Examples are: Malaysia-Tapis, Angolan-Cabinda, Nigerian-Bonny light
• Heavy/sour crudes – lower priced but are more available world-wide because of increased amounts of impurities like sulphur, vanadium, iron & nickel. Examples are: Mexico-Maya, Saudi Arabia-Arab heavy.
2.3 Refineries are classed into three kinds according the Nelson factor index – a measure of a plant’s capacity to refine or breakdown a range of crude oils. The refinery can be a Topping, Hydro-skimming and Complex one (in increasing factor)! Ours is a hydro-skimming plant able only to treat crude oil blends up to ‘high-octane and unleaded petrol stage’. Because of this, the feedstock is usually co-mingled with condensates and gas oil (diesel) in order to boost crude content so that refinery yields meet national demand!
3. SUPPLY CHAIN
In establishing the full petroleum product supply chain, several issues require attention in order to facilitate sustained supply at a cost-reflective price to the consumer. The procurement process demands that enough resources are allocated so that the feedstock cargo is timely ordered. Without it, everything attendant to the supply chain faces challenges. Here are some of my thoughts on the failures and challenges that impact this process in seven particular areas.
3.1 Supply chain failures.
The Zambian case can relate to a breakdown in the supply model. According to a report by Association for Risk Management Professionals (Airmic), it identifies seven underlying factors that often exist whenever a supply chain goes wrong:
a) Off-shoring (hiring outside) – by nature, the business of petroleum product trading requires engagement of intermediaries to handle the complexities involved and also to maintain cost-efficiency. As such, only specialist traders to source & supply feedstock (and finished products) for Indeni refinery are usually appropriate [Total Outre’ Mer (2003-7), Trans-Sahara Trading, TST (2003) were engaged]. However, failure arises in that outsourcing services from such large commercial entities is a challenge because of the limited capacity to monitor their operations.
b) Increasing complexity of the supply chain – knowing the suppliers’ suppliers is important if some measure of control is to be achieved. Entities such as Glencore Energy, Trafigura, Gunvor, Dalbit & Otterbea are all huge commodity traders with world-wide operations and understanding their respective operational needs is again a tall order. To avoid failure and second guessing their capacity to perform, an appreciation of their operations beyond submitted tender documentation is crucial.
c) Cost pressures – contractors are usually under pressure to cut or manage costs and therefore they may compromise on quality, ethics and avoid need for corporate social responsibility for the service rendered. In the world today, there are reports of some feedstock not measuring up to a refinery’s configuration which then led to production challenges.
d) Geographical clustering – suppliers located in one area present a risk in that should adverse activity such as cyclone, earthquake, riots, floods, etc strike, it can affect operations of the supplier/vendor and therefore disrupt its ability to perform the contract with Zambia. Admittedly, contract clauses for ‘force majeure’ notwithstanding, such failure can prove economic disaster for the country!
e) Modern communication – we live in a ‘global village’ and any adverse development can be easily communicated to other parties – ‘word gets out’! Most traders that bid to deliver crude oil stock and/or finished products are major corporations whose activities span the world over and can be known courtesy of media networks via the internet. Some bad press can impact the supplier’s business negatively, thereby endangering its capacity to perform its supply contract with Zambia!
f) Just-in-time production methods – this arrangement of economic activity is not ideal as ‘living-hand-to-mouth’ exposes the country to world vagaries outside our control. Although it makes for shorter cycles between crude oil cargoes and is supposedly easier to finance, the arrangement also gives rise to shorter but invariably more expensive lead-times for recovery. It necessarily therefore obliges planning for alternative sources of supply and attendant logistical changes at short and costly notice.
g) Dependence on multiple suppliers – this poses another challenge in that it increases vulnerability. There is failure to build a long-term business relationship with the vendor so that discounts can be negotiated.
3.2 These failures can be addressed and some avoided. If not, at least measures should be instituted to reduce or mitigate against them so that the consumer in the end benefits from assured petroleum product supply and that the price paid is really cost-reflective and affordable despite fuel being a ‘grudge-purchase’!
4 FINAL THOUGHTS
All this must be viewed in a holistic economic fashion because other economic variables such as exchange rate, world oil market prices, inflation, unemployment and national output all influence government policy (fiscal and monetary) to support the sustainable model for procurement, supply and distribution of our energy needs. Just some thoughts!