At the height of the recession Tseke Nkadimeng was tasked with switching off the lights at Afric Oil, South Africa’s first empowered oil company. He had other plans. This year, it’s planning to mark its 20th anniversary.
“If Afric Oil had to die, then the dream of having black indigenous distributors would go away…We didn’t really have any black independent distributor, which could sit at the table with the major companies and government, and represent the interests of black distributors in South Africa,” Nkadimeng, now Chief Executive of Afric Oil, recalled. The company’s good reputation, dedicated staff and Engen’s willingness to provide support instilled confidence “that if we understand what the issues are, we are going to be able to come out”, he said.
Afric Oil’s journey, supported by parent company Pembani, appears to be marked by resilience and resolve. 2009 wasn’t the first time Pembani – whose founders include Phuthuma Nhleko, Wiseman Nkhuhlu, Khaya Ngqula and the late Max Maisela – considered liquidating the oil company.
To get Afric Oil off the ground, Pembani’s founders used their homes as collateral and borrowed R2 million from FirstCorp Merchant Bank. Soon, the company signed a deal to convert and rebrand 50 Caltex outlets into Afric Oil service stations. As it turned out, most of the service stations weren’t profitable and this, in part, pushed Afric Oil to the verge of liquidation – for the first time. Eventually a settlement, which saw the outlets revert to Caltex, was reached.
With funds in hand, the company had another go at the retail space in 1998. “We did a leveraged buyout of Zenex because we realised that we didn’t have scale, we had dog service stations and such, but we were already in the industry,” Nhleko said in a commemorative book. The R400 million transaction saw the company takeover 200 service stations and grow its share of the South African market from 0.1% to 6%. But Pembani had even bigger plans for Afric Oil. It traded its stake in Zenex for a 20% interest Engen, which in turn acquired 45% of Afric Oil, allowing the company operate in the wholesale sector. Pembani reclaimed 100% ownership of Afric Oil in 2010.
Today, Africa Oil operates only in the wholesale sector, supplying diesel, petrol, paraffin and lubricants to range of private and public companies. Through its network of 50 direct employees in South Africa, it distributes 30 million litres of petroleum products per month and has a monthly turnover in the region of R 300 million. It holds 1% of South Africa’s total petroleum market share and 2.5% of the diesel market, Nkadimeng said.
He counts winning a major Transnet fuel supply contract among the company’s more recent highlights. In 2013, Afric Oil and eight other black owned companies in the energy sector were awarded a R15.5 billion contract to supply the parastatal with 222 million litres of fuel per year, over a five year period. Another vote of confidence came in the form of the Public Investment Corporation acquiring a 29% stake in the company in 2014. “The largest financial services company in Africa has done a due diligence and they believe in our story…We’re a company with the right processes, governance, strategy and we can survive in this industry,” he said.
According to him, the company’s first 20 years can be described as a “building phase” in a monopolised, highly competitive industry with high barriers to entry. Having successfully established itself, the company is now looking to grow its market share, expand into other products such as gas and into other African markets. It has already set up operations in Namibia and Zimbabwe and is looking into opportunities in Zambia and the Democratic Republic of Congo (DRC). Given the company’s success in the highly regulated South African environment, it can advise on regulations, building trustworthy partnerships in fragmented industries in which the oil majors no longer operate and even take the place of those majors to “build a proper and world class oil industry in any African country”, he said. As its South African customers pursue growth north of the borders, it also plans to be able to supply them with products.
To mark Afric Oil’s 20 year anniversary Nkadimeng, will share his outlook on the future of the oil and gas industry in South Africa and the rest of the continent at the Johannesburg Stock Exchange. Maurice Radebe, chair of the South African Petroleum Industry Association, and Phinda Madi, author of Black Economic Empowerment: 20 years later – The baby and the bathwater, will join him to discuss how the regulatory framework and infrastructure deficit impacts growth in the local oil sector and the development of black-owned companies.
“If you look at the figures, black economic empowerment (BEE) in the industry still has a long way to go,” he said noting that BEE firms hold less than 5% of the total fuel market share in South Africa. Instead of counting on share schemes and debating issues like once empowered always empowered, “it’s about time that we start to manage and run our own businesses, and use them for our own purposes”, he said.
Afric Oil is South Africa’s first black economic empowered (BEE) oil company. Why was it so empowered to have a BEE oil player in the first place?
Since 1994, the government has made considerable efforts to transform the economy, which was looked at in a number of ways; most particularly from an employment and management as well as an ownership point of view. Prior to this, black people could not own any companies in South Africa, nor could they occupy senior positions in white-owned companies.
The first big step was the Employment Equity Act, which was the first legislation requiring senior management to be black. When then President Mandela visited Malaysia, the notion of Black Economic Empowerment was introduced to ensure a real transformation of the economy. This was in line with the Malaysian context, where a similar model was constructed to shift power from the Chinese to the Malays, even though this was mainly applied to government-owned entities. In South Africa, the new view was the 25% of our companies should belong to the historically disadvantaged people.
Since then, the oil and gas industry has also development a transformation charter focused on matters such as ownership, management, socio-economic investment, procurement, and so forth. In the same period, around 1998, Petronas entered South Africa and purchased shares into a listed company, renaming it Engen. The BEE partners they brought on board were a company called Worldwide African Investment Holdings, now known as Pembani Group (Pty) Limited. As part of the whole restructuring, the need emerged to have a BEE distribution company too. As part of the procurement space, the views were that companies distributing fuels to big players in the mining sector, government sector, etc. would be transformed companies. This is why Engen took a share of 45% in Afric Oil at the time, while the remaining capital stayed in the hands of Worldwide African Investment Holdings.
More recently, Engen pulled out as a shareholder in Afric Oil. In a recent public statement, your CFO also commented that Afric Oil was now looking into new suppliers such as Total and Sasol. Did this also change the risk profile of the company?
The relationship with Engen –the 45% ownership- was always considered as a temporary measure. Afric Oil was a small distributor and Engen’s intention was to build up the company and exit again at a later stage. As new measures such as the Competition Act evolved, it became increasingly difficult to distinguish Afric Oil as an independent operator from an Engen perspective, despite the fact that we have always operated independently from our point of view.
While the shareholding changed hands, the supply agreements have remained the same. As we do not own refineries, we need to diversify these supply arrangements and ensure that we have the right ‘accommodation agreements’ in place. All the oil companies co-share the different depots we find across the country and such agreements are therefore strategically important. As long as we would be an Engen subsidiary, we would not be able to independently approach the different players. Now, we are able to do more things on our own.
Is a perception change still needed when dealing with other suppliers, such as Total for example, on the independence of Afric Oil?
The relationship between Afric Oil and Engen has lasted 10 years, so inevitably it will take some time to change perceptions in the marketplace. Certainly, we have seen that by having been allocated a part of the New Multiproduct Pipeline (NMPP) from Durban to Johannesburg, people have realized that we are truly independent. We have gone through a stringent audit mechanism to ensure we were not making any fronting violations. Slowly, people are realizing that we are truly independent.
Being the first black-owned company to be allocated a part of the NMPP is surely something to be proud of. What changes did this allocation bring to your supply chain?
The pipeline is the most efficient way to distribute fuel from Durban. The traditional industry players such as Engen, BP, Sasol, Shell, Caltex, etc. have all been operating among themselves and saving costs through the pipeline. The BEE companies and secondary distributors, however, are on the outskirts of areas precisely because they could not operate in a number of depots. Despite having capital, depot, etc. a Cape Town-based distributor will always remain constrained to Cape Town.
One of the advantages for Afric Oil to be leasing part of this pipeline from Transnet is that we can focus on our niche distribution business without being confined to Durban. Instead, we are in Gauteng, Mpumalanga, North West Province, etc. and are a serious competitor to the oil companies in those areas. As far as pricing is concerned, we are also very competitive as Transnet is managing the infrastructure on our behalf, as well as on behalf of the other players. Without this leasing opportunity, we would have to build and manage our own depots.
Afric Oil has also shown an interest in imports to compensate for some of the fuel shortages. Can you tell us more about this strategy?
The importation of refined products in South Africa is constrained by a lack of infrastructure in Durban. A 2006-7 TNPA study showed that the different tanks in Durban –owned by the big players- are not properly coordinated leading to many inefficiencies.
We are therefore pushing to ensure that the storage and receiving of product in Durban sees improved levels of coordination through independent storage companies such as Vopak and Bidvest. In the meantime, however, we are already meeting some of the refiners in the Middle East to get our own prices and finance small loads, which arrive through co-sharing agreements.
The long-term solution to creating more efficiencies will require a joint effort towards storage. Now that the pipeline has been built, the next stage is to provide enough storage in Durban to receive products.
You show clear intentions to cooperate, but does the same account for the rest of the industry? What would be some of their arguments not to cooperate?
The industry has traditionally been a net exporter. Now, as a net importer, everyone is trying to scramble for the limited available product to satisfy themselves before their next door neighbor.
A second issue is that discussions between the different oil players are limited by competition laws, resulting in indecision in the industry. However, this is one of the areas of improvement that the South African Petroleum Industry Association (SAPIA) has been working on. There are no formal structures to discuss these issues, apart from a very brief informal daily meeting per telephone. We require more formal structures led by either government or regulators such as SAPIA to discuss product imports, long-term capex plans, and so forth. At the moment, many industry actors are still in a ‘wait and see’ mode.
Afric Oil has also been involved in investing in storage tanks and fuel management systems on customer sites. How have these efforts been received by your customer base?
Our customers are very pleased with these interventions. Many South African consumers have traditionally not been very cost-conscious when it comes to energy. Now, with higher fuel and electricity prices, people are increasingly looking at fuel efficiencies, energy savings, and so forth. As a result, our interventions have also been increasingly welcomed.
However, we were forced to taking such measures. When taking product from Durban, you cannot simply bring only 10,000 loads. Instead, volumes go per 42,000 loads which will therefore require onsite tanks of 42,000 liters at the customers, in order to bring a full load.
Are the other players making the same types of investments?
They are, although the big players largely focus on their garages and distribution to the end-users. They usually focus on one area and ask other players such as Afric Oil to deliver the small loads to other areas.
If Eskom asks you to receive x liters by tomorrow, what exactly is the range of flexibility you can offer?
We tend to say 48 hours. The areas that are mainly affected by fuel shortages are on the outskirts, which is unfortunately also where most of the growth of the country is situated through e.g. mining activities. Because of the lacking fuel infrastructure and long travel times in these areas, we foresee 48 hours.
You are now also looking at expanding in the Democratic Republic of Congo (DRC). What more can you tell us about the emerging footprint of Afric Oil across the African continent?
In the short term, we will focus on Botswana, the reason being that this is an easier market for us considering the close proximity to our Transnet-leased depot in Krugersdorp. From Botswana’s perspective, we also believe that the government will welcome an independent player.
Going forward, the DRC will be a focus area as that is where we find the copper belt region. We believe there is growth there in terms of mining and –related industries. We do not yet want to go into garages and still want to be a bulk distributor to the end-users.
DRC is an area that represents quite a different ballgame. Apart from a different language, we can imagine it is still a market with its own challenges. Which are the key challenges that you have identified?
Africa is still far off in terms of infrastructure, border connectivity & clearances, and so forth. Taking the Zambia-DRC border for example, it can sometimes take up to 2 days to get the product cleared. There is also no clarity nor uniformity on duties and required paperwork along the South Africa-DRC route.
Does this not mean that it is too early to move into such markets?
Botswana is an easier market, while markets such as the DRC still represent a decent margin.
On a final note, what role do you ideally foresee for Afric Oil within the energy landscape in 5 years from now?
We want to be a model of independent distributors in South Africa. The market is still very big, with around 15 billion liters annually. With around 400 million liters, we are still a small player which is why we first also want to increase our market share in South Africa. Additionally, we want to keep encouraging independence to ensure that there is a truly independent South African company. Further down the line, we also foresee to acquire some of the infrastructure inland as well as in the ports, to ensure that we own some of the depot infrastructure.
Would you have any final message to send out to the readers?
South Africa is changing and evolving. We are focusing inwardly in terms of building our infrastructure. Our view is that through this infrastructure, South Africa will be able to market and distribute product within the SADEC region and sub-Saharan Africa. As an ambitious young company, we model ourselves based on this strategy. Our intention is to first do things right in our own country which we know best, and then move together with the government to integrate the entire region as one area and one big market for fuel.