[Article] At what cost must TOR be allowed to refine a portion of local crude?

Among the Ghanaian news headlines that accompanied this year’s Offshore Technology Conference (OTC) in Houston Texas, is the call by the Managing Director of the Tema Oil Refinery (TOR) Mr. Isaac Osei for TOR to be allowed to refine portions of Ghana’s crude oil for the local market, instead of selling all on the international market.

He bemoaned the situation where Ghana National Petroleum Corporation (GNPC) sells all of the country’s oil entitlement on the international market while TOR shops around for crude oil to refine into finished products for local consumption.

And in his view, the situation did not give Ghanaians the confidence and excitement they were supposed to have following Ghana’s discovery of oil in commercial quantities.

His call was geared towards the creation of a healthy synergy between the upstream and downstream sectors of the Ghanaian petroleum industry, and also to ensure value creation.

Of course, this call resonates with many that have been made in the past by well-meaning Ghanaians, especially of the need to refine indigenous crude to increase State revenue through value addition; and to provide fuel security, reduce the growing fuel imports, and possibly to reduce domestic fuel prices.

However, given what Ghanaians know of TOR today as poorly managed, one fundamental question that begs for answer is “at what cost must the entity be allowed to refine a portion of Ghana’s share of the local crude?”

Emotional Call
While the business of crude refining has been found by most oil producing countries the world over as a catalyst for accelerating growth in the downstream sector, providing jobs for many, creating economic value, reducing capital flight and the building new set of industries, especially petrochemicals; in Ghana’s case, the Tema Oil Refinery has become more of a drainpipe, a source of alleged massive corruption and direct government interference.

Hence the assertion that a state would be richer and derive all the benefits stated above if it could simply add value to its crude by refining locally is flawed on most occasions, especially in sub-Saharan Africa (SSA) where it is rare to find a domestic refinery reporting profits and sustainability; compared to their peers in more liberalized markets due to varied reasons that makes the refineries unattractive for Government and private investor support.

That is why it was imperative for the Managing Director of TOR representing the entity; to have made a much stronger case to support the call. He must demonstrate to Government and the investor community beyond any economic doubts, that the refinery is economic and operationally viable in this regard. But to simply ask Government to allow the somnolent entity to refine the country’s crude without an assurance of “value for money”, is simply flawed.

He was equally unable to state that crude suppliers, be it international companies or the State; are convinced that they would either obtain in full with acceptable operational losses the quantity and quality of products from the crude oil it supplies to TOR for refining, or for the payment of the crude.

Indeed, Mr. Osei failed to argue that in his dealings with distributors and marketers of refined petroleum products, they have come to accept TOR as internationally competitive in the supply of refined products for the Ghanaian market. Failing to convince Ghanaians to the effect that TOR’s refined products could be sold cheaper than or at par with the products that are currently being imported into the country; given the advantage of zero or minimal freight cost, and import duty.

Anything short of these relevant arguments makes the Managing Director’s call for a portion of Ghana’s crude to be refined by TOR quite an emotional and unnecessary one, as the statement lacks economic basis, and is inconsistent with what Ghanaians think of today’s TOR.

Ability to Pay
The Managing Director of TOR made the unwarranted call at a special panel put together by the Ministry of Energy (MoE) to discuss issues affecting Ghana’s Energy Sector at the OTC. But the matter of TOR refining local crude as requested by the refinery MD is not in any way a problem that affects the country’s energy sector, giving that the Tema Oil Refinery has ever refined a local crude.

In December 2016 TOR took delivery of the first local crude oil produced from the Tweneboah, Enyera, and Ntomme (TEN) fields in the Western Region. The cargo of approximately 1 million barrel was delivered aboard the vessel MT. Bordeira, and supplied by AOT Energy on an Open-Account basis (120-days credit).

And so today if TOR wishes to refine crude from any of Ghana’s production fields, then all that is required of Management is putting in place the right trade frame-work and product accounting system that guarantees payment of the crude. With a proven ability to pay, it wouldn’t matter who supplies TOR the crude, and whether from a local source or elsewhere; period.

If a refinery can demonstrate the ability to pay for a crude parcel, suppliers will be more than willing to offer the commodity based on international pricing benchmarks.

Stark Realities
The TOR Managing Director and his team seem not to have identified and thoroughly understood the relevant business issues at the country’s sole oil refinery, and that he appears to be oblivious of the stark realities on the ground.

Over the past few years, British Petroleum (BP), Trafigura, Vitol, BB Energy and few others have supplied TOR with crude from various sources, under different operational and financial arrangements. However, the reasons for which these oil trading firms are shying away from doing business with TOR lately, seem to have lost on the TOR boss.

The truth is that crude suppliers, be it international companies or the State are only willing to supply crude (whether local or foreign crude) to TOR if they can be assured of prompt payment.

That, others including Government; are ever willing to bring crude to the facility on tolling basis if they can be convinced that they would obtain in full with acceptable operational losses the quantity and quality of products from the crude oil it supplies to TOR, within a reasonable time. That, Traders would want to be convinced that the refinery would run continuously and at optimum capacity, so as to have their products within a reasonable period to manage price risk in this volatile oil market.

That, other crude traders, are apprehensive about BP Oil International chickening out of the “supply deal” it had with TOR last year, after supplying approximately 950,000 barrel of crude oil on board the vessel MT British Heritage in October 2018.

That, Government, investors, and traders alike are very much aware that TOR is poorly managed. And as a result of the operational and technical challenges at the refinery, they are hesitant in putting crude in the TOR system.

That, the Government very much understand that as a result of the low refining capacity and the low rate of capacity utilization of the facility, it cannot be internationally competitive; with TOR’s products being significantly higher than the import parity price. And that, it is difficult for a small refinery to remain financially viable, especially in a liberalized market such as Ghana’s.

Cogent Arguments
In view of these stark realities, the Management of Tema Oil Refinery led by Mr. Isaac Osei must make compelling arguments that are capable of convincing Government and individuals into investing in the entity TOR. It must rather direct its attention into re-evaluating the economics of the current refinery, and proffering solutions to the inefficiencies in the system.

As a matter of urgency, Management must assure crude suppliers of prompt payment of supplies, be it from a foreign or local source. And must convince suppliers who seek for tolling services, that TOR can account in full with acceptable operational losses the quantity and quality of products from the crude oil supplied to TOR within a reasonable time, and also the continuous operating of the plant.

It must, of course, convince Government in supporting TOR to upgrade and optimize the existing facility to achieve some level of efficiency. And argue forcefully that, the installation of the new Boiler and the repair of the Furnace which exploded over two years ago remain paramount to the quest for economies of scale.

Additionally, Management must present a bankable case that can garner support for TOR’s plan to expand the refinery’s capacity by building a new facility over the next few years. Taking into consideration the huge funding associated with the project, it is necessary to fashion out policies and strategies that can help reduce the fear and prospect of failure of the project.

Above all, Mr. Osei and his team must, of course, demonstrate that they have the know-how to make the current refinery operable and profitable. For it is rather the refinery’s poorly managed state that does not give Government and the investor community the confidence and excitement they were supposed to have in putting money and crude into the TOR system; for the fear that the cost would outweigh the benefit.

Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security ©2019

The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media.