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Viewing cable 08ADDISABABA3298, BENZENE FUEL SUPPLY BOTTLENECK SQUEEZES MARKET

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Reference ID Created Released Classification Origin
08ADDISABABA3298 2008-12-09 14:21 2011-08-25 00:00 UNCLASSIFIED Embassy Addis Ababa
VZCZCXRO1933
PP RUEHROV
DE RUEHDS #3298/01 3441421
ZNR UUUUU ZZH
P 091421Z DEC 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 3018
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RHMFIUU/HQ USCENTCOM MACDILL AFB FL PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUCNIAD/IGAD COLLECTIVE
UNCLAS SECTION 01 OF 04 ADDIS ABABA 003298 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR ENRG ET
SUBJECT: BENZENE FUEL SUPPLY BOTTLENECK SQUEEZES MARKET 
 
REF: ADDIS 2569; 
ADDIS 2816 
 
------- 
SUMMARY 
------- 
 
1. (SBU) The Government of Ethiopia's (GoE) decision to require 
regular benzene to be blended with ethanol has led to severe benzene 
fuel supply gaps, exacerbating an already inefficient fuel supply 
chain.  The ethanol blending program has hampered the GoE's ability 
to maintain adequate benzene fuel supply to its fast growing urban 
centers, leaving private motorists and the public transportation 
sector to fight long lines and more often face empty pumps at fuel 
stations.  The benzene fuel shortage appears to be affecting all 
sectors of the Ethiopian economy and more recently has put GoE 
officials on a collision course with the domestic fuel retailers and 
transnational oil company fuel suppliers.  To date, diesel supply 
has not been affected.  This latest fuel supply crisis provides yet 
another example of how state-oriented GoE economic policies continue 
to impede market stability and broader economic growth.  END 
SUMMARY. 
 
---------------------------- 
GOE POLICIES LEAVE PUMPS DRY 
---------------------------- 
 
2. (SBU) In recent months, the GoE has enacted several fuel policy 
actions that have made regular benzene fuel supply problematic. 
First, the GoE's move to require transnational oil companies 
operating in Ethiopia to blend regular benzene fuel with five 
percent ethanol before delivery to the domestic retail market seems 
to have contributed to an acute supply gap.  Motorists have been 
facing one to three hour traffic queues and barren fuel pumps at 
local fueling stations.  The fuel blending directive, which was 
endorsed by the Council of Ministers in September 2007, authorized 
the Ministry of Trade and Industry (MOTI) to force all domestic fuel 
retailers and private transnational oil company suppliers to begin 
selling a fuel blend of 95 percent regular benzene and five percent 
Ethanol starting September 2008.  In addition, the government as 
recently as November 21, 2008 threatened license seizures of all 
domestic fuel retailers found not to be adequately stocked with the 
new blended fuel.  While the blending program is a cost savings 
initiative replacing five percent of the country's imported benzene 
bill with domestically produced Ethanol, the GoE's license seizure 
directive aims to break the loggerhead between the fuel retailers, 
transport companies and transnational oil company suppliers of 
blended fuel. 
 
3. (SBU) According to the General Manager of Kobil, a Kenya based 
transnational oil company operating in Ethiopia, the GoE's recent 
directives further establish Ethiopia as having one of the most 
tightly regulated oil and fuel trading markets in the world.  Over 
the last several years, the GoE has instituted fuel regulations such 
as: 1) strict price controls on the fuel and lubricant market by 
MOTI, 2) GoE regulation of fuel transportation logistics and costs, 
3) GoE monopoly control of importation of all oil and fuel products, 
and 4) GoE oversight of fuel quality.  In addition, the blending 
directive has largely resulted in general confusion among domestic 
fuel retailers concerning the roll-out and supply cost agreements 
with the transnational oil company fuel suppliers and government 
regulated fuel transport companies.  Currently, the GoE imports all 
domestic fuel needs with its limited supply of hard foreign 
currency, allowing transnational oil companies to purchase the 
imported fuel in local currency (Ref A).  Oil companies deliver, 
process, and sell the imported fuel products to a largely 
mom-and-pop domestic retail market that sells to the public under 
transnational oil company logos. 
 
------------------------------------------- 
COST-SAVING ETHANOL PROGRAM INCREASES COSTS 
------------------------------------------- 
 
4. (SBU) The ethanol blending fuel program which was implemented as 
a cost saving effort to reduce the GoE's soaring fuel bill has 
increased costs for retailers, suppliers and transporters of fuel. 
Retailers have alleged that they have observed measurable losses in 
fuel stock deliveries since the GoE directed oil companies to blend 
regular benzene fuel and ethanol before delivery to local retail 
depots.  Fuel retailers and suppliers both blame the temperature 
differences between the government-designated blending facility in 
Salulta (20 km outside Addis Ababa) and the retail market in Addis 
Ababa as the culprit behind the perceived volume losses. 
Apparently, the volume of the blended liquid fuel expands in warming 
temperatures and contracts in cooler temperatures resulting in a 
perceived volume change.  Neither retailers nor suppliers have been 
able to resolve this discrepancy.  In addition, petroleum 
 
ADDIS ABAB 00003298  002 OF 004 
 
 
transporters argue that the new urban supply route linking the 
blending facility in Salulta to the Addis Ababa leaves their trucks 
stuck in traffic most of the day and has significantly impacted 
their ability to remain profitable.  Transporters of fuel have 
formally appealed to MOTI to enact a 300 percent wage increase (from 
USD 2.5 cents to USD 7.5 cents per km traveled) for their transport 
services to carry fuel to retailers. 
 
---------------------------------------- 
FUEL RETAILERS SAY NO TO INCREASED COSTS 
---------------------------------------- 
 
5. (SBU) Fuel retailers have formally protested the entire fuel 
blending program and for many weeks refused to accept regular 
delivery of benzene fuel from domestic oil companies since September 
2008.  Fuel retailers blame domestic oil company suppliers for not 
providing them with the requisite volume of fuel determined in 
purchase agreements.  According to press accounts, the Dealers 
Association, who represents retailers, warned all concerned parties 
in a letter to MOTI, dated October 21, 2008, that they would not be 
able to operate their fuel retail facilities if they incurred losses 
due to perceived fuel stock degradation upon delivery.  A local 
Total company fuel retailer explained to EconOff that retailers have 
the right to refuse fuel delivery if they believe any loss or 
unwarranted tampering of product has occurred.  However, if loss due 
to volume contraction from temperature changes occurs, retailers 
would be forced to absorb the costs if they want to keep their 
stations stocked.  Additionally, retailers who are already operating 
on a thin margin (USD 0.03 per cubic meter sold - set through 
government regulations) may face certain closure if they accept 
losses.  The retailer operating under the Total Oil company brand 
estimates that his business would lose roughly one percent of his 
yearly purchases of benzene stock as a result of fuel stock loss at 
the time of delivery. 
 
------------------------------------- 
EASY TARGET: BIG OIL PROFITS SQUEEZED 
------------------------------------- 
 
6. (SBU) The transnational fuel suppliers seem to have gotten caught 
in the cross hairs of the recent GoE directive and fuel retailers' 
unwillingness and inability to realize losses in fuel stocks at 
delivery.  According to Kobil Ethiopia's General Manager, most 
transnational oil companies operating in Ethiopia have decided to 
absorb the costs associated with loss in fuel inventory coming to 
market from the blending facility in Salulta.  Retailers cannot 
realize any additional squeeze on their limited profits of USD 0.03 
per cubic meter of fuel sold.  The Kobil representative explained to 
EconOff that oil companies in Ethiopia can earn roughly USD 5 per 
cubic meter of fuel sold compared to as much as USD 200 per cubic 
meter sold in neighboring Uganda.  According to the Kobil 
representative, the additional costs resulting from fuel stock loss 
after blending will continue to peel away their already small 
margins and make operations unsustainable.  Transnational oil 
companies have a choice to either continue absorbing the additional 
costs associated with this blending directive or worse consider the 
prospect of a complete pull out of the Ethiopian market.  As 
recently as November 14, 2008, after 60 years of presence in the 
country, Royal Dutch Shell Oil Company pulled out of Ethiopia 
following the departure of Mobile and Agip oil companies, three and 
six years ago, respectively.  Libya Oil Holding Ltd has assumed 
control of 100 percent of Shell's downstream oil products marketing 
business and its 142 employees in Ethiopia. 
 
7. (SBU) To date, only the National Oil Company (NOC) fuel retailers 
have been able to provide a steady supply of blended benzene and 
ethanol fuel products to the local market.  While there has been a 
visible shuttering of doors of the other oil companies and local 
fuel retailers, NOC has struggled to meet the soaring demand for 
benzene fuel.  NOC retailers have battled to fight back the 
seemingly endless lines of cars at their area retail depots.  It is 
to be noted that NOC is owned and managed by the Midroc Ethiopia 
Investment group.  The Midroc group is run by Sheikh Mohammed 
al-Amoudi, the single largest private investor in Ethiopia. 
According to a rival fuel retailer, most NOC retailers have more 
financial flexibility at their disposal and credit facilities as a 
result of the parent oil company's close relationship with the GoE 
and Commercial Bank of Ethiopia.  As recently as December 07, 2008, 
Ethiopian media outlets reported that NOC clinched two lucrative GoE 
contracts with a combined worth of USD 73 million.  NOC defeated all 
other oil company bids to supply Ethiopian Roads Authority (ERA) 
with asphalt at a cost of USD 30 million and Ethiopian Electric 
Power Corporation (EEPCO) with diesel fuel at a cost of USD 42.8 
million. 
 
-------------------------------------------- 
GOE BLAMES LOGISTICS AND AFFIRMS FUEL POLICY 
 
ADDIS ABAB 00003298  003 OF 004 
 
 
-------------------------------------------- 
 
8. (SBU) The GoE denies that there is a fuel supply shortfall 
in-country or any suggestion that its benzene and ethanol fuel 
blending program is the cause for the fuel shortage.  Ato Yeshitla 
from MoTI's commercial office told EconOff that he believes that the 
problem is not related to an import gap or the ethanol blending 
program, but instead is related to resolvable logistical 
disagreements between the suppliers and retail companies.  In 
addition, EPE points to congestion of the heavily used ports and 
roads network and the lack of transport capacity as major factors in 
exacerbating domestic fuel supply backlogs.  The GoE is confident 
that the benzene supply shortage can be corrected with its recent 
policy directive, which forces a compromise between retailers and 
suppliers by threatening license seizures for non-compliant fueling 
stations.  In a recent meeting at MOTI, an unnamed GoE official 
expressed disappointment at the fuel suppliers and retailers for not 
being able to resolve their dispute.  According to an official from 
one of the transnational oil companies present in the meeting, the 
MOTI official pointed out that the government was providing the 
market a great service by importing all of the fuel and could not 
understand why suppliers and retailers were quibbling about pricing. 
 
 
------------------------------------- 
GOE SETS PRICES AND FUEL SUPPLY CHAIN 
------------------------------------- 
 
9. (SBU) The GoE uses a heavy hand in the management of fuel prices 
and the supply chain in Ethiopia.  MOTI is authorized to adjust fuel 
prices on a monthly basis to reflect exogenous and endogenous 
trends; however does not allow oil companies to capture additional 
profits from increased world oil prices (Ref B).  The GoE also 
captures roughly 15 of the state-authorized 30 percent profit 
margins that oil companies could realize while selling lubricants. 
The lubricants business can be very lucrative and has in large part 
kept many retailers and suppliers in business in spite of razor thin 
margins on fuel sales.  On the supply side, EPE imports the bulk of 
petroleum products from the Gulf countries with diesel accounting 
for 90 percent of the total import stock.  Also, EPE imports roughly 
80 percent of its required regular benzene from Sudan, with the 
balance coming from the Gulf market.  The GoE also sets the 
transport costs and quality standards for imported fuel.  EPE 
collects petroleum imports at the ports of Sudan and Djibouti where 
transnational oil companies prepare the product for delivery and 
blending just outside of Addis Ababa.  To date, there has not been a 
slowdown in the volume of fuel and oil imports to Ethiopia. 
Ethiopia imported 1.88 million tons of fuel in 2007, at a cost of 
USD 1.55 billion, up 17 percent from the previous year.  In 2008, 
EPE plans to import as much as 2.15 million tons of fuel. 
 
10. (SBU) There are six oil companies operating in Ethiopia who are 
responsible for transporting the fuel coming from the ports to their 
depots in the country: 1) National Oil Company (NOC), 2) Libya Oil 
Holding Ltd, 3) Total, 4) Kobil, 5) Yetebaberut, and 6) Nile 
Petroleum Company.  The oil companies are held responsible for any 
loss of fuel stock during the delivery and blending process.  The 
transnational oil companies transport regular benzene to the 
blending center at Salulta, which is currently managed and operated 
by Sudan based Nile Petroleum Company.  The Nile Petroleum Company 
is tasked by the GoE with blending the imported benzene with the 
required five percent Ethanol before fuel hits Addis Ababa and other 
local markets.  The GoE is the monopoly supplier of ethanol to Nile 
Petroleum Enterprise, selling the product at a fixed price. 
Currently, the GoE's blending program uses about one third of its 
existing ethanol capacity.  In the next 5 years, the GoE plans to 
increase ethanol production capacity fourfold to 130 million liters 
per annum at four domestic sugar factories in order to meet demands 
for its fuel blending program.  According to the Ministry of Mines 
and Energy, although Fincha sugar factory is the only producer of 
Ethanol to date, Methara, Wonji, and Tendaho sugar factories will 
soon come on line. 
 
------- 
COMMENT 
------- 
 
11. (SBU) The GoE's statist fuel policies have complicated an 
already inefficient fuel market and have managed not to address the 
real benzene fuel supply bottleneck, which has pitted retailers, 
suppliers and transporters of fuel against one another.  The GoE's 
November 21, 2008 move to pull the licenses of all non-compliant 
fuel retailers has gotten fuel flowing again, but at the expense of 
oil company margins.  Although oil companies have acquiesced to the 
GoE's policy in the short-term, this latest action cannot 
indefinitely force retailers and transnational oil companies, who by 
their own admission are operating at a loss, to continue to do 
 
ADDIS ABAB 00003298  004 OF 004 
 
 
business in Ethiopia if fuel policies do not change.  Despite the 
steady flow of fuel from foreign suppliers, the GoE may be suffering 
from a crisis of confidence among domestic retailers, oil company 
suppliers and a public who cannot understand why pumps continue to 
run dry and why they continue to pay relatively the same price at 
the pump in spite of almost 60 percent declines in world oil prices. 
 The current dispute may result in future benzene shortages, retail 
fuel hoarding among motorists and, worse, the departure of existing 
private transnational oil companies from Ethiopia.  Post will 
continue to monitor the ongoing fuel crisis.  END COMMENT. 
Yamamoto