Forte Oil Prepares For Strategic Battle

0

On May 2, 2018, Forte Oil announced its intention to sell its upstream services and power businesses in Nigeria, as well as its operations in Ghana, which in 2017 accounted for 3.7% of the company’s sales. The decision, as per the press release, is in order to focus on its core fuel distribution operation at home and to invest in storage infrastructure. In explaining the decision to restructure its business and focus on the domestic downstream value chain, the company said, “The changing landscape also suggests backward integration would be essential to remain competitive within the sector, particularly in the face of impending deregulation.”

Forte Oil 2017 results. Source: Nigerian Stock Exchange

Forte oil which operates through the following segments: Fuels, Upstream Services, Lubricants and Greases, and Power Generation, has had a tough 24 months. In 2016 the company suffered from the impact of naira depreciation on dollar loans linked to its power plant; scarcity of products; and an elevated tax bill. While revenues dropped from ₦148 billion in 2016 to ₦129 billion in 2017, profit after tax rose massively from ₦2.89 billion in 2016 to ₦12.2 billion in 2017 on the back of reduced administrative and finance costs.

The announcement to refocus its efforts is welcome but appears to be a belated response to impending changes in the strategic forces shaping the downstream petroleum sector. Top of that list is the Dangote refinery project, which is expected to start operations before the end of 2019. With a design capacity of 500,000 bbl/day, the Dangote refinery has the capacity to meet the current domestic demand for petrol in Nigeria.

The downstream petroleum market in Nigeria is expected to change in the same way that other domestic commodity markets changed once domestic production capacity increased beyond domestic demand levels. Domestic production capacity growth in several commodity value chains has been driven by a myriad of de facto import substitution policies of several administrations of the Nigerian government. Once domestic production capacity is enough to satisfy domestic demand for any of the commodities of interest, trade barriers are immediately erected in the form of import bans or sharply increased import tariffs in order to protect domestic producers and reduce imports.

In the absence of anti-trust regulation and enforcement, domestic producers are able to substantially raise prices of commodities and earn extraordinary profits from the sale of such commodities given that they no longer have to compete with imports. In the end, consumers are penalized for the domestic production “success”. This scenario of higher prices once domestic capacity exceeds demand has happened with several commodity groups including cement, polypropylene and fruit juice, and is currently underway with sugar, rice and tomato paste.

Interestingly, the impending changes in the downstream petroleum market are likely to not only result in higher retail prices but also result in a re-ordering of the distribution of margins between all participants in the value chain. Prior to the announcement by Forte Oil, the post-2019 industry will have been characterized by the Dangote refinery acting as a de facto monopoly (given the inconsistency of NNPCs refineries) selling petroleum products to a large variety of wholesalers including members of MOMAN, DAPPMA & IPMAN. Given Dangote’s monopoly status, and with imports likely to be banned following the start of the refinery, the wholesalers in the value chain would have had their margins considerably squeezed by the Dangote refinery monopoly on one end, and the competition for customers between themselves on the other end.

However, Forte Oil appears to have belatedly realized the resulting competitive scenario and seems determined to take action before it crystallizes. It is unlikely that Forte Oil will commission any refining facilities before or shortly after Dangote’s, but from their point of view, this is a good first step to ensuring that they are positioned to capture additional returns from the value chain in the medium term.

Share this!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Show Buttons
Hide Buttons