feasibilty study for lpg

1Draft Feasibility Study for Distribution of petroleum, LPG and Lubricants throughout Ethiopia HASS PLC

Table of content

Title

Pa

ge

No

I. Executive Summery 1

II. Background of the document 2

Overview of Ethiopia 2

Overview of Energy sources and energy policy in

Ethiopia 6

Overview of Ethiopian policy towards to LPG,

Kerosene and other related by products 8

III. Market Analyses 10

Nature and size of demand for petroleum products 10

Project ownership and structure 10

Proposed Location 11

Past Demand 11

Forecasted Demand 12

Supply & Distribution 13

Types of Products 14

Target customers 15

Competitors Analysis 15

Marketing 18

IV. Regulations, Licenses and incentives (Legal

analysis) 19


Regulatory Requirements 19

License 19

Pre-Qualification for License 19

V. Environmental Analysis 20

Location of the project 20

Environmental analysis 21

VI. Financial Analysis 21

Initial Project Costs 21

Expansion Project Costs 22

Price of Fuel 23

Risk on investment for Petroleum investment 23

Income statement 24

VII. Conclusion 27

VIII. References 28


1. Executive Summery

The purpose and scope of this feasibility study is to assess the feasibility of distributing LPGs, petroleum and related products and lubricants like: Diesel Engine Oils, Petrol Engine Oils, Gear Oils, 2 stroke, Engine Oils, Brake Fluid, Hydraulic Oils and Industrial Gear Oils throughout Ethiopia as whole seller and retailer. In addition to the provision of Fuels, Lubricants, other specialized products like Modern Car wash, Lub change, Supermarket, Cafes and Restaurant Services will be implemented by outsourcing to others.

The project feasibility will form the basis of an important investment decision and in order to serve this objective, the document covers various aspects of the business concept development, start-up, marketing, and finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself. The report divided in to nine parts with annex and reference.

All the material included in this document is based on data/information gathered from various sources and is based on certain assumptions. And as much as possible we used the most trusted and recent sources for the study.

The HASS petroleum Group is a regional Oil marketing company, incorporated in 1997, with significant presence in East Africa and Greater Lakes region. From its beginning as a fuel seller, HASS petroleum is now a renowned Oil Marketer with full fledged in Kenya, Tanzania, Uganda, Southern Sudan, Rwanda, Burundi, and the democratic Republic of Congo. And in 2013 it will start in Ethiopia after the legal and investment activities finalized.

The initial cost of the project is estimated to be 84,600,000birr_ with a payback period of 4 years and 6 months. IRR and NPV of 29%and birr 121,847,000 respectively. Version Control

Type of Document

Feasibility study for LPG , Kerosene and related supplies


Prepared by Grace ConsultantVersion 1.0Issue date May 30, 2012Revision Date May 31, 2012

2. Background of the document

a. Overview of Ethiopia

Ethiopia is an independent republic which lies in the north-east corner of Africa and forms part of the North East African Region. The capital city is Addis Ababa, headquarters of the Organisation of African Unity (OAU). Since the secession of Eritrea in 1993, Ethiopia has been a landlocked state. The official language is Amharic but other languages like English and Italian are used in commerce. The local currency is the Ethiopian birr.

The Ethiopian economy is based on agriculture, which accounted, in 2009/10, for about 42 percent of the gross domestic product (GDP), 75.9 percent of foreign currency earnings. In 2009/10, the industrial sector, which mainly comprises small and medium enterprises accounts for about 13 percent of GDP. The services sector accounts for about 46.1percent of GDP.

Real GDP grew by an average of 11.3 percent per year for the last Seven consecutive years (2003/04-2009/10), which is the highest among the non-oil producing economies of Africa. During 2006/07, 2007/08 and 2008/09, the general annual inflation was 15.8, 25.3 and 36.4 percents, respectively, and dropped to 2.8 percent in 2009/10. These were largely driven by the trend of the food component of price which showed 21 percent annual average growth during the indicated fiscal years. The budget deficit as a percent of GDP was only 1.3 percent in 2009/10

The Ethiopian economy has grown stronger as the transition from a command to a market-based economy takes place. The former system of price controls has almost been discarded, the tax rates have decreased, and several private sector restrictions have been removed. Progress has been made on the implementation of reforms. Valued Added Tax was introduced in the country in January 2003 and the import tariff regime has been reformed. The financial sector is also improving, with flexible interest and


exchange rates that are market-determined. Ethiopia belongs to the COMESA agreement. Member countries enjoy preferential trade terms. Ethiopia has similar agreements with a number of countries and the EU.

In the Growth and transformation plan (GTP Plan), the government expected to boost the real GDP from 10.1 to 14.9 percent. Projection of export of goods assumed to grow at a faster rate in response to the adoption of export promotion policy measures. According to the GTP plan for the five years, exports of goods are expected to grow by 36.6% in 2010/11 and 28.4% percent annual average in the remaining period. With regard to transportation, in 2015, all Kebeles (100%) will connected to all weather roads with an average time of 1.4 hrs to reach nearest all-weather road .

The National Bank of Ethiopia is the central bank of the country. Commercial banking functions are performed by the state-owned Commercial Bank of Ethiopia (CBE) and an increasing number of private banks . The number of banks operating in the country reached seventeen: three of them government-owned and the rest private (NBE home page).

The Ethiopian tax law provides for the imposition of direct and indirect taxes. The direct taxes are divided in to five categories: personal income tax, rental tax, withholding tax, business profit tax and other taxes. The main types of indirect taxes applicable are value added tax, custom duty, excise tax and turn over taxes.

Ethiopia has abundant supply of skilled workers in various fields at internationally competitive rates. Wages and salaries vary on the type of profession and level of skill required. They are determined by agreement between the employer and the employee.In conformity with the international conventions and other legal commitments, Ethiopia has enacted its labor law to ensure the worker-employer relations be governed by the basic principles of rights and obligations with a view to enabling workers and employers maintain industrial peace and work in spirit of harmony and cooperation.

The labor law has fixed hours of work as eight hours a day and thirty-nine hours a week. Work done in excess of these hours is deemed to be overtime. Labor disputes in


Ethiopia are resolved through the application of the law, collective agreements, work rules, and employment contracts. Foreign investors obtain work permits for their expatriate employees directly from the Ethiopian Investment Agency (EIA). The EIA processes applications of work permits in an hour.

All transactions in foreign exchange must be carried out through authorised dealers under the control of the National Bank. Payments abroad for imports require exchange licences, obtainable upon presentation of a valid importer’s licence, exchange licences are also granted in any convertible currency requested. All imports require a licence. There are no free trade zones in Ethiopia.

Addis Ababa, the capital city, is linked by road to the port of Djibouti, at the Gulf ofAden. The port of Berbera in Somaliland and Port Sudan are other external trade routes that provide services for export-import trades of the country. Another potential port accessible to Ethiopia is Mombassa in Kenya. In order to ensure efficient, cost effective and reliable import and export movement of cargo to and from the sea ports of neighboring countries, the government has established the Dry Port Service Enterprise. The Enterprise is currently operating two dry ports which are located at Modjo, in the Oromiya Regional State, and at Semera, in Afar Regional State.

b. Overview of Energy sources and energy policy in Ethiopia

Ethiopia’s known energy resources essentially consist of wood fuels, animal dugs and agricultural residues, which are overexploited, and hydropower, which are being exploited,, crude oil which is largely untapped. Ethiopia has proven reserves of fossil fuels in the form of natural gas and coal as well. The energy resource potential of the country includes several hundred million tons of coal and oil shale, and over 70 billion cubic meters of natural gas. However, only a very small portion of this potential is developed owing to lack of financial resources, skilled manpower and more importantly appropriate policy and planning. (GTZ (2007)

According to the 1997 World Development Report (World Bank, 1997), the per capita commercial energy for Ethiopia in 1994 was 22 Kilograms (Kg), while for low income economies it was on the average 369 Kg and for high income economies it was 5066 Kg.


Table: Rural and urban enrgy sources

Energy Source Rural (%) Urban (%)Firewood and Charcoal 82.2 74.47Dung 9.8 7.8Agricultural residues 8.4 6.3Kerosene 0.0 7.6LPG 0.0 0.6Electricity 0.6 3.0

Sources: GTZ, 1998

As you can see from the above table, nearly all the remaining energy needs particularly for domestic purposes are covered by fuel wood, the supply of which has led to a very rapid depletion of the natural forest resources and vegetation cover. Due to frequent usage of fuel wood for energy supply in the country, the forest resource coverage has dropped from 35 percent coverage to less than 3 percent. As a consequence of increased environmental degradation, Ethiopia is facing a cyclical draught and famine.

According to the GTP Plan, by 2015 maintaining facilities and construction of the storage for petroleum, the reliable and steady supply of petroleum will be secured. Inthe next five year it is planned to increase the present generating capacity which is 2000 MW to 8,000 up to10, 000MW at the end of the plan period (2014/15) with electricity power coverage of the country to 75%. In addition by 2015:

Increase the production of bio- ethanol to 194.9 million litter at the end of the planning year through coordinating the governmental and private sugar industries,

Increase production of bio diesel up to 1.6 million litters through involvement of Private investors, farmers, etc. In general, the development of bio-fuel will generate 1 billion dollar foreign currency,

Increase the number of blending facility of benzene-ethanol from 1 to 8 and that of biodiesel to 72 by oil companies.

Sea port utilization ratio will reach 60:30:10 for Djibouti, Berbera and Port Sudan, respectively

Fuel transportation by Ethiopian ships will reach 3.6 billion ton in 2014/15


Ethiopia has vast hydropower resources and only a small fraction has been developed. The developable hydropower potential is estimated at 30,000 MW, located primarily along the Blue Nile and its tributaries.

Very limited and very few proportion of the population in Ethiopia have access to modern fuels. The per capita modern energy consumption is about 0.02 tones of oil equivalent (TOE), which is one of the lowest in the world(ESMAP-Energy Sector Management Assistance Programme Ethiopia-Energy Assessment Report No. 179/96.)

To initiate production and utilization of potential energy sources, the Government of Ethiopia for the first time has approved a National Energy Policy, which was issued in May 1994. The policy clearly identifies the need for the promotion of private sector participation in the energy sector development. The New Investment Code Proclamation No. 37/1996 and the Amendment Code Proclamation No. 116/1998) further strengthened this initiative. And, for the exploration and exploitation of petroleum resources, which also includes gas resources, the Government has issued Petroleum Operations Proclamation No.295 of 1986, Petroleum Operations Income Tax Proclamation No.296 of 1986 and a Model Production Sharing Petroleum Agreement (1994).

c. Overview of Ethiopian policy towards to LPG, Kerosene and other related by products

Ethiopia, at the moment, is a net importer of petroleum products. White and black petroleum products are imported directly by the Ethiopian Petroleum Enterprise (EPE) through third party suppliers. Upon receipt from third party suppliers, EPE stores the products at Horizon Terminal in Djibouti and then distributes the different grades mainly Gasoline (Benzene), Gas Oil (Naphta), Kerosene, Light fuel oil, Heavy fuel oil and Jet fuel to Oil companies and these companies distribute the fuel through a fixed margin structure set by the government. In addition, EPE imports Gasoline (Benzene) from Sudan. For the supply of Gasoline in Addis Ababa, EPE has made an agreement with Nile Petroleum, a Sudanese Oil Company operating in Ethiopia, where the latter conducts blending of Gasoline with Ethanol (E5) at its depot in Sululta (Northern Part of Addis Ababa with 15 KM distance from the center)and distributes E5 to Oil Companies.


The market is regulated by the Restatement of the Distribution Agreement (DA) which gives the power of supervision to the Ministry of Trade and Industry (MoTI). The authority to set and monitor petroleum product prices and margins is granted to the MoTI through the DA, and the DA also provides for monitoring and related activities of petroleum sector regulations, such as operations, safety and environmental issues.

All of Ethiopia’s petroleum products is imported. Ethiopian Petroleum enterprise isresponsible for the procurement of petroleum products through competitive international bidding on and as – needed basis. International oil companies like Total, NOC, Oil Libya handle distribution. These companies in the market are granted an oligopoly in downstream operations by virtue of the Distribution Agreement (DA) andin effect, the companies are self-regulating in many respects. Petroleum, Ethiopia’s major source of commercial energy is crucial to the functioning and growth of the economy.

Ethiopia is also believed to hold a huge potential for energy and mining. The nation’s current efforts in the areas of hydroelectric power projects and exploration of Oil and Gas are clear testimonies of the government’s determination to unleash its natural resources. Ethiopian industry, transport and commercial sectors largely depend on imported fuel. The amount of foreign currency spent for the importation of petroleum products is very significant and it is between 19 to 28 percent of the export earnings(National Bank of Ethiopia, 1999.)

Distribution of Petroleum

To date, petroleum products distribution activities are done according to the Restatement of the Distribution Agreements signed periodically between the MoTI and the petroleum distribution companies (whole sellers) like Total, NOC, Oil Libya operating for more than 30 years in Ethiopia. The Government organ that signed the Distribution Agreement and regulates the implementation and overall petroleum distribution operation is MoTI. Distribution Agreement focuses on the process of delivery, supervision, measurement, accounting procedures, price determination, transportation etc.


The Government is the one that determines the inland wholesale and retail selling prices. According to the Agreement, the Government takes factors such as CIF (cost of insurance and freight) cost of product, transport, duties and taxes, company's marketing expenses, profit and dealer's commission into account for petroleum price determination.

3. Market Analyses

3.1 Nature and size of demand for petroleum products

Petroleum is one of the most traded items in the world. Petroleum is a necessity product and the nature of its demand is inelastic. Unlike other businesses whose demand is impacted by price and other economic variables, the consumption of petroleum products in Ethiopia continues to increase even in the face of any economic slowdowns.

Demand for petroleum products such as Fuels & lubricants in Ethiopia is massively growing at an average rate of 10% over the last five years (since 2004). As of 2009, the overall size of demand for fuels & lubricants amounts 2.5 billion liters and 25 millions liters respectively.Project ownership and structure


Proposed Location

The head office of the company will be Addis Ababa with rented building and leased land for the depo. The two filling stations will be located in the two commercial areas: Akaki Kality Area in which the biggest get with high volume of traffic from and to port Djibouti, Awassa, Harere, Awassa and Arbaminch. The second station will be around Addis Ketema, the second biggest get, which serves Gojam, Gonder and Port Sudan. Other outlets will be opened in Adama, Shahemene, Bahirdar, Wolliso, Nekemitte, Dessie, Mekele, Assosa, Debire Markose and Gonder in collaboration with private retailers.

A. Past Demand

According to MOT report due to the increasing price of petroleum, most vehicles currently are Naphta and those vehicle which are using Benze are converted in to Naphta

Inspected and Registered Vehicles by License and Plate Type

Type of License 1999/00 2000/012001/0

22002/03 2003/04 2004/05 2005/06

2006/07

2007/082008/

09

1. Government 16,081

16,611

17,278

17,070

17,424

20,013

21,581

27,365

27,210

31,200

2. Mass organization

239

256

294

261

780

1,657

2,271

2,880

3,852

4,417

3. UN 1,015

1,001

954

1,056

1,045

1,202

1,221

1,548

1,386

1,589

4. C.D 819

815

921

1,060

672

1,050

1,099

1,394

1,318

1,511

5. Aid Organization

3,794

4,280

4,219

4,052

4,393

4,384

4,828

6,122

6,292

7,216

6. OAU 134

132

157

217

192

225

250

317

330

379

7. Commercial 30,851

33,311

34,995

34,931

36,703

50,046

58,120

73,697

81,761

93,752

8. Taxi 10,156

10,632

12,010

12,506

12,395

14,523

20,062

25,439

34,282

39,310

9. Private Commercial

9,859

10,661

11,531

8,245

13,508

14,988

17,263

21,890

24,014

27,536

10. Private cars 42,258

43,858

47,905

53,540

58,696

58,221

65,930

83,600

89,555

102,69

0

Total 115,206

121,557

130,26

4

132,938

145,808

166,309

192,625

244,25

2

270,000

309,60

0


Sources: Ministry of transport

Most oil products are consumed in the transportation sector, which accounts for at least two-thirds of the country’s total petroleum product consumption. The sectoral breakdown is approximately as follows: Transport 69% , Industry 10% ,Households 21% .

B. Forecasted Demand

According to Transport ministry, the growth of vehicles is 7% and 9.4% for Minibus and Bus’s respectively. Based on the above data the forecasted number of the vehicles in the country for the coming 10 years is as follows:

Type of License

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

1. Government

32,448

33,746

35,096

36,500

37,960

39,478

41,057

42,699

44,407

46,184

48,031

2. Mass organization

4,594

4,777

4,969

5,167

5,374

5,589

5,812

6,045

6,287

6,538

6,800

3. UN 1,653

1,719

1,787

1,859

1,933

2,011

2,091

2,175

2,262

2,352

2,446

4. C.D 1,571

1,634

1,700

1,768

1,838

1,912

1,988

2,068

2,151

2,237

2,326

5. Aid Organization

7,505

7,805

8,117

8,442

8,779

9,131

9,496

9,876

10,271

10,681

11,109

6. OAU 394

410

426

443

461

480

499

519

539

561

583

7. Commercial

102,565

112,206

122,753

134,292

146,915

160,725

175,834

192,362

210,444

230,226

251,867

8. Taxi 42,062

46,015

50,341

55,073

60,250

65,913

72,109

78,887

86,303

94,415

103,290

9. Private Commercial

29,464

32,233

35,263

38,578

42,204

46,171

50,511

55,259

60,454

66,136

72,353

10. Private cars

174,573

190,983

208,935

228,575

250,061

273,567

299,282

327,415

358,192

391,862

428,697

Total 396,827

431,528

469,387

510,696

555,776

604,976

658,680

717,305

781,309

851,192

927,503


3.2 Supply & Distribution

Ethiopia’s current refined petroleum products are delivered at the port of Djibouti and Port Sudan and trucked more than 600 KM and more than 1,500KM respectively inland by many tanker trucks that use the road in each direction.

Petroleum Consumption : Transport SectorQuantity in

MT

Year

Petroleum Products Consumed in Transport Sector By Quantity

Total Amount of Petroleum Products

Consumed in

Transport Sector

Road Transport (Motor Vehicle)

Sub-Total

Aviation

MGR (Motor

Gasoline Regular)

Gasoil Jet/Kerosene

1997/98 122,995

557,640

680,635 252,302

932,937

1998/99 135,469

542,936

678,406 238,836

917,241

1999/00 142,526

548,787

691,313 224,177

915,490

2000/01 129,964

610,835

740,799 225,431

966,230

2001/02 133,111

623,197

756,308 259,786

1,016,095

2002/03 148,555

679,281

827,837 259,630

1,087,467

2003/04 130,415

688,527

818,943 294,699

1,113,642

2004/05 146,094

773,256

919,350 334,638

1,253,988

2005/06 137,193

811,689

948,882 370,401

1,319,283

2006/07 143,743

905,478

1,049,221 402,311

1,451,532

2007/08 139,093

1,073,148

1,212,241 482,173

1,694,414

2008/09 150,099

1,203,567

1,353,666 506,497

1,860,163

2009/10 155,806

1,237,922

1,393,728 529,857

1,923,584

2010/11 141,397

1,213,751

1,355,149 558,462

1,913,610


Source: Ethiopian Petroleum Enterprise (EPE)

Total Amounts of petroleum imported and consumedIn Metric Tone (MT)

Year Petroleum Products By Quantity TotalLPG

(LiquifiedPetroleum

Gas)

MGR (Motor

Gasoline Regular)

Jet/Kerosene Gasoil LFO (Light

Fuel Oil)

HFO (Heavy

Fuel Oil)

1997/984,401

122,995

252,302

557,640

107,576

- 1,044,914

1998/99 1,304

135,469

238,836 542,936

96,025

- 1,014,571

1999/00 1,283

142,526

224,177 548,787

61,566

54,954

1,033,293

2000/01 - 129,964

225,431 610,835

49,149

61,973

1,077,352

2001/02 - 133,111

259,786 623,197

40,688

80,894

1,137,677

2002/03 - 148,555

259,630 679,281

41,865

93,804

1,223,136

2003/04 - 130,415

294,699 688,527

40,770

90,078

1,244,489

2004/05 - 146,094

334,638 773,256

43,185

110,048

1,407,221

2005/06 - 137,193

370,401 811,689

41,521

117,198

1,478,002

2006/07 - 143,743

402,311 905,478

42,255

116,429

1,610,216

2007/08 - 139,093

482,173 1,073,148

49,692

138,059

1,882,164

2008/09 - 150,099

506,497 1,203,567

36,421

116,506

2,013,089

2009/10 - 155,806

529,857 1,237,922

10,714

100,967

2,035,265

2010/11 - 141,397

558,462 1,213,751

37,613

99,563

2,050,787

Source: Ethiopian Petroleum Enterprise (EPE)

From the total 2,050,787 , 1,913,610 MTR is consumed by transport sector and the remaining by industries and others.

3.3 Types of Products 1. Fuel products: Gasoline (Benzene), LPG (Liquefied Petroleum Gas),Gas Oil

(Naphta) and Kerosene ,Aviation fuels (Avgas and Jet A-1) 2. Lubricants, Bitumen and greases.


3. In addition to the provision of Fuels, Lubricants and other specialized products like Modern Car wash, Lub change, Supermarket, Cafes and Restaurant Services will be added by leasing out our premises to companies that offer these services.

Although the company planned to distribute the above product in the first few years of the project, at the expansion stage other related activities like distribution of tier, petrochemicals for paint and detergent will be added.

3.4 Target customers

Commercial and private transport

Construction companies

Power Generation

Agricultural companies

Manufacturing :Cement, Metal/Steel, Pulp and Paper, Sugar

Mining

3.5 Competitors AnalysisFuels are generally homogeneous products from the same source, transported the same way and are generally sold in a similar manner. The market for fuels is therefore very competitive since product differentiation is closely tied to the marketer's corporate reputation. Therefore our company will identified ourselves as the fuels supplier of choice through our innovative approach to marketing and competitive pricing.

Currently, there are very few Oil Companies operating in Ethiopia. The current players are TOTAL, National Oil Company (NOC), Oilibya, Yetebaberut Beherawi Petroleum S.C(YBP), Kobil Ethiopia, Nile Petroleum, Wadi Al Sundus (WAS) Petroleum Ethiopia, and TAF. As compared to neighboring countries, Ethiopia has fewer numbers of Oil Companies with less competition. A case in point is Uganda and Kenya where over 50 independent companies are engaged in the distribution of petroleum products with aggressive competition in the industry. Despite persistent and increasing growth in the demand for petroleum products, the network expansion (the number of outlets being built) and supply by existing Oil Companies is not adequate. Recent trends in the exit of multinational Oil Companies is further weakening the strength of the Oil Industry to service the growing demand of the nation for petroleum products. In view of the current trends in economic growth and government’s plan to invest millions of dollars


in infrastructure, hydropower projects, mining and others sectors, the current gaps between demand and supply in the petroleum sector is wide.Company Address No of

stationsProducts

TOTAL +251 011 465 11 25 Petroleum, LPG, lubricants

NOC Petroleum, LPG, lubricants

Oilibya 180 Petroleum, lubricants

YBP 251-11-4400965/67 Petroleum, lubricants

Kobil Ethiopia +251 11 4674500 / 5 /6

Petroleum, LPG, lubricants

Nile Petroleum Petroleum, LPG, lubricants

WAS Petroleum, lubricants

TAF Petroleum, lubricants

Dalol 251 114 163838 / 165757

Petroleum, lubricants

Ghion Gas Plc 251-011-2793360 251-011-2794771

One filing station and

220 distributers

Gas only


LPG Distribution in Metric Tone

Companies 2010 2011NOC 2742 2895YBP 0 0TOTAL 1049 730KOBIL 0 18INDUSTRY 3791 3643

NB this data does not include LPG distributed by Ghion Gas PLC

All Products Volume Trend (September. 2010 & 2011)

Libya Oil NOC YBP Total Kobil Industry

2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011MGR 5751 6076 5692 4466 1270 1192 5426 4921 585 759 18724 17414

AGO 21171 21321 31490 28547 121911020

0 29522 30353 4171 3888 98545 94309KERO 6714 6815 7502 7797 2863 2947 7028 7320 2516 2525 26623 27404FFO 726 947 829 1045 3472 3640 2781 2252 113 44 7921 7928LUBES 652 275 1203 666 131 97 1294 1247 97 61 3377 2346AVIATION 17649 15244 532 4970 0 0 12377 10703 0 0 30558 30917OTHER PRODUCTS 0 0 281 318 0 0 528 73 128 18 937 409


As you can see form the above table, the LPG distribution is pretty low compared to the demand and consumption of other fuel sources like dung, fuel wood and the like.

Why have major International Oil Companies such as SHELL, MOBIL & AGIP have left the Ethiopian Market?

There are two basic reasons why these multinational companies are leaving not only the Ethiopian market in Particular but also the African market. First reason is Safety. The stringent operational safety requirements such companies have has made their continual operation in the Africa market very difficult due to increased number of fatalities due to high degree of exposure and unsafe road conditions.

Second reason is “Shift in strategy” Most of the multi-national Oil Companies are engaged in both up-stream and down-stream business. When such companies compare exportation & production with the distribution business, the income from up-stream taker the lion’s share. Hence they have embarked on a strategy which they call “focus on upstream, profitable down-stream” As a result, they are divesting their resources from their down-stream business in Africa and expanding their investment into more profitable and emerging markets such as China, India, Indonesia etc.

3.6 Marketing

The company will offer retail customers the most convenient ways to fuel through our Service Stations. In addition to cash payments for fuel and other non-fuel purchases, we have innovated various fuel management systems to make fueling at our outlets an enjoyable experience. For the example, we will have special Fuel card and coupon in addition to VISA card. The fuel cards are available to our customers on Pre-paid and Post-paid terms and most of them are enabled for both fuel and non-fuel purchases at our Service Stations. In addition to the comfort associated with the use of our fuel cards as a mode of payment, we will offer irresistible discounts for Card holders. Our excellent customer service, irresistible product offers, competitive pricing and eye catching branding will make us the marketer of choice in all our markets.


4. Regulations, Licenses and incentives (Legal analysis)

4.1 Regulatory Requirements

The legal status of business tends to play an important role in any setup; the proposed petroleum, LPG and lubricant Marketing and Distribution business. The company is assumed to operate on as a private limited company as it is mandatory for an oil or gas company to register as a private limited company.

4.2 License

Any company willing to distribute and market Oil and Gas needs to obtain a license from OGRA(Oil & Gas Regulatory Authority). Additionally, license from Explosivedepartment is also required for the proposed LPG marketing and distribution business. OGRA (Oil & Gas Regulatory Authority) issues provisional licenses to technically and financially sound applicants/ parties for construction of works commensurate with their work program, for a period of one year. OGRA inducts reputable third party inspectors to check/monitor compliance with the terms and conditions of licenses. The licenses can be cancelled in case of non-compliance with licensing terms and conditions.

Pre-Qualification for License

Following requirements are required to be fulfilled for obtaining a license:

Pay Order / Bank Draft /- in favor of Oil & Gas Regulatory Authority, as License fee

Minimum capital requirements:

o 100,000USD for foreign investors

o 600, 000USD if in joint venture with local investors

Proof of registration of the Company (Company incorporation certificate). Memorandum and Articles of Association. Location of the tentative / proposed site. Financial Competence Certificate issued by a Bank (original and stamped). Minimum Work Program: Number of storage tanks and capacity of storage tanks. Bottling facility capacity. Quantity of LPG to be distributed per day or per month. Identification of areas where distribution& / marketing of LPG is planned.

After companies meet the pre-qualification criteria’s the following criteria’s should be fulfilled:


Professional competency papers from ministry of trade & investment. Licensing & regulation kit from the investment office shall be filled Through principal registration the minimum legal competency requirement

to be fulfilled are: o 5000m3 tankero Minimum 6 stations of which two must be ready for functioning

and the rest will function within 5 years.o Local investors shall be willing to work in joint venture with

Foreign Investors if need arises. However to distribute LPG, establishment of stations is not necessary. With regard to lubricants, companies cannot distribute lubricants alone; it should be along with petroleum in which Pre-Qualification & Qualification requirements should be fulfilled.

5. Environmental Analysis

a. Location of the project

The company will have its head office in Addis Ababa. The company will also construct its mini depot in the outskirt of Addis Ababa during its first five years of operation. The company will have carefully identified strategic cities, towns and locations at which its service stations are going to be build. As a strategy, we will focus to optimally invest in trade areas with significant traffic flow and locations, which are convenient and accessible for motorists. In addition to the traditional channel of providing service solely through service stations, the company will also introduce its unique channel to provide service by getting much closer to end users.

b. Environmental analysis

The assessment of possible impacts on the environment prior to the approval of a project provides an effective means of harmonizing and integrating environmental, economic, cultural and social considerations into a decision making process in a manner that promotes sustainable development. The Environmental Assessment Regulations, LI 299/2002, was proclaimed in 2002 to give complete legal status to the Ethiopian Environmental Impact Assessment procedures. The Regulations require that all


development activities likely to impact adversely on the environment must be subject to Environmental Assessment. The objective of the LI is to ensure that such development activities are carried out in an environmentally sound and sustainable manner.Ecologically sound development of the region is possible when energy needs are integrated with environmental concerns at local and global levels, for which an integrated planning framework would be necessary.

The implementations of the project will respect environmental rights and objectives enshrined in the Constitution by predicting and managing the likely adverse environmental impacts, and will maximize the socio-economic benefits.

.

6. Financial Analysis

6.1 Initial Project Costs (‘000) in Birr

Type No Specification Unit Cost

Total cost

Pick Up 2 Toyota Hailux

1000 2,000

Fuel cargo 1 Turbo 2500 2,500 Automobile 2 Toyota

Hailux600 1,200

Cobra Vehicle 2 Toyota V6 1500 3,000 Depo – Petroleum 1 40,000 Depo - LPG 1 10,000Outlet 2 with 6 gate 5000 10,000 Outlet Machine 12 600 7,200 Office Furniture's 400 computers 250 working Capital 4,000 Others(contingency) 4,050

Total 84,600


6.2 Expansion Project Costs (‘000) in Birr

Type No Specification Unit Cost

Total cost

Pick Up 10 Toyota Hailux

1,000 10,000

Fuel cargo 3 Turbo 2,500 7,500 Automobile 6 Toyota

Hailux 600 3,600

Toyota Land closure 8 Toyota V6 1,500 12,000 Depo 1 50,000 Outlet 50 with 6 gate 1,000 5,000 Outlet Machine 50 300 15,000 Office Furniture's 1,400 Computers 1,250 Working Capital 7,000 Others(contingency) 4,050

Total 161,800

6.3 Price of Fuel

A government committee also revises the retail prices of petroleum products every three months. Lubricants and greases, however, are being directly imported by the Oil Companies with the intervention of government in setting prices on a quarterly basis. The margin set by the Ethiopian government on lubricants and greases is attractive as compared to the slim margin on fuel. In the year 2008, the overall consumption of fuels in Ethiopia was over 2 billion liters. By the same year, nationwide Lubricants and greases consumption was over 25 million liters. The consumption of both fuels and lubricants is consistently increasing by 10% on a year on year basis and the trend in growth is expected to continue in a similar pattern over the next years. Increased economic activity coupled with increased government spending in the areas of infrastructure, power, mining and other sectors continues to further expand the demand for petroleum products. For long, few multinational oil companies with little competition to satisfy the increasing demand had controlled the petroleum industry.


The current distributors margin and retailers margin is as follows:

Type of Fuel Distributors Profit Margin Cents per

liter

Retailers Profit Margin Cents per

literMGR 7.75 4.00 Kerosene 5.35 4.00Jet Fuel 14.00 0.00Light Fuel oil 5.00 0.00Heavy Fuel Oil 5.00 0.00

Sources: Ethiopian Petroleum Enterprise (EPE)

As you we can see from the above table, Jet fuel is the cost profitable business. The price and the profit margin for lubricants and other oils are put on range with high profit margin.

Risk on investment for Petroleum investment

The nature of investment on petroleum business is such that once the network of service stations are build, the amount of capital investment on fixed assets will be minimal whilst a significant proportion of investors’ capital will be circulating on stock of petroleum products. Stock and inventory being the next liquid form of asset next to cash, being engaged in the sectors provides investors with flexibility to diversify business. In addition, Oil Companies are also enjoying a 15 days credit on supply of fuels from Ethiopia Petroleum Enterprise (EPE), an incentive the Ethiopian government has provided to facilitate a smooth distribution of the products across the country. From control point of view, the petroleum business is a safe business for investors as costing and pricing mechanisms are highly transparent and automated.


Income Statement (‘000) birr2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Network Plan

Number of stations Owned by company 2 3 5Number of stations Owned by Dealers/retailers 11 15 19 23 29 37 46 57 72 89 112

Sales -MGR

Estimated industry Volume

2,559,287

2,815,216

3,096,737

3,406,411

3,747,052

4,121,758

4,533,933

4,987,327

5,486,059

6,034,665

6,638,132

Market Share 255,929

295,598

341,415

394,335

455,457

551,102

666,834

806,869

976,312

1,181,337

1,429,418

Profit Margin 19,834

23,482

27,799

32,911

38,962

48,323

59,933

74,331

92,189

114,338

141,808

Sales -Jet


692,823

775,331

867,665

970,995

1,086,631

1,216,038

1,360,856

1,522,920

1,704,285

1,907,248

2,134,382

Market Share 69,282

77,533

86,767

97,100

108,663

121,604

136,086

152,292

170,428

190,725

213,438

Profit Margin 970

1,113

1,245

1,393

1,559

1,745

1,953

2,185

2,446

2,737

3,063

Sales -LFO


46,864

52,671

59,199

66,534

74,779

84,046

94,461

106,167

119,323

134,109

150,728

Market Share 4,686

5,267

5,920

6,653

7,478

8,405

9,446

10,617

11,932

13,411

15,073

Profit Margin 234

270

303

341

383

431

484

544

612

687

772

Sales -Jet


123,425

138,020

154,341

172,592

193,000

215,823

241,344

269,883

301,796

337,484

377,391


Market Share 12,342

13,802

15,434

17,259

19,300

21,582

24,134

26,988

30,180

33,748

37,739

Profit Margin 617

707

791

885

989

1,106

1,237

1,383

1,547

1,730

1,934

Sales -LFO


5,635

6,198

6,818

7,500

8,250

9,075

9,982

10,981

12,079

13,287

14,615

Market Share 563

682

750

825

907

998

1,098

1,208

1,329

1,462

1,608

Profit Margin 282

349

394

444

501

565

637

718

809

913

1,029

Sales- LPG

Estimated industry Volume 5,635 6,198 6,818 7,500 8,250 9,075 9,982 10,981 12,079 13,287 14,615Market Share 563 682 750 825 907 998 1,098 1,208 1,329 1,462 1,608

Profit Margin 1,127

1,398

13,837

15,221

16,743

18,418

20,259

22,285

24,514

26,965

29,662

Sales-Lubricants


2,346

2,698

3,103

3,568

4,103

4,719

5,426

6,240

7,176

8,253

9,491

Market Share 235

283

326

375

431

495

570

655

754

867

997

Profit Margin 4,223

5,227

6,010

6,912

7,949

9,141

10,512

12,089

13,903

15,988

18,386

Profit fromOthers

(car wash, Restaurants)

110

121

133

146

161

177

195

214

236

259

285

Gross Profit 26,270

31,268

36,676

43,032

50,505

61,488

74,950

91,465

111,741

136,652

167,278

Expenses

Storage and handling cost

2,359

2,831

3,397

4,076

4,892

5,870

7,044

8,453

10,143

12,172

14,606

Station


Maintenance cost

390 540 713 703 879 1,099 1,373 1,717 2,146 2,682 3,353

Salary and admin cost 1200 2100 3560 4272 5126 6152 7382 8858 10630 12756 15307

Others 592

821

1,150

1,358

1,635

1,968

2,370

2,854

3,438

4,142

4,990

Depreciation Expense(SL)

650

900

1,188

1,172

1,465

1,831

2,289

2,861

3,576

4,470

5,588

Total Expense 4,541

6,291

8,820

10,409

12,531

15,088

18,169

21,882

26,357

31,752

38,256

Net Income After tax 21,729

24,977

27,856

32,623

37,973

46,400

56,781

69,584

85,384

104,900

129,021

Income Tax (35%) 7,605

8,742

9,750

11,418

13,291

16,240

19,873

24,354

29,884

36,715

45,157

Net Income After tax

14,774

17,135

19,294

22,377

26,147

31,991

39,197

48,090

59,076

72,655

89,452


7. Conclusion

To summaries, future trends in Petroleum, lubricant and LPG market will influence the

future demand of and supply. Numbers of vehicles are increasing at tremendous rate,

due to the government policy towards industry led agriculture and a lot of heavy

industries like textile and metal opened industries in the country. According to Central

statics Survey; between 1998 and 2002 the number of manufacturing industries

increased form 1,43 to 2172. In addition, the awareness of the community to use LPG

increase from day to day. The other competitive advantage of the sector is since there

are very few companies which distribute Petroleum (9), Lubricants and LPG (4),

Based on the project evaluation criteria’s, the project is feasible enough (please see the

following table)

Indicator Calculated Criteria Decision1 IRR 29% Should be greater

than the market interest rate ; 28%

Accepted

2 NPV 121,847,000 birr Should be greater than zero

Accepted

3 Pay Back period

4years & 7months

Should be shorter Accepted


Reference

1. Energy Law in Ethiopia, Girma Hailu

2. GTZ Ethiopia Bioenergy Market Assessment Report

3. World Bank energy consumption report

4. Petroleum Operations Proclamation No. 295_ 1986 p 62-70 ,Addis Ababa, Ethiopia

5. Report on Large and Medium Scale Manufacturing and Electricity Industries Survey,

Central Statistic Authority

6. Investment Guide, Addis Ababa, Ethiopia

7. Oil and Gas in Africa, African development Bank

8. Commercial code of Ethiopia, 1960, Addis Ababa, Ethiopia

9. Investment Guide of Ethiopia, Addis Ababa, Ethiopia

10. Company registration in Ethiopia, Addis Ababa chamber of commerce

11. The Management of commercial Road in Ethiopia, Addis Ababa chamber of commerce

12. Oil Price and Profit margin , Ministry of trade and transport and Ethiopian petroleum

enterprise

13. Quarterly Reports of Ethiopian petroleum enterprise

14. The Prospectus of Dalole Oil company

15. The Prospectus of National Oil company

16. The Prospectus of Oil Libiya company

17. The Prospectus of Yetebaberute Oil Company

18. The Prospectus of Total Oil company

feasibilty study for lpg

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