ewura report - final revised draft report

Review of Petroleum Wholesalers & Retailers Margins SANITISED Draft Report Energy and Water Utilities Regulation Authority (EWURA

13 September 2013

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13 September 2013

Reliance Restricted Director General EWURA Harbour View Towers Samora Avenue/Mission Street 5th Floor, Room No. 517 P.O.Box 72175 Dar es Salaam Tanzania

Establishment of the Wholesalers and Retailers Margins in the Tanzania Petroleum Downstream Industry In accordance with your instructions, we have performed the work set out in our contract dated 1 June 2013 in connection with the Establishment of the Wholesalers and Retailers Margins in the Tanzania Downstream Petroleum Industry.

Scope and nature of our work Our work in connection with this assignment is different from investigation or audit and our report is based on compilation, review of secondary data available in the public domain, third parties and analysis applied to the data provided to us. We need to reiterate that we have only done limited reviews of the data from the Oil Marketing Companies (OMCs) mainly by comparing the information received to the audited financial statements where available.

Basis of our work and limitations We have reported broadly on matters which we have found and as per our engagement letter and the limited time available for the assignment and our review might not have revealed all matters which would have been identified by more detailed primary research covering a more in depth detail.

Our report Our report comprises of two parts; the Executive Summary, where we summarise our key findings and conclusions, and the rest of the report, where we discuss in more detail overview of the sector, wholesale operations, retail operations, other key issues affecting the Oil Marketing Companies (OMCs) margins, summary of the findings and recommendations and conclusions and next steps.

While each part of the report addresses different aspects of the work we have agreed to perform, the entire report should be read in its totality for a full understanding.

Please note that this is a draft report and summarises our draft findings provided solely to inform you of our findings identified to date and facilitate discussions between us. It is subject to revision as further work is performed or further information is received. Our final report will record our definitive findings and reliance should be placed only on that report.

Purpose of our report and restrictions in use This report was prepared on the specific instructions of EWURA solely for the purpose of evaluating the downstream wholesale and retail margins for the petroleum sector and should not be quoted, referred to or shown to any other parties (except as

Ernst & Young Utalii House, 36 Laibon Road, Oysterbay, P.O Box 2475, Dar es Salaam, Tanzania.

Tel: +255 22 2667227/2667368 Fax: +255 22 2666948/2666869 www.ey.com

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provided in our engagement letter and provided that we assume no responsibility or liability whatsoever to the third parties in the respect of the contents) unless so required by court order or a regulatory authority without our prior consent in writing.

EY assumes no responsibility whatsoever in respect of or arising out of or in connection with the contents of this report to the parties other than EWURA. If others choose to rely in any way on the contents of this report they do so entirely at their own risk.

Sensitive information This report contains sensitive market information to various OMCs that should be treated confidentially. EWURA should therefore review the report for sensitivities before sharing it with a wider audience. OMCs names have been distinguished in this report to guard some of the more sensitive investment and cost data.

We wish to record our appreciation to EWURA, the OMCs and other stakeholders we met for the support they provided us in completing this report. We would be pleased to provide any clarification that may be required.

Yours faithfully

Julius Ngonga Partner, Transaction Advisory Services and Infrastructure Ernst & Young ASA East Region

Contents

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Contents

1. Executive Summary ................................................................................................... 2 1.1 Introduction and background ......................................................................................................................... 2 1.2 Approach and methodology .......................................................................................................................... 2 1.3 Summary findings and recommendations .................................................................................................... 3 1.4 Conclusions ................................................................................................................................................... 5 1.5 Next Steps ..................................................................................................................................................... 6

2. Introduction and background .................................................................................... 7 2.1 Objectives of the assignment ........................................................................................................................ 8 2.2 Our approach and methodology ................................................................................................................... 9

2.2.1 Overview 9 2.2.2 Primary data collection and review approach................................................................................ 10 2.2.3 Methodology for determining the wholesalers and the retail margins .......................................... 11 2.2.4 Reviewing the allowable investment and operating costs ............................................................ 12

3. Overview of the sector ............................................................................................. 14 3.1 Sector organisation and structure ............................................................................................................... 14

3.1.1 Key market players ......................................................................................................................... 14 3.1.2 Structure of the industry and competition ...................................................................................... 17

3.2 The Need for Regulation ............................................................................................................................. 23 3.3 The Current Pricing Formula ....................................................................................................................... 23

3.3.1 Overview of petroleum pricing formula .......................................................................................... 23 3.3.2 Application of the Price Formula .................................................................................................... 26 3.3.3 Current Margins .............................................................................................................................. 26

4. Wholesale operations .............................................................................................. 27 4.1 Overview of the wholesale operations ........................................................................................................ 27

4.1.1 Types of Licensed Wholesalers ..................................................................................................... 27 4.1.2 Market Size and Share ................................................................................................................... 28 4.1.3 Wholesale Business Activities. ...................................................................................................... 28 4.1.4 Licensing Criteria for Wholesalers ................................................................................................. 29

4.2 Infrastructure investments ........................................................................................................................... 30 4.2.1 Regulation Requirements ............................................................................................................... 30 4.2.2 Comment on the existing storage facilities and their adequacy vis a vis demand ....................... 30 4.2.3 Infrastructure investment costs for depots..................................................................................... 33

4.3 Working capital requirements...................................................................................................................... 36 4.4 Operating costs for a depot ......................................................................................................................... 36 4.5 Financing costs and required return ........................................................................................................... 37 4.6 Summary margin calculations of wholesale operations ............................................................................. 37 4.7 Comparison with the current margins ......................................................................................................... 40

5. Retailers operations ................................................................................................. 41 5.1 Overview of the retailers operations ........................................................................................................... 41

5.1.1 Types of petroleum dealerships ..................................................................................................... 41 5.1.2 Types of retail stations. .................................................................................................................. 41

5.2 Infrastructure investments ........................................................................................................................... 41 5.2.1 Regulation Requirements ............................................................................................................... 41 5.2.2 Comment on the existing retail outlets .......................................................................................... 42 5.2.3 Infrastructure costs for retail outlets ............................................................................................... 43

5.3 Working capital requirements...................................................................................................................... 45 5.4 Operating costs for a standard retail outlet................................................................................................. 46 5.5 Financing costs and required return ........................................................................................................... 47 5.6 Margin calculations of retail operations ...................................................................................................... 47 5.7 Comparison with the current margins ......................................................................................................... 49

6. Other key issues affecting OMCs margins ............................................................. 50 6.1 Demurrage ................................................................................................................................................... 50 6.2 Evaporation and pilferage ........................................................................................................................... 50 6.3 Infrastructure control.................................................................................................................................... 50 6.4 Transit products and localising export products ......................................................................................... 50 6.5 Taxes and levies .......................................................................................................................................... 51 6.6 Other OMCs concerns ................................................................................................................................ 52

7. Summary findings and next steps ........................................................................... 54 7.1 Margin recommendations ............................................................................................................................ 54 7.2 Frequency of review and need for indexation ............................................................................................ 54 7.3 Conclusions and way forward ..................................................................................................................... 55

Contents

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8. Appendices .............................................................................................................. 56

Contents

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Abbreviations

AGO Automotive Gas Oil BPS Bulk Procurement System CAGR Compound Annual Growth Rate CIF Cost Insurance & Freight COCO Company Owned Company Operated CODO Company Owned Dealer Operated DAP Delivered At Place DODO Dealer Owned Dealer Operated EHSE Environment Health and Safety and Environment EWURA Energy and Water Utilities Regulatory Authority FIFO First In First Out FOB Free on Board HFO Heavy Fuel (furnace) Oil JET A1 Jet Aviation Turbine Fuel KOJ Kurasini Oil Jetty LPG Liquefied Petroleum Gas Ltr Litre M3 Cubic Meters O&M Operations and Maintenance OMC Oil Marketing Company PIC Petroleum Importation Coordinator PMSG Premium Motor SpiritGasoline SPM Single Point Mooring SUMATRA Surface and Marine Transport Regulatory Authority TBS Tanzania Bureau of Standards TIPER Tanzanian and Italian Petroleum Refining Company Limited TOR Terms of Reference TPA Tanzania Ports Authority TPDC Tanzania Petroleum Development Corporation TRA Tanzania Revenue Authority TShs Tanzanian Shillings USD United States Dollars

Executive Summary

Draft Report: Review of wholesalers and retailers margins for the downstream petroleum sector EY 2

1. Executive Summary

1.1 Introduction and background Tanzanias petroleum subsector can be divided into two activities i.e. upstream and downstream. Upstream activities involve exploration and production of hydro carbons, while downstream currently includes importation, storage, transit transportation, wholesale and retail distribution of the refined petroleum products including liquefied petroleum gas.

The petroleum downstream sub-sector was liberalized in 2000 enabling Oil Marketing Companies (OMCs) to procure and trade petroleum products in accordance with their market requirements. As a result there are over 60 licensed OMCs and more than 1,000 retail outlets making the sector very competitive particularly the whole sale business where there is evidence for discounting to retain and win new customers.

The Energy and Water Utilities Regulatory Authority (EWURA) is an autonomous multi sector regulatory authority established by the EWURA Act Cap 414 and is responsible for regulating the energy sector while the Ministry of Energy and Minerals, promulgates the policy for the sector. EWURA started publishing cap prices for petroleum downstream products in 2009 to discourage profiteering by the OMCs and stabilise the petroleum retail pricing. It subsequently released a formula that among other guidelines, capped the whole sale and retail margins for the downstream petroleum industry.

While publishing the pricing formula, the regulator acknowledged that more studies were required to determine the actual costs of whole sale and retail operations for the petroleum downstream business. It is against this backdrop that EWURA hired EY to undertake the costing study to establish wholesale and retailers margins in the Tanzania petroleum downstream industry.

1.2 Approach and methodology Our understanding of the overall objective of the assignment is that EWURA wishes to see consumers purchase petroleum products at fair and reasonable prices and promote fair competition among the players. This will, at the same time, help foster investment in the downstream business by giving fair returns to the OMCs that have invested in the sector and thereby, to the extent possible, ensure security of supply. The assignment therefore seeks to develop an appropriate methodology for determination of Wholesalers and Dealers margins.

Our approach to the assignment reflects our understanding of EWURAs needs. The overall approach involved:

Collecting actual investment and operating costs incurred by the OMCs in each of the two segments, whole sale and retail, of the downstream petroleum business;

Reviewing the data presented by the OMCs to determine the allowable investment and operating costs for each of the segments; and

Developing an appropriate approach and methodology to determine the margins for each of the segments.

Executive Summary


To establish the level of the investment and operating costs, a survey for the main OMCs in relation to the minimum licensing requirements was carried out through questionnaires, interviews and review of information available from OMCs, EWURA and other sources. In this regard, varied data was collected from the OMCs to review their investment and operating costs. It is not possible within the duration of this study to complete 100% enumeration of actual investment and operating costs data from OMCs. Therefore data collection was carried out on a sample basis:

To cover 85% of the whole sale market and

100 of 1074 retail outlets based on various stratifications covering the type of station - whether Company Owned Company Operated (COCO), Dealer Owned Dealer Operated (DODO), and Company Owned Dealer Operated (CODO), the location (rural or urban) and the OMC affiliation.

An exercise to validate the data was then carried out, through corroborating to independent records such as audited financial statements, industry information on construction and operations of the facilities and our own knowledge of the industry. For each of the segments, data on the most recent infrastructure investments was obtained both for depots and for retail outlets. These were used as benchmarks to evaluate the costs in addition to comparing it with data from other regional countries and our knowledge of the sector.

Lastly margin calculations were carried out for the wholesalers and the retailers. This was then compared with the current published margins and empirical evidence sought to support the conclusions. The calculations were geared toward achieving equity and fairness and cost recovery on the part of the OMCs and the dealers. The calculations therefore considered asset replacements costs, operating and maintenance as well as return on capital for the infrastructure investments and working capital for each of the market segments.

1.3 Summary findings and recommendations The table below summarises the results of margin calculations for the whole sale components as explained above. Table 1: Summary cost per unit

Cost Component TShs/Ltr Depot direct operating cost 29 Other company overheads 26 Depreciation 8 Financing cost 21 Return on investment 23 Total 107 Source: EY Analysis

The above calculations compare well with the current margins for the wholesalers at TShs 124 (including transition costs) per litre.

This is also consistent with discussions with OMCs. There was an underlying acknowledgement that the wholesale margins were largely adequate, save for the other additional taxes such as municipal turnover taxes and levies on money transfers that are squeezing in the margins and that have not been factored in the above calculations nor in the pricing calculations. The calculations also seem to indicate the reasons

Executive Summary


why some OMCs are able to offer discounts on the maximum recommended prices.

The workings suggest that the current whole sale margins should therefore be maintained, but EWURA should consider including the additional taxes that are not currently captured by the pricing formula. In an unregulated market, investors would pass additional taxes through to consumers.

On the contrary, the calculations for the retail segment show that the current retail margins are unlikely to be covering the total costs as shown in the table below.

Table 2 : Summary of the retail margin

Cost Item TShs/ Ltr

Operating Cost per Ltr 36

Financing Costs per Ltr 3

Depreciation 16

Return on Investment 35

Total margin 90 Source: EY Analysis

The above results show a higher per litre margin for retailers than the current cap margin of TShs 64 per litre. This is also collaborates discussions with OMCs where most felt that the retail business segment has been loss making. It is anticipated that the independent dealers have remained in the business by reducing their costs to the bare minimum and therefore reducing the quality of service to consumers.

It should be noted that the calculations above are based on submissions from OMCs. Although some validation has been done, to countercheck the data, in absence of a complete audit, it is difficult to give complete representation on the data presented. For this reason, the outliers were excluded from the calculations and further validation may be required in some cases.

In addition there are other factors that affect the margin calculations and that are of concern to the OMCs. These include:

Demurrage - The oil companies, while appreciating the way EWURA is now using actual demurrage in the price calculation, expressed concerns regarding the unrecovered demurrages since the BPS was introduced. In future EWURA should assign unjustifiable demurrage to the parties responsible and only incorporate the demurrage from common factors like infrastructure into the cap prices.

Unusual evaporation losses that is not captured in the pricing formula. Data of a January 2013 AGO ship showed there was a loss of 0.18% through the SBM system. This appears high for such a short distance and for a newly commissioned facility. EWURA should investigate the cause of such losses and take necessary corrective actions.

Theoretical losses for TIPPER and custody of the SBM and TPA manifold that may be contributing to unexplained losses. EWURA

Executive Summary


should investigate the cause for these unusual losses and take measures to ensure that the facilities are secured.

Non payment of wharfage costs for the localised products that promotes unfair competition. TRA should be authorized to collect the top up fees on behalf of TPA (or Government) for any localized when Petroleum products are localized.

New taxes and levies that are not captured by the pricing formula that needs to be considered in the pricing formula.

Concerns on the treatment of the exchange differences where EWURA only relies on BOT exchange rates while the importers source some or bulk of the foreign currency needs from the open market. Since data for actual importation and projection is available, EWURA should use this information while calculating the average prices.

These assertions were as a result of discussions with the OMCs and needs to be validated. EWURA therefore needs to examine the issues in more detail and develop regulations on how they should be handled.

1.4 Conclusions From the analysis above, the draft conclusions indicate that the wholesale margins are perhaps adequate at the current levels. Our estimates show a margin of TShs 107 per litre against the recommended margin of TShs 124 per litre (including transition costs). This is consistent with the finding that most of the OMCs were discounting their products to maintain market share. The margin should therefore be maintained at the current levels.

It should however be noted that it is difficult to generalise the margin calculations across different operators and some operators may find it difficult to operate within the set margins. However, as the regulator, EWURA should drive sector efficiency.

For the retailers, the findings are that these do not entirely cover the investment and operating costs. The calculations result in estimates of TShs 90 per litre compared to a maximum margin of TShs 64 per litre. These finding are consistent with discussions with dealers and OMCs that reflected a general feeling that the retailers margins are not adequate for sustainable operations. This may be the reason why most of stations do not meet the minimum licensing standards and that independent dealers, that operate most of the stations, have side businesses to make ends meet.

There is also merit in considering whether the retailers margin can be further disaggregated. There were concerns from some dealers and OMCs that the lump-sum margin given for this component brings some confusion as to which party should get what, more so for the CODO outlets. This is because of the dealers view that they are entitled to the entire retailers margin. However OMCs have made the infrastructure investments as well as incurring other costs that they need to recoup an there are arguments that the margin should be shared. However there is no guidance on how this could be shared.

EWURA however needs to be careful so that it does not end up over-regulating the sector and strictly has no business in interfering with the private arrangements between the dealers and the OMCs. If the dealers or OMCs are not happy, they should be free to discontinue with the business relationships strictly in the tenets of a free market.

Executive Summary


1.5 Next Steps This is a draft report produced for EWURA for comments and to engage in further discussions. The consultants expect to further engage EWURA on the detailed findings and to further conduct any further data validation that may be required to support the findings.

The consultants are aware that the OMCs and the stakeholders are eagerly expecting the findings of this report. It may be necessary for EWURA to present sanitised findings to the key stakeholders. The sanitised findings need not include data attributable to particular OMCs.

Introduction and background


2. Introduction and background

Tanzanias petroleum subsector can be divided into upstream and downstream activities. Upstream activities involve exploration and production of hydrocarbon, while downstream activities currently includes importation, storage, transit and transportation, wholesale and retail distribution of the refined petroleum products including liquefied petroleum gas.

The petroleum downstream sub-sector was liberalized in 2000 enabling Oil Marketing Companies (OMCs) to procure and trade petroleum products in accordance with their market requirements. As a result there are over 60 licensed petroleum OMCs and more than 1,000 retail outlets making the sector very competitive.

Tanzania consumes about 2.6 million cubic metres per annum of petroleum products wholly imported from the refining centres in the Arabian Gulf and the West Coat of India.

The Energy and Water Utilities Regulatory Authority (EWURA) is an autonomous multi sector regulatory authority established by the EWURA Act Cap 414 and is responsible for technical and economical regulation of electricity, petroleum, natural gas and water sector. EWURA is responsible for technical, economical and safety regulation of petroleum supply operations. The petroleum supply operations include all operations and activities for or in connection with the importation, landing, loading, transformation, transportation, storage, distribution, wholesale or retail trade of petroleum and petroleum products, including the operations of industrial consumer who buy their products directly from wholesalers.

SUMATRA issues wholesale, retail, storage installations, refinery, and pipeline transportation licences. In addition, EWURA provides approvals for the construction of petroleum facilities such as petrol stations, deport and pipeline construction.

In exercising its mandate of regulating pump prices in the country, EWURA issues monthly cap pump prices for all districts in Tanzania. The pump prices are based on the petroleum pricing formula that was first published in 2009 and subsequently amended and published in 2011.

While publishing the pricing formula, the regulator acknowledged that more studies were required to determine the actual costs of whole sale and retail operations for the petroleum downstream business. In particular, the regulator noted that the level and timing of the investments and overhead cost structure differ substantially among players in the subsector. As a result, setting up a standard overhead recovery and operating margin for all OMCs is difficult.

In this regard, EWURA undertook to conduct a review of the actual cost of marketing the petroleum products that would help validate the wholesalers and the retailers margin currently stated in the pricing formula.

It is against this backdrop that EWURA hired EY to undertake the costing study to establish wholesale and retailers margins in the Tanzania petroleum downstream industry and development of a methodology which will include a financial model for determination of wholesale and retail margins.



2.1 Objectives of the assignment As indicated above, EWURA introduced the capping of prices for petroleum downstream products in 2009 to discourage profiteering by the OMCs and stabilise the petroleum retail pricing. The current formula has capped margins for both wholesalers and retailers operations. The current margins including a temporary Transition cost allowance are capped at TShs 124.00 and TShs 64.00 per litre respectively.

There have been concerns that the current allowed margins do not cover the costs of their operations. As discussed above, while introducing the pricing formula, EWURA undertook to carry out a detailed review of the margins and hence this study.

EWURA wishes to see consumers purchase petroleum products at fair and reasonable prices and promote fair competition among the players while at the same time helping foster investment in the downstream business by giving a fair returns to the OMCs that have invested in the sector and thereby to the extent possible, ensure security of supply.

The assignment therefore seeks to develop an appropriate methodology for determination of Wholesalers and Dealers margins. The underlying objectives of the assignment include:

Understand the costing of downstream petroleum industry in the region and Tanzania.

Develop a financial model for determination of wholesalers and retail margins based on recommended methodology.

The scope of the work therefore includes the following:

establishing the level of investments in the wholesale segment of the petroleum supply chain in relation to the minimum licensing requirements for petroleum depots;

establishing the level of investment in the retailers segment of the petroleum supply chain in relation to the minimum licensing requirements for petroleum retail stations;

commenting on adequacy of the installed infrastructure in the wholesale and retail segments of the supply chain in relation to the available market

determining the average annual operating and maintenance costs including remuneration of staff, electricity, water, etc for wholesalers and retailers;

determining the average annual statutory payments made by wholesalers and retailers;

developing a model for determination of wholesale and retail margins based on recommended methodology; and

computing applicable margins for wholesalers and retailers margins based on the developed financial model and recommend frequency of review, if any.



2.2 Approach and methodology 2.2.1 Overview

The approach to the assignment reflects the consultants understanding of EWURAs needs and draws on our ability to bring on board a multidisciplinary team whose experience is backed with proven and flexible methodologies to address your specific needs.

The overall approach was hinged on three key tasks.

Firstly, the collection of the actual investment and operating costs incurred by the OMCs in each of the two segments, whole sale and retail, of the downstream petroleum business

Review of the data presented by the OMCs to determine the allowable investment and operating costs for each of the segments

Developing an appropriate approach and methodology to determine the margins for each of the retail segments

The diagram below shows our overall approach to the assignment.

The review of the cost has been based on the actual investment and operating costs being currently incurred by the OMCs in each segment of the market. This means that data collection strategy had to be devised to gather data from 15 consulted OMCs that command more than 85% of the market as well as other sources as follows.

EWURA: This covers information about demand and supply, number of OMCs and retail operators, ownership of the OMCs and retail operators, etc

OMCs : Information regarding their level of investment, operating costs and volume of petroleum products that the company has imported over the past five years

Tanzania Port Authority: Information about the Authoritys role in ship discharge operations, storage and distribution of the petroleum products to the OMCs or TIPER infrastructure.

Tanzania Revenue Authority: Type and collection process for various taxes administered by the Authority.

TIPER: Information on their operating costs, state of the physical storage facility, etc

Industry information including sector organization and studies and benchmarking data available etc.

Task 4 - Recommending an appropriate methodology for determining fair margins

Task 3 Determining the level of annual

operating costs

Task 1 Review of investment and operating

costs

Task 4.5 Recommending frequency

of review

Task 4.3 Calculating

the appropriate

margins

Task 4.2 -Cost and fair

return modelling

Task 4.1 -Conceptualisi

ng an appropriate

method

Task 3.2-Determine

the average annual

statutory payments

Task 3.1 Determine the annual operating

costs

Task 2.3: Comment on the adequacy

of the installed

Infrastructure

Task 2.2Determine

the investment and retail operators

cost components

Task 2.1 Determine

the investment

and wholesalers

cost components

Task 1Mobilisation,

Planning & Inception Reporting

Final Report



2.2.2 Primary data collection and review approach

The first activity was to review and understand the petroleum supply chain in Mainland Tanzania. The diagram below outlines the broad petroleum product marketing value chain in Tanzania.

Figure 1: The downstream petroleum value chain

The landed cost of refined product into the countrys coastal receiving depots is centrally tendered and procured through the Bulk Procurement System (BPS).

This study reviewed the handling and distribution costs subsequent to the importation ie the investment and cost requirements incurred upon evacuation of the products from the central marine facilities at TPA and TIPER into the various licensees storage facilities. Petroleum wholesalers are largely responsible for the evacuation and storage of the petroleum products from the central marine terminals (or from the importer) and transportation of the product to their individual storage facilities and finally to the bulk buyers and to the retailers premises.

To establish the level of the investment and operating costs, a survey was carried out on the main OMCs in relation to the minimum licensing requirements through questionnaires, interviews and review of information available from OMCs, EWURA and other sources.

As a result, significant and varied data was sought from the OMCs. It should be noted that there are many OMCs in Tanzania, with wholesale and retail operations spread across Tanzania mainland. It was therefore not possible or cost effective and within the duration of this assignment to collect 100% (complete enumeration) of data from all retail and whole sale outlets. Therefore a sample from the population of the wholesalers and retailers was taken.

The sample surveys were designed to operate on selected subsets of the target population and using a number of assumptions regarding the distribution of the population to provide estimates of the parameters under study. It should be noted that as well as the sample error, sample-based surveys involve uncertainties as to the correctness of the various assumptions used. However, a well-designed sampling survey can often produce accurate and reliable estimates at a cost much lower than that of complete enumeration.



The sampling strategy therefore considered the nature of the many variables from the wholesalers and retail operations (for example, size, location, age, level of investment). For the wholesalers operations data from OMCs that control more than 85% of the market was collected. For the retail operations, data collection a targeted 100 of the 1074 stations with retail operations in mainland Tanzania.

Sampling can lead to bias and unbalanced results. This can occur if, for example, data collectors choose operators located in a certain area, or operators of a certain size when sampling. The simplest theoretical way to avoid bias is to use random sampling. Under this scheme it is ensured that all operators within a stratum have an equal chance of being selected. In practice, this is often difficult to achieve. Therefore a systematic sampling scheme, which guards against the worst forms of bias, was undertaken.

However, it should be noted that most analytical methods assume random sampling, and therefore the possible effects of other sampling methodologies need to be considered in interpreting the results.

Some form of data stratification was also necessary. This was particularly so as different regions have different costs associated with them particularly land and installation. Presence of significant cost differential was also considered more so whether there are significant cost differentials in other costs, such as labour or establishment costs that needs to be factored.

Stratification reduces the error in sample estimates by systematically removing as much as possible of the data variability through the sampling design. This is achieved by dividing the sample population into groups or strata; where as much as possible of the variability in the population is represented in differences between the groups. For instance, each region was treated as separate stratum when selecting retail outlets since across the operators; this division marks a clear divide in many variables. Affiliation to OMCs was also considered to ensure a representative sample across the OMCs divide.

2.2.3 Methodology for determining the wholesalers and the retail margins Regulating prices of consumer products is a complex matter and needs to be implemented and administered properly. The regulatory process should balance between fairness in consumer pricing and reasonable financial returns to the OMCs and to retailer or resellers.

For margin calculation to be able to meet the objectives set above, they need to have certain characteristics:

Equity and fairness Equity simply means that the margins needs to similar OMCs, retailers and customers in the same situation needs to be treated equally.

Cost recovery the margins needs to be able to provide needed revenue to support the OMCs operations, maintenance, capital costs and debt service

Ease of implementation A margin calculation formula needs to be easy to explain, understand and implement.

Acceptability the results of the margin calculation needs to be acceptable to the stakeholders.. This may require the margins to conform to perceptions of fairness, often quite different from equity. A



successful margin design is one that is not controversial, nor should it become a focus of public criticism of the industry players.

These objectives have been considered in reviewing the wholesalers and retailers margins.

Successful regulatory approaches base margin calculations on the reasonable cost of service. The reasonable cost of service determines the total revenues that are required for the OMCs and retailers to cover their costs. Determination of full cost recovery includes:

Identifying the components of the total revenue requirement for both wholesalers and retailers that includes operations and maintenance (O&M) and investments costs including an element of return on invested capital

Using appropriate accounting approach (cash based or accrual approach)

Determining the reasonable cost of services (eg eliminating inefficiencies of the OMCs in the provision of the service)

Calculating the return on investments including working capital elements

As a general rule, the revenue required by a regulated entity in a defined period is determined by two essential cost components: O&M expenses and the capital component. On this basis, two main approaches have been used for estimating revenue requirements: the Cash Needs method and the Accounting Approach. Both approaches conclude that the revenue requirements to be built in the margin calculations model include an operating component plus a capital component as follows:

i. For Cash Needs = O&M costs + Debt service

ii. For Accounting Approach = O&M costs + Depreciation + Return on investment

For this report the accounting approach has been adopted because different OMCs will have different financing structures (ie mix of debt and equity) and hence different levels of debt service obligations. For this, the same level of regulated return for all the OMCs was assumed. This is essentially what the current formula tries to achieve by capping the level of margins for both the wholesale and retail part of the supply chain.

2.2.4 Reviewing the allowable investment and operating costs Different OMCs will have different level of investments and operating costs both for the whole sale and the retail segments of the markets. For example, our review shows that investment in storage tanks range from USD $ 3500-4200 per m3. Likewise, station investment range widely: from USD 1.5 million for the large ones to about USD 500,000 for the small to medium outlets. This is similar to investments levels which have been experienced in Kenya and Uganda recently for similar facilities.

While some variations in investments costs are simply due to location factors with varying cost of land, labour and other inputs other costs are due to the additional facilities, more so in the retail stations that are not necessarily part of core business, such as shops. Though there are arguments that these may be necessary to attract more customers, they ideally should be excluded from margin calculations the investors would receive compensation from the increased trade and volumes and margins from those side businesses.



It is therefore challenging to standardise and apply a single margin across the value chain. However, it would cumbersome and potentially difficult to justify and to regulate if different margins existed for different OMCs. The study therefore sought to establish reasonable investment and operating costs for both the whole sale and the retail outlets.

The study relies on the consultants research and discussions with various stakeholders to establish reasonable investment and operating costs for a model storage facility and a model retail outlet as documented in section 4 and 5 of this report.

Overview of the sector


3. Overview of the sector

3.1 Sector organisation and structure 3.1.1 Key market players

The Ministry of Energy and Minerals

The petroleum sector falls under the Ministry of Energy and Minerals that promulgates policy decisions for the sector. The petroleum subsector is divided into upstream and downstream activities. The upstream activities are coordinated through the Tanzania Petroleum Development Corporation (TPDC).

The Energy and Water Utilities Regulatory Authority (EWURA)

The downstream petroleum sector is regulated by the Energy and Water Utilities Regulatory Authority (EWURA), an autonomous multi-sectoral regulatory authority established by the Energy and Water Utilities Regulatory Authority Act, Cap 414 of the laws of Tanzania. It is responsible for technical and economic regulation of the electricity, petroleum, natural gas and water sectors in Tanzania pursuant to Cap 414 and sector legislation. EWURA issues licences for most activities in the downstream industry. It also monitors petroleum quality and standards. EWURA also sets a recommended and maximum price cap for a number of petroleum products on a regular basis.

EWURA also monitors the provision of third party services such as storage hospitality. This involves OMCs with spare capacity at their depots providing storage capacity for other OMCs.

The functions of EWURA include among others, licensing, tariff review, monitoring performance and standards with regards to quality, safety, health and environment. EWURA is also responsible for promoting effective competition and economic efficiency, protecting the interests of consumers and promoting the availability of regulated services to all consumers including low income, rural and disadvantaged consumers in the regulated sectors.

Tanzania Ports Authority (TPA)

Tanzania Ports Authority (TPA) provides tugs, pilot vessels and berth space for importing vessels to unload at. They also own the pipelines, and manifolds in the port area. Their obligation is to provide safe port operations and a safe berth so that the product can be off-loaded to the OMCs.

Currently TPA schedule vessels for berthing on the basis that the earlier of the vessels requiring a specific berth to arrive at the port, is the first to berth or first in first out basis (FIFO).

Other facilities under TPA include KOJ and SPM. Scheduling for Bulk Procurement System vessels will need to be on the basis that such a vessel has an agreed arrival date range of say three days and if the vessel arrives at the port in that date range then it is given priority over all others to use the berth. There is no reason why such a managed system could not be extended to cover all vessels using the KOJ. This sort of system is in common use at oil handling berths throughout the world.



Kurasini Oil jetty (KOJ)

The Kurasini Oil Jetty (KOJ) is the main import facility in the country.. The facility has two jetties to handle marine and coastal vessels. The jetty handling the marine vessels (KOJ 1) caters for petroleum products as well as vegetable oils. The other jetty KOJ 2 mainly handles LPG. There is provision to offload Liquefied Petroleum Gas (LPG) at KOJ 1 but the lines are corroded and cannot be used.

KOJ 1 has a jetty manifold with dedicated product lines. The jetty head had three marine loading /offloading arms but they are not in use and are said to have been damaged during the Tsunami. Hoses are used for loading and offloading of products. There are steel pipes running on steel racks up to the metering station.

KOJ 2 has a jetty manifold that mainly handles LPG (both liquid and vapour lines). The draught at this jetty is less than KOJ 1 and caters for small coastal vessels only. The pipes from the jetty head run to the metering station.

Single Point Mooring (SPM)

The New Offshore Single Point Mooring (SPM) for crude oil and petroleum products which was completed in 2012 makes it possible for the large quantities to be delivered to the storage facilities connected to SPM.

Tanzania Revenue Authority (TRA)

Tanzania Revenue Authority (TRA) is responsible for levying and collecting import customs charges on imported petroleum products. It also monitors the duty-free transportation of product to other countries.

Petroleum Importation Coordinator (PIC)

The Petroleum Importation Coordinator was established by the Petroleum (Bulk Procurement) Regulations of 2011. The current operations of the PIC are guided by the Regulations of 2011 as amended from time to time, the Bulk Procurement System Manual; and Supply and Shipping Contract between PIC and the Supplier. The PIC as a coordinator has the responsibility of administering the importation and supply of petroleum products in the country. The PIC is responsible for the following functions.

Collecting the procurement requirements of petroleum and petroleum products in respect of members;

Concluding and administering contracts with a supplier and between the PIC and OMCs;

Conducting International Competitive Bidding for the procurement of a bulk petroleum products through either CIF or DAP as the case may be from time to time;

Reporting to the Authority on its activities on a monthly basis or as may be required by the Authority ;

Preparing plans and a budget to cover its operations;

Relaying information, in a timely manner, related to the petroleum and petroleum business to all relevant parties



Forecasting supply and demand of petroleum and petroleum products in consultation with the Oil Marketing Companies;

Coordinating diligent receipt by OMCs of petroleum and petroleum products from the delivery vessels;

Maintaining records of the shipment and performance

Coordinating invoicing and collection of payments for the respective shares of petroleum products imported by the OMCs; and

Appointing, jointly with a supplier, an independent inspector at the load-port and discharge-port to ensure delivery of acceptable quantity and quality of petroleum products;

Where so decided by the Authority in consultation with stakeholders, appointing a lead bank through which payments for procurement of petroleum products will be made by OMCs.

Retailers or dealers

These are service station operators under any of the three ownership structure discussed earlier. The retailers supply petroleum products available to the end user (final consumers) when fuel is pumped out to vehicles, motorcycles and others.

Tanzania International Petroleum Reserve Limited (TIPER)

The TIPER operates a facility that was initially a refinery, but later revamped for use as a fully fledged bulk petroleum storage facility. The facility is currently used as an intermediate storage facility between KOJ and the OMC storage facilities. It is by far the largest single storage facility with a capacity of about 140,000 cubic meters. It does not have a truck loading facility.

Oil Marketing Companies (OMCs) and wholesale activities

There are a number of OMCs that are involved in the downstream petroleum industry in Tanzania: These can be grouped into the following groups:

Multinationals e.g TOTAL, PUMA, etc

Regional e.g Kobil, Engen,Gapco, Oilcom, etc

Indigenous Tanzanian companies Mount Meru. HASS,etc

Sector players under the industry structure and demand have been discussed below.



3.1.2 Structure of the industry and competition Petroleum products demand in the country

Demand for petroleum products in Tanzania has been increasing over the last few years with about 2.6 million cubic meters (m3) expected to be locally consumed in 2013 as shown in the table below.

Table 3: Demand (sales) for Petroleum Products

Volume in Litres 2011 2012 2013 AGO 1,182,020,112 1,432,553,950 1,577,298,749 PMS 534,364,776 623,065,998 695,323,486 OTHERS 347,171,403 387,186,254 399,767,045 TOTAL 2,063,556,291 2,442,806,202 2,672,389,280

Source:EWURA

The graph below provides the demand (based on sales up to June each year) growth from 2010 to 2013 Figure 2: Petroleum product demand

Source: EWURA



Storage depots/facilities

The analysis estimated that the country has storage capacity of about 900,000 cubic meters for various petroleum products. The distribution of the storage facilities per our survey is shown in the table below. It appears that most of the storage facilities are concentrated around Dar es Salaam area.

Table 4:Storage Facilities in m3

Petrol Diesel Kerosene Others Subtotal Camel Oil 6,000 18,000 - 12,000 36,000 Engen 6,800 16,300 4,400 - 27,500 GAPCO 26,419 67,501 10,313 6,036 110,269 GBP 17,574 38,499 13,470 - 69,543 Hass Petroleum

10,000 14,000 - - 24,000

Kobil Tanzania

15,600 15,600 - - 31,200

Lake Oil 3,987 20,974 - - 24,961 Mogas 12,000 20,000 8,000 - 40,000 Mount Meru

500 1,485 875 85 2,945

National Oil

8,000 17,900 1,000 - 26,900

Oilcom 15,200 42,900 8,300 15,500 81,900 Oryx Energies

7,396 13,398 1,333 4,643 26,770

Petrofuel - 289 - - 289 Puma Energy

8,496 41,066 508 40,820 90,890

Total Tanzania

3,018 12,177 6,536 14,981 36,712

World Oil 8,963 26,936 - - 35,899 NSK 300 1,300 9434 - 11,034 Mansoor 5,500 4,500 5500 - 15,500 Star Oil 12,400 24,800 - - 37,200 Malawi Cargo

12,166 14,887 392 - 27,445

Tanga Petroleum

- 7,200 - - 7,200

TIPER 21,566 94,386 9,599 12,101 137,652 TOTAL 201,885 514,098 79,660 106,166 901,809

Source (OMCs,TIPER and EWURA)



As seen from the table above, the largest storage facilities are held by TIPER, GAPCO, PUMA and OILCOM and GBP that make up more than half the bulk storage available. Most of the storage facilities are for Diesel, a reflection of the product demand structure discussed above.

Figure 3: Storage capacity

Source: EWURA, OMC, TIPPER and EY analysis

Retail outlets

As at the end of May 2013 there were a total of 1074 petrol stations operating in the country. These petrol stations are of varying sizes and different ownership structures including Company Owned Company Operated (COCO), Company Owned Dealer Operated (CODO), and Dealer Owned Dealer Operated (DODO).

a) Regional distribution

Most of the petrol stations are located in cities and big towns. Dar es salaam leads with 147 Petrol stations, followed by Arusha 86 and Mwanza 82. A complete list of petrol stations and regions in the country is provided in the table below: Table 5 ; Petrol Stations locations in the country.

Region Number of Petrol Stations %

Arusha 86 8% Coast 71 7% Dar es salaam 147 14% Dodoma 26 2% Iringa 43 4% Kagera 53 5% Kigoma 27 3% Kilimanjaro 73 7% Lindi 25 2% Manyara 33 3% Mara 48 4% Mbeya 65 6%



Region Number of Petrol Stations %

Morogoro 72 7% Mtwara 24 2% Mwanza 82 8% Rukwa 14 1% Ruvuma 21 2% Shinyanga 62 6% Singida 18 2% Tabora 22 2% Tanga 62 6% TOTAL 1,074 100% Source: EWURA

b) Ownership

As per information provided by EWURA, most of the petrol stations are Dealer Owned Dealer Operated as shown on the diagram below.

Figure 4; Petrol stations Ownership and operating models

Industry Structure and competition

An industry structure captures that set of characteristics governing the nature of competition among buyers and sellers at each level of trade. The relevant characteristics defining industry structure are:

Industry concentration the number and relative size of buyers and sellers provides an indication of market power or price-setting ability. An industry composed of a few large firms ordinarily has more market power than one featuring many relatively small firms.

Buyer-seller relationships formal and informal links between buyers and sellers that limit independence affect price levels and the speed with which prices change in response to changes in market conditions. The stronger these ties are, the less competitive the industry.

Entry and exit conditions these are fundamental indicators of a competitive industry. Presence of barriers (eg, financial, technological, regulatory, knowledge, access to supply, etc.) means



prospective firms face challenges entering the industry even when it appears profitable to do so.

Of course, an industry does not exist in isolation from wider economic forces outside its market area. Tanzanias market is heavily influenced by international factors such as refined products prices and supply and demand for petroleum products within the region. The local OMCs can do little about these conditions. The Tanzania market is therefore a price taker for the import prices from the global oil market.

The wholesale sector consists of 62 licensed companies supplying the countrys 1074 retail outlets. Most of the wholesalers participate in the importation of the petroleum product under the BPS discussed below while some resellers obtain petroleum products directly from larger wholesalers and supply their dealers from bulk storage tanks.

Some OMCs takes their petroleum products directly from the KOJor the SPM directly to their storage facilities. Those OMCs who are not connected to SPM can receive petroleum products from TIPER.

Petroleum products from the OMCs facilities are usually trucked to stations throughout the mainland Tanzania or smaller inland storage facilities within the country for regional distribution by dealers.

The local demand for bulk operations is very competitive due to the many players in the industry. Entry and exit is easy due to not too stringent licensing criteria, combined with the relative ease of entry to the market: the excess storage capacity, as discussed later in our report, means OMCs can obtain, at cheaper rates, hospitality services. This means more OMCs can play in the bulk supply market. From our discussions with the market players and observations, the hospitality rates ranges from USD 5 to USD 11m3. Most of the OMCs choose to play in this market and there is evidence of strong competition within the market players. Indeed most of the OMCs are selling their products below the recommended cap prices by EWURA to secure the market. Whereas this is because of the relative low entry barrier, compared to the retail operations where capital investments and complexities of running retail outlets is required, it is also a pointer, as discussed and demonstrated later in our margin calculations, that the whole sale margins are perhaps adequate for normal profits within the industry.

This competitiveness is also supported by the fact that most retail outlets do not have formal affiliations to particular OMCs. As discussed above, 67.3% of the retail outlets are DODO with COCO and CODO representing only 32.7%. Whereas you would expect the independents to have some form of agreements to guarantee supply of products, in reality the barriers to switching to a different bulk supplier are lower.

It is difficult to gauge the competitiveness of the downstream retail operations. Our research showed that most of the retail outlets are selling the products at the maximum recommended retail prices. Further, there is no discernible product differentiation to lull customers from one outlet to another.



Recent developments in the sector

The petroleum sector in Tanzania has been going through restructuring and streamlining spearheaded by the industry regulator, EWURA. Some of the recent changes within the industry include the following:

BPS introduction

EWURA carried out a study in 2008 which revealed that there were problems in the petroleum supply chain including fragmentation of the imports resulting to higher costs and congestion at the unloading facilities adding to demurrage cost. Other includes lack of information in the downstream subsector, adulteration of the products and inefficiencies. As a result of this, A consultant was engaged to advise EWURA on the BPS implementation after which BPS Rules, Manuals and Regulations were prepared.

The Minister for Energy and Minerals with authority to issue regulation for BPS, issued an order to directing all OMCs to import all their products through the Bulk Procurement System (BPS).

BPS eventually started working in January 2012 and there is an appreciation among players that all stakeholders and the economy at large are benefiting from the system.

The following are some of the areas where the benefits of the BPS can clearly be seem:

Decrease in the premium and freight costs due to the ability to benefit from economies of scale by importing larger parcels.

Reduction in the demurrage charges because of importing in a few large parcels rather than many small parcels and better coordination of the import jetties. More reliable and accurate data capture for the regulator for the purpose of fixing the Cap Price.

Improved quality of petroleum products supplied in the country (as the winner of the tender is given specific conditions including the quality of the product to be imported).

Improved revenue collected from fuel imports and pump prices as taxes are now assessed at one point (as opposed to the previous system where there would be many smaller carriers for each of the OMCs).

Single Point Mooring (SPM)

Tanzania Ports Authority (TPA) launched a new Single Point Mooring (SPM) in 2012. The first tanker offloaded diesel through the SPM in the south-eastern portion of the Port of Dar es Salaam around November 2012. This makes it possible for delivery of large quantities of petroleum products to the bulk storage facilities.



3.2 The Need for Regulation

Tanzania imports all its requirements of liquid petroleum products, mainly from the refineries in the Arabian Gulf and the west coast of India. Petrol, Diesel 500ppm, and Kerosene are imported through the Bulk Procurement System.

The study to introduce the BPS started in 2008 and the first cargo through BPS arrived in the country in January 2012.

The domestic wholesale and pump prices of petroleum products in Tanzania are therefore highly influenced by the international prices of refined products and the rate of exchanging Tanzanian shillings into US Dollars. The international prices are governed by the rules of supply and demand and other international developments. The frequency and magnitude of the changes of the international prices are outside the control of any oil importing nation.

In the past the OMCs effected upward adjustment of local wholesale and pump prices immediately there was news that international prices had risen even though no imports had been landed in Tanzania at the higher prices. When international prices fell the OMCs would affect local price reductions over a long period. In summary the petroleum dealers would be quick to adjust prices upwards following increase in input costs, say prices of imported refined product and slow to response reduction in prices when the upward trend reverses.

This inconsistency in the procedure of making price adjustment created consumer anxiety and concerns that the OMCs were undertaking unfair practices to make high profits. Regulating margins will therefore ensure that the oil marketers earn capped returns that shield consumers from sky rocketing and downward price stickiness of pump prices.

3.3 The Current Pricing Formula 3.3.1 Overview of petroleum pricing formula

Under Special Gazette Supplement No.1 to the Gazette of the United Republic of Tanzania No. 2 Vol. 90 dated 9th January 2009, EWURA issued Gazette Notice No. 5: The Energy and Water Utilities Regulatory Authority (Petroleum Products Price Setting) Rules, 2009. These Rules were issued in accordance with Sections 40(1) (c), (d) and (j) of the EWURA Act. Rule 4(1) that gives EWURA powers to intervene for purposes of regulating wholesale price or pump price while Rule 5(1) mandates the authority to determine appropriate wholesale price and pump price in accordance with a Pricing Formula Specified in the Schedule.

Under the Rules, EWURA issued a Schedule of the Petroleum Products Pricing Formula for Petrol, Diesel 500ppm and Kerosene. Arising out of consultations among stakeholders during the implementation period, the original formula was revised per Government Notice No. 454 of 23rd December 2011.

The workings of the current formula, as applied to determine the prices effective July 2013 are described below:



Table 6: Cap Prices July 2013

Cost Item UNIT Petrol Diesel Kerosene Average

COST CIF DAR 1,178.27 1,211.41 1,229.04 1,206.24

LOCAL COSTS PAYABLES TO OTHER AUTHORITIES

Wharfage Tshs/Ltr 14.12 15.99 15.09 15.07

Customs Processing Fees Tshs/Ltr 4.80 4.80 4.80 4.80

Weights & Measures Fee Tshs/Ltr 1.00 1.00 1.00 1.00

TBS Fees Tshs/Ltr 1.24 1.24 1.24 1.24

TIPPER Fee Tshs/Ltr 0.20 0.20 0.20 0.20

Actual Demurage Cost Tshs/Ltr 3.43 3.89 3.67 3.66

Actual Ocean Losses Tshs/Ltr

Surveyors Cost Tshs/Ltr 0.07 0.03 0.12 0.07

Financing Cost Tshs/Ltr 11.78 12.11 12.29 12.06

Regulatory Levy Tshs/Ltr 6.10 6.80 3.50 5.47

Overporation Losses Tshs/Ltr 5.89 3.63 3.69 4.40

Petroleum Marking Cost Tshs/Ltr 6.33 6.33 6.33 6.33

TOTAL LOCAL COST 54.96 56.02 51.93 54.30

GOVERNMENT TAXES

Fuel Levy Tshs/Ltr 263.00 263.00 263.00

Excise Duty Tshs/Ltr 339.00 215.00 425.00 326.33

Petroleum Levy Tshs/Ltr 50.00 50.00 50.00 50.00

TOTAL GOVERNMENT TAXES Tshs/Ltr 652.00 528.00 475.00 551.67

Transion Costs Coverage to OMCs Tshs/Ltr 13.00 13.00 13.00 13.00

OMC Overheads and Margins Tshs/Ltr 111.00 111.00 111.00 111.00

WHOLESALE CAP Tshs/Ltr 2,009.23 1,919.43 1,879.97 1,936.21

Dealers Margin Tshs/Ltr 57.50 57.50 57.50 57.50

Transport Charges Tshs/Ltr 10.00 10.00 10.00 10.00

Transion Costs to Dealers Tshs/Ltr 6.50 6.50 6.50 6.50

PUMP Price CAP (DSM) Tshs/Ltr 2,083 1,993 1,954 2,010.21

The Pricing Formula is based on a cost-plus principal. The cost parameters for importing the products to Tanzania are considered, then the costs incurred in the local importation facilities and the different taxies and levies by various government agencies are added. Finally allowances for wholesale and retail margins are added to arrive at the cap prices in Dar es Salaam. The published prices also include the pump prices for 140 towns spread all over the country.



The current input parameters for the price cap formula are as follows:

1. Free On Board (FOB) Price - the price at the loading port and is the largest component in the price build up. The formula uses the weighted average of the actual prices for the cargoes received in the previous month for the different products and references as specified in the BPS procedures.

For Premium Motor Spirit (PMS) the reference FOB is the Mean of Platts quotation for Premium Unleaded FOB basis Italy; 5 days around the Bill of Lading (as published in Platts European Marketscan).

For Automotive Gas Oil (AGO) the reference is the Mean of Platts quotation for Gasoil( 0.25%S) FOB Arab Gulf; 5 days around the Bill of Lading ( as published in Platts European Marketscan).

For Aviation Turbine Fuel/Illuminating Kerosene the reference is the Mean of Platts quotation for Kerosene FOB Arab Gulf, 5days around the Bill of Lading (Published in Platts European Marketscan).

2. For Freight, Insurance and Premium the formula uses the actual as quoted by the winning bidder in the BPS.

3. The following local costs incurred during the importation process are included were captured in the formula for the price cap effective July 1, 2013 as actually charged by the various agencies:

Wharfage: USD 10.00 per ton +18% VAT.

Customs Processing Fees: TShs 4.80 per litre.

Weights and Measures Fee: TShs 1.00 per litre.

TBS Charge Tzs1.24 per litre.

Regulatory Levy: Petrol TShs 6.10/l, Diesel TShs 6.80/l and Kerosene Tzs3.50/l.

4. The following local costs have determined been through a tendering process for the procuring of these specialized services:

Surveyors costs: Petrol USD 0.114 per M3, Diesel USD 0.048 per M3 and Kerosene USD 0.187 per M3.

Petroleum Marking Costs: USD 3.3 per M3 + VAT.

5. The following local financing and operational costs are also included:

Financing Costs at 1.00% of CIF:

TIPER Fee at USD 0.15/MT+ 18% VAT:

Local evaporation Losses (MSP 0.5%.AGO/IK-0.30%).

6. After the above parameters, taxes, wholesale and dealer margins and local transport costs are added to come up with the cap prices. The wholesale margins are currently set up an TShs 124 while the dealers margins is set at TShs 64 both inclusive of the transition costs. These are discussed in section on margins below. The transportation costs are benchmarked and kilometre based. The transportation costs largely account for the



price differentials between at the various dealer outlets within the country.

3.3.2 Application of the Price Formula The principle purpose of the formula is to set the indicative maximum wholesale and pump prices allowed within the country for Petrol,, Diesel 500ppm and kerosene. The prices of the other petroleum products in the market, (Liquefied Petroleum Gas, Jet Fuel and Furnace Oil) are set by the oil marketing companies.

Between 2009 and July 2011, the calculations were done at the beginning and the middle of each month and the cap prices issued for the next two weeks. However from August 2011, new price caps are set once a month for the next 30 days from the day they become effective.

This is believed to be reasonable given that the overriding change in price factors is due to importation costs for petroleum products and the FOB prices that are influenced by international prices. Given that importation is usually not done more than once in a month and can be argued that the factors that influence prices significantly do not vary materially before the next importation.

3.3.3 Current Margins Both the oil marketing companies and the retail station dealers have previously made presentations to EWURA the effect that the approved gross margins are low and therefore not adequate for the recovery of actual expenses incurred in their businesses and give a fair return on their investments. To partly address these concerns, EWURA has approved and converted the previous pricing margin spread as additional Transitional Costs coverage as a temporary measure until a full study of the margins is undertaken.

The current allowances for wholesalers overheads and margins are TShs 111.00 per litre plus a Transition Costs Coverage of TShs 13 per litre. The same allowances for retail station dealers are TShs 57.50 per litre and TShs 6.50 per litre respectively. Using the price caps set on July 1, 2013, the total overheads and margins for wholesalers as percentages of cost are 6.58% for Petrol, 6.9% for Diesel and 7.06% for Kerosene while similar percentages for the retail station dealers are 3.17%, 3.32% and 3.38% for Petrol, Diesel and Kerosene respectively.

Sections 4 and 5 below review these margins in more details based on actual OMCs and dealers costs.

Wholesale operations


4. Wholesale operations

4.1 Overview of the wholesale operations 4.1.1 Types of Licensed Wholesalers

There were 62 companies licensed to wholesale petroleum products in Tanzania as at July 2013. This number is rather large for a market the size of Tanzania. However the market is dominated by about 13 companies that control about 85-90% of the market share as shown opposite. The main reason for such a large number is partly explained by the low entry barrier for obtaining the wholesale licences.

In addition there are additional companies who are licensed to undertake wholesale business only in specialized petroleum products such as bitumen, bunkering, lubricants and Liquefied Petroleum Gas.

The operations of the licensed Wholesale companies in Tanzania are very varied. They can be broadly classified in four groups:

i. OMCs who own only storage terminals in Dar es Salaam and some storage depots in upcountry towns.

ii. OMCs who own storage terminals in Dar es Salaam only.

iii. OMCs who own storage facilities in Dar es Salaam, storage depots in up county locations and also retail stations throughout the country.

iv. OMCs who have not invested in any storage terminals or depots anywhere in the country and depend on hospitality arrangements with the owners of such facilities.

Figure 5: Petroleum product demand share July 2012-June 2013



4.1.2 Market Size and Share

The demand for petroleum products in Tanzania has been rising in the last several years and is likely to continue growing as the overall country economy grows. As shown in table 2, demand grew by 14% CAGR from June 2011 to June 2013. In the short run, the demand is expected to grow driven by economic activities like gas exploration in the southern part of Tanzania and on going mining activities in the northern part of Tanzania

The market share of the different companies shows a lot of variations over time although GAPCO, PUMA, ORYX, OILCOM, TOTAL and MOGAS continue to dominate as shown in Table 7 below. Table 7: Market Share Trends

Company % Market Shares 2011 2012 2013 GAPCO 16.2 12.1 8.6 BP/PUMA 11.9 12.2 12.7 ORYX 8.6 11.1 11.5

OILCOM 7.6 5.9 7.7

NATOIL 6.1 4.4 3.4

CAMEL 6 6.3 6.4

GULF BULK

5.9 1.4 1.8

TOTAL 5.7 7.5 7.3

ACER 5.5 5 4.5

MOGAS 5.5 5.1 6.6

LAKE OIL 3.7 3.8 4.8

KOBIL 3.7 4.3 3.6

HASS 2.1 2.1 2.2

ENGEN 6.8 5.3 5.5

ALL OTHERS

4.7 13.5 13.4

TOTALS 100 100 100

Source: EWURA

4.1.3 Wholesale Business Activities. The licensed wholesalers obtain their requirements for PMS,, Diesel 500ppm, Jet Fuel and Kerosene through the Bulk Procurement System (BPS). Importation of Furnace Oil and Liquefied Petroleum Gas are arranged separately by the companies marketing those products.

The main wholesale operations involve selling bulk petroleum products directly to:

i. Businesses for own use such as in mining activities, industries, transportation, agriculture etc.

ii. Own company owned retail outlets.

iii. Independent retail station dealers.



iv. Independent resellers (also licensed as wholesalers) who in turn sell to their customers. Such customers could be either per bullet (i), and (iii) above.

v. To a lesser extent, other licensed wholesalers to meet unplanned supply and demand distortions.

Due to the large number of licensed wholesalers and the ability to procure supplies through the BPS there is heavy competition in the wholesale business, as discussed earlier under structure of the sector, as the OMCs compete for market share. There is evidence of heavy discounting (selling below the capped maximum whole sale prices) in these activities and also investments by the OMCs at customer sites to ensure long term commercial relationships.

4.1.4 Licensing Criteria for Wholesalers The current Minimum Wholesale Criteria used by EWURA for licensing of wholesalers considers some technical and financial parameters in a very broad way.

The technical parameters are:

Certificate of Registration;

Ownership of a storage depot or a hospitality agreement with another licensee.

Adequate skilled personnel.

EIA Certificate for a new depot.

Business Plan;

Tax Identification Certificate.

Land ownership details and layout plans

List of facilities.

The Financial parameters are to prove financial capability by either:

i. A bank guarantee of not less than one billion and five hundred million Tanzania Shillings, or;

ii. A bank statement showing a balance of not less than one billion and five hundred million Tanzania Shillings, or:

iii. An equivocal letter of comfort from a financial institution or a bank that confirms that the bank or financial institution shall extend a loan to the applicant for the amount not less than one billion and five hundred million Tanzania shillings, provided that the letter shall be signed by the chief executive officer of the financial institution or bank.

The Consultants view is that the second and third financial parameters are too weak and partly explain why there are many licensed wholesalers, many of who do not have the financial capacity to meet their obligations, particularly under the current BPS arrangements. A bank statement only reflects a period and does not prove that the resources are applied for the petroleum business. An equivocal letter from the financial institution or bank is only an intention and not proof of financial strength.



4.2 Infrastructure investments 4.2.1 Regulation Requirements

The Tanzania Bureau of Standards, (TBS) has developed standards for petroleum depots. However under Section 5 of the Petroleum Act, Cap 392 EWURA has powers for the technical regulation of the petroleum sector.

In this regard EWURA has prepared Rules governing wholesale operations and Retail Operations, through which the Bulk Installations (Technical Considerations) and Retail Stations (Technical Considerations) construction has to be factored in building the respective facilities.

The Above Ground Bulk Installation Checklist is used for evaluating new facilities before they are licensed and also for inspection of existing licensees. The checklist follows the requirements in the standard and is a useful tool for capturing data such as location, types and capacities of the installations in addition to undertaking inspections to ensure compliance with minimum Health Safety and Environmental (HSE) requirements.

These regulatory requirements were considered in evaluating standard depot facility and standard retail outlet for evaluation of acceptable whole sale and retail margins.

4.2.2 Comment on the existing storage facilities and their adequacy vis a vis demand Depot facilities available in the country

The current Tanzania International Petroleum Reserves Limited started as Tanzanian and Italian Petroleum Refining Company (TIPER) in the 18 May 1963. The main objective of the Company was to carry on the business of importers, exporters, stores, suppliers and distributors, buyers and sellers, refiners of petroleum and petroleum products in all its branches. On 19 June, 1963, the Government of Tanganyika together with ANIC6.P.A of 72, Viale Dell'arte, Rome, Italy; Hydrocarbons Holding Company A.G of Zurich, Switzerland and Tanganyika and Italian Petroleum Refinery Company Limited (TIPER) signed a 30-year Participation Agreement to construct and run an oil refinery at Dar ss Salaam. The Agreement provided that the Government shall nominate the Chairman of the Board of Directors and ANIC Group shall nominate the manager for the refinery. The Tanzanian and Italian Petroleum Refining Co Ltd (TIPER) was a refinery with a distillation capacity of 875k tonnes per annum (17,500 bpd) but was generally operating at approximately 60% of rated capacity. In the year 1991 the refinery went through rehabilitation and modernization in order to increase its efficiency, safety standards and output. The rehabilitation was intended to restore output to its nominal capacity. In October 1999, AGIP Group (successor of ANIC Group) sold its shares to Oryx Oil and Gas Ltd a subsidiary of Addax BV from Switzerland. On the 20 October 2009 the Companys name was changed to Tanzania International Petroleum Reserves Company Limited (TIPER) under certificate number 3142. In 2000, TIPER refinery was changed to a petroleum depot. To date TIPER's main business activity is to store petroleum products.



In total, TIPER has 37 tanks that as of now have a storage capacity of 137,652 M3. This represents about 17% of the total storage capacity available in Tanzania.

The other depot facilities, as discussed under section 3 above are spread across the various OMCs with the key players as Total, MOGAS, GBP, Oilcom, PUMA and GAPCO as the key players as shown in the diagram opposite.

Depot distribution within the country

Most of these storage facilities (more than 80%) are located in Dar es salaam. This is mainly due to the fact that Dar es salaam is the largest commercial /business city in Tanzania and also the entry point for Petroleum products consignments to the neighbouring landlocked countries like Zambia, DRC and Rwanda.

In addition the largest facilities are within the larger towns, due to the higher demand in the urban centres than the rural areas. However, there has been an increase in the demand for petroleum following the rapid increase in motorcycles (Boda Boda) and three wheelers (Bajaj) as means of transportation in rural areas. However the overall demand is far from adequate to persuade OMCs to put storage tanks in rural areas, but there is certain a health safety case for EWURA to encourage OMCs to set up more retail outlets to reduce the risky peddling of 5 litres, 2 Litres and 1 Litres containers.

The table below provides spread of the storage facilities across the country. Table 8: Distribution of the storage facilities in the country

Region Capacity M3 %

Dar es Salaam 791,316 87.75%

Kigoma 17,632 1.96%

Arusha 5,043 0.56%

Bukoba 890 0.10%

Moshi 7,846 0.87%

Musoma 755 0.08%

Mwanza 11,473 1.27%

Tanga 33,999 3.77%

Tabora 790 0.09%

Mtwara 4,800 0.53%

Isaka 7,500 0.83%

Zanzibar 2,261 0.25%

Shinyanga 17,504 1.94%

901,809 100.00% Source: OMCs, TIPER and EWURA

Age profiling of the storage facilities



An analysis of the age profile of the storage capacity in the country shows an average age of 19 years. Going with the assumption that the lifespan of the storage facility is 15-25 years, on average the storage facilities in Tanzania are fairly old.

However, in practice and with proper maintenance, storage facilities can last much longer than 25 years.

The table below provides the average age for depots in Tanzania

Table 9:Average Age of storage facilities in the country

OMC Number of Depot

Average Age Weighting

Weighted Average age

Camel Oil 1 7 0.04 0.31

Engen 2 18 0.03 0.62

GAPCO 8 0.14 -

GBP 5 9 0.09 0.81

Hass Petroleum 1 3 0.03 0.09

Kobil Tanzania 1 0.04 -

Lake Oil 1 3 0.03 0.09

Mogas 1 0.05 -

Mount Meru 1 0.00 -

National Oil 1 18 0.03 0.60

Oilcom 6 9 0.10 0.92

Oryx Energies 4 0.03 -

Petrofuel - 0.00 -

Puma Energy 4 61 0.11 6.94

Total Tanzania 4 20 0.05 0.91

World Oil 1 3 0.04 0.13

TIPER 1 45 0.17 7.71

TOTAL 42 18 1.00 19.14 Source: OMCs and TIPER



Hospitality

Most storage facilities provide hospitality (store oil products) for other OMCs operating within the country as well as the ones exporting to the neighbouring countries. Discussions with the OMCs and research shows that the rates for hospitality vary from USD 2.3 per M3 per month to USD 11 M3 as provided in the table below.

Table 10: Hospitality charge rates

Storage Company Fees Com

ewura report - final revised draft report

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