BP, Shell pull out: pros and cons for Botswana

* MAHUBE MPUGWA | Friday August 13, 2010 00:00

The two companies contributed immensely to the country's economic growth by supplying fuel through their retail network to the government fleet, and to commercial customers such as mines, transport and construction companies. BP, particularly, has supplied aviation fuel to the country's major airports and also LPG for both domestic and commercial use. Both companies have made a significant contribution in developing homegrown entrepreneurs as retail operators and in turn employing over 2,500 petrol attendants. Given the circumstances Shell's announcement, that the Shell brand will be retained, (albeit as minority shareholder post sale) provided a straw to clutch. In the early 1970's both companies were heavily involved in coal exploration especially in the central part of Botswana led by BP Coal and Shell Coal. In fact, both companies used to have joint operations under the name BP/Shell before going their separate ways. BP and Shell dominated the industry and between them enjoyed a market share of more than 50%, with close to 80 service stations.

The common question asked, centres on the reasons for the exit, and specifically whether the local operations were no longer profitable. On the contrary, the separate announcements by both BP and Shell clearly stated that these were profitable operations. In the same vein, the decision should not be interpreted as a lack of confidence in Botswana as an investment destination. The decision mainly focused on the need for a strategic realignment in search of the next productivity frontier.

This means getting the most out of operations and paying more attention to the decline in refining margins, as well as focusing on upstream operations which generate high returns despite high capital expenditures and risks.

As multinationals, oil companies are renowned for proactively playing out scenarios with the intention of understanding how future events in the political, economic, social, legal and technological spheres will influence their operations. Shell -leads the pack in this field where it has formed partnerships with academia. One of Shell's experienced planners -Kees van der Heijden- was instrumental in developing a scenario planning programme for the Strathclyde University Graduate Business School in Glasgow - Scotland (which happens to be my MBA alma mater).

In his book - 'The Squeeze, Oil, Money and Greed'- Tom Bower  points to a forecast by consultants Mckinsey in 1992 that  'as the atomisation of the major oil companies into small, nimble operators.. as excessive costs burden the oil majors... too big and too expensive to run, they would give way to small private companies and the growing power of national oil companies.'

We live in an era where state and regional oil companies have access to oil reserves that have catapulted them to producers of significance. Previously  the oil industry both downstream and upstream was dominated by the major oil companies such as Exxon, BP, Shell, Chevron Texaco, Mobil and Gulf  also called  'The Seven Sisters' ( book by Anthony Sampson). The new players include oil companies from Africa, China, Russia and South America.These new players have even emerged in the downstream business i.e. refining, marketing and demonstration.

Notably, these include Kenkobil in East Africa, Sasol, and Engen. Botswana has also seen new entrants in the marketing and distribution that include Petro-Botswana and Access Petroleum. The success of the new entrants is attributed to their knowledge of the business environment and their lower operating costs.

As these two multi-nationals oil companies exit from Botswana, we Batswana must ponder whether the indigenous or regional oil companies' have security of supply. South Africa remains the primary source of supply; leaving Botswana vulnerable as was highlighted by the recent Transnet strike in South Africa which affected fuel supplies into Botswana. During that period a number of retail sites and commercial customers ran dry. Botswana is a net importer of refined products and fuel consumption is circa 850 million litres per annum or 2.5 million litres per day. The increase in demand for petroleum products will mainly be driven by a growing car park estimated at 10  percent per annum, power peaking plants, infrastructure projects and increased mining activity across the country. 

We are a nation of fuel guzzlers, demonstrated by the popularity of SUV's on our roads.

We not only love our cars, but we also drive a lot. It's a common commentary at funerals or weddings that there are more vehicles at the event than people. This makes the sourcing of oil products and the logistics of bringing them to the market particularly urgent for Botswana.

We are already seeing some active engagement by the Ministry of Minerals, Energy and Water Affairs with their counterparts in Mozambique, Zimbabwe and Namibia on fuel supply into the country.

The actions are commendable and the challenge will be in effecting the envisaged supply chain when dealing with a situation where local operators do not have line of sight with a refinery.

The possibility of sourcing fuel from traders instead of the traditional oil company will have to be explored, even though it is for the oil companies to demonstrate the abilities and capabilities to supply their customers at all times, by tapping into their regional resources and infrastructure to ensure a diverse source of supply for the country.

Activities that address the security of supply cannot be left to government and the oil industry alone as the support from business and the public is pivotal to fuel conservation. We are already reaping the benefits of campaigns from Botswana Power Corporation (BPC) encouraging people to conserve electricity by using energy saving bulbs or switching-off appliances such as geysers.

The same logic can be applied to fuel conservation through similar initiatives. Debswana mines working with BP have successfully implemented a fuel efficiency programme based on a measuring and targeting process.

Factors such as haul road condition, operator behaviour and pay load optimisation are closely monitored to drive down fuel consumption in the mines. These are some self-help examples to help achieve the agenda on fuel conservation. I believe the recent announcements by BP and Shell present an opportunity for both local and foreign investors to enter the local oil industry which has good growth potential as demonstrated by the increasing number of vehicles and new mining opportunities across the country. Most importantly it underscores the fact that Botswana is open for business.

* Mahube Mpugwa is the General Manager of BP Botswana. The views and opinions expressed do not represent those of BP or Shell )