A recently released report by the Botswana Regulatory Authority (BERA) has found that Botswana citizens are being locked out of the Liquefied Petroleum Gas (LPG) market.
The report which assessed and analysed a number of issues in the industry, among them shareholding structure, market share and concentration index, found that Batswana are just watching from the sidelines while the industry is dominated by a small number of foreign firms.
Says the report: “The analysis of LPG companies’ shareholding structures and directorship, market shares and business concentration assessment has revealed the existence of an oligopolistic market with its inherent opportunities for uncompetitive behaviours and predatory pricing practices … There is need to enhance competition within the sector by identifying and addressing barriers impeding entry into the local gas market, especially by Batswana.”
It notes that for BERA to act effectively against these practices, LPG regulations need to be reviewed and approved as a matter of urgency to allow for efficient regulation of a number of issues.
The report recommends that a rapid identification and assessment of factors impeding entry into the local LPG market should be undertaken in furtherance of this study. It adds that the assessment should be used to guide formulation of strategies to better enhance competition in the market. It says the Draft Botswana Oil and Gas Sector Strategy of 2013 should be reviewed to provide policy direction on the development of the local gas market.
“Of particular interest should be the development of clear strategies aimed at facilitating and mainstreaming Batswana into the gas market,” say the report. “The strategy should adopt a holistic approach aimed at bringing synergy on sectorial cross-cutting issues to enable coherent and long-lasting solutions.
“In an endeavour to ensure meaningful citizen participation in the gas sector, BOL should consider commencing implementation of commitments under the Bulk Petroleum Infrastructure and Product Supply Agreement to encompass LPG trading.”
The report also calls for a holistic review of the regulatory licensing framework. It says other applicable legal instruments should be undertaken to facilitate penetration of Batswana companies into the local gas market and that any identified bottlenecks should be addressed. The LPG regulations should be approved as a matter of urgency and implemented to ensure efficient regulation of the sector.
Regarding market structure, the report found that there is no clear demarcation between LPG wholesalers, distributors and retailers. “Some wholesalers sell gas to both retailers and individual customers who under normal circumstances should be served by retailers,” it says. “Thus, wholesalers, distributors and retailers compete for the same customers. In the process, it is retailers who suffer the most because they are outpriced by the more dominant distributors and wholesalers.”
According to the report, both wholesalers and distributors conduct almost similar processes without any significant value addition that can be passed to the consumer. “Infact, the existence of the distribution level could be viewed as adding more burden to consumers in terms of increased price of the commodity,” it notes. “There is need to reorganise the market to achieve efficiencies and value for money.
“Therefore, the existing 3-tier model where there are wholesalers/suppliers, distributors and retailers should be revised to a 2-tier model comprising suppliers and retailers. Distributors who operate filling facilities should upgrade to the wholesale/supplier level and those who do not have filling facilities will be accorded the opportunity to decide which level they are interested to occupy.”
The report acknowledges that the introduction of price regulation is a sensitive matter which, if not properly conceived, could pose challenges relating to the profitability, efficient operations and sustainability of businesses. “It is important that price regulation is introduced once the LPG market is properly structured,” it says. “This is to avoid distortions that (may) arise because of embedded inefficiencies that may come along with the unstructured market. Furthermore, a framework that is developed for the pricing of LPG should take into consideration the source of origin (reference markets) of the gas, supply routes with their associated costs, and applicable taxes and levies.”
The report found that the BERA has limited skills and experience to regulate the highly specialised and complicated LPG market. Somewhat speculating, the report notes that the gas consumed in Botswana may be originating in three locations, namely South African refineries, Ras Tanura in Saudi Arabia and the US Gulf Coast.
“It is important for BERA to have continuous training and development programmes for its employees in the petroleum and gas department,” it says. “Besides the fact that the Authority will be introducing new regulations to an unregulated market, the business environment keeps changing, and hence it is critical to keep learning and picking up new skills to improve the effectiveness of the organisation and its employees so as to support immediate changes and longer-term goals.”
To that end, the report recommends that BERA should develop a robust training and development programme to capacitate its officers dealing with LPG to effectively regulate the sector. Such a programme should include training courses on tariff setting which covers price regulation, building revenue requirements, tariff structure and design, and end-user price regulation and monitoring; technical regulation covering supply and logistics, gas installations, and quality assessment and management.
Significantly, unlike with liquid fuels, Botswana does not maintain strategic stocks of LPG. In 2010, the government approved establishment of a National Oil Company, Botswana Oil Limited (BOL). The report notes that in December 2018, the Ministry of Mineral Resources, Green Technology and Energy Security (MMGE) and Botswana Oil Limited signed the Bulk Petroleum Infrastructure and Product Management Agreement (BPIPMA) with defining the roles and responsibilities of MMGE and BOL in the overall government objective of achieving national energy security of supply and facilitating the participation of local companies in the Botswana oil industry as key goals.
Other objectives of BIPIPMA were to formalise the operation and management of the Strategic Reserves Petroleum Infrastructure between MMGE and BOL and develop a framework within which the parties may cooperate on matters of mutual interest.
Petroleum products covered by the agreement include unleaded petrol, diesel, aviation gasoline, jet fuel, liquefied petroleum gas and illuminating paraffin received at Government Reserve Storage (GRS) Depots. However, the government does not maintain strategic stocks of LPG. Infact, BOL has never traded in LPG. “The above cited issues are highly likely to compromise the country’s security of supply objectives with regard to LPG use,” the report notes.
In part because of these discrepancies, BERA has called on Botswana Oil Limited to explore opportunities in the gas market, including developing the necessary competencies to trade in LPG. The BERA report recommends a review of licensing requirements in order to facilitate investments into the development of the gas infrastructure in Botswana.
