PREPARED BY JANUNAY 2021

UNDERSTANDING FUEL PROCUREMENT IN ZAMBIA PART 2

IN COLLABORATION WITH

Monitoring and Evaluation & Communications Departments

©2021 Policy Monitoring and Research Centre (PMRC) www.erb.org.zm
[email protected] | www.pmrczambia.com

THE PROCESS Extract:

Zambia’s total petroleum requirements are met through imports as the country Zambia imports a mixed petroleum feedstock consisting of Crude oil, Naphtha PETROLEUM IN THE NATIONAL ENERGY POLICY 2019
has not recorded proven reserves of crude oil. The petroleum industry in Zambia and Diesel from the Middle East. This petroleum feedstock is processed at
INDENI Petroleum Refinery and sold to OMCs as finished petroleum products.
is made up of TAZAMA Pipelines Ltd, which is owned, by the Governments On behalf of the OMCs, transporters distribute the petroleum products mainly Petroleum is wholly imported and subject to ever increasing international
of Zambia and Tanzania, INDENI Refinery, Ndola Fuel Terminal, Bulk fuel by road to the service stations and commercial customers. prices and uncertain supply. The high cost of petroleum imports affects
the costs of production and development programmes.
The basic business activities involved in the petroleum sector are:
storage depots and the Oil Marketing Companies (OMCs). The major activities
• Procurement and financing of INDENI Refinery; and Objectives
that take place in the petroleum sector are; procurement, transportation, petroleum feedstock; • Storage and distribution: The OMCs
Transportation of petroleum uplift the refined products from Objective 7: To ensure adequate, reliable and affordable supply of
refining, distribution and supply petroleum products to various customers at a •
feedstock from Dar-es-Salaam by the Ndola Fuel Terminal and bulk petroleum products and natural gas in order to increase security of
reasonable cost. •
pipeline to INDENI Refinery in Ndola;
Refining of petroleum feedstock by
fuel storage depots for distribution
and sale to service stations and
supply of petroleum products.
commercial customers.
Policy Measures
7.1 Enhance mechanisms for the development and effective
THE FUEL SUPPLY CHAIN IN ZAMBIA management of the petroleum sub-sector;
PRICING STATUS ANALYSIS
3 2 1 7.2 Ensuring full capacity utilization of existing petroleum
In determining fuel (Petroleum) prices, the Energy Regulation infrastructure;
Board (ERB) uses the Cost-plus Pricing Model, (CPM), which
Fuel remains one of Zambia’s largest import products. 7.3 Promote investments in the petroleum infrastructure;
operates on the principle that the final price of petroleum
products should cover all the costs incurred in the supply chain. 7.4 Ensure the effective and efficient pricing of petroleum products;
TAZAMA and INDENI Refinery are 100% dependent on the flow of petroleum
Using the CPM model the ERB determines the wholesale prices
feedstock that should ensure reasonable capacity utilisation in order to 7.5 Strengthen mechanisms aimed at ensuring uniform pricing of
and pump prices of petroleum products. OMCs rarely import
operate efficiently. Any inconsistency in the supply of petroleum feedstock petroleum products across the Country; and
finished products due to the high import duty of 25% on petrol
would result in operating these facilities below minimum capacity levels and
and diesel.
would demand an increase in the level of imports for fast selling products. 7.6 Petroleum Sub-Sector Infrastructure development to improve
TAZAMA Tank Farm in Feed Stock Cargo Ship at Dar-es-Salaam Procurement of security of supply;
Dar-es-Salaam Petroleum Feedstock INTERNATIONAL OIL PRICES AND ZAMBIA
According to the Ministry of Finance, in order to deal with challenges in
the petroleum sector, the Government is reviewing the petroleum supply
THE PLAYERS chain and the financing options. Further, alternative sources of fuel CHALLENGES
supply are being pursued to reduce costs. Discussions at bilateral level
A. TANZANIA – ZAMBIA MAFUTA (TAZAMA) PIPELINES D. BULK FUEL STORAGE DEPOTS with oil producing countries for the supply of crude and finished products
TAZAMA Pipelines is jointly owned by the Government of Government has commissioned bulk have commenced to streamline the procurement process by eliminating INFRASTRUCTURE: The state of the major infrastructure in the petroleum
the Republic of Zambia (67%) and the Government of the fuel storage depots in Northern, middlemen, if any. supply chain; namely the refinery and the pipeline need to be addressed.
Republic of Tanzanian (33%). The Pipeline runs from Dar Lusaka, Western, Northern-Western These assets are all over thirty (30) years old and require some investment
es salaam (Tanzania) to Ndola (Zambia) into the INDENI and Luapula provinces. Another depot According to the Ministry of Mines, Energy and Water Development, INDENI to make them more efficient. At present, the refinery’s production can
4 Refinery was built with an installed refinery capacity of 1.1 million litres only meet about 50% of national demand.
Refinery over a distance of 1710 KM. that is currently under construction
is located in Chipata district. The of petroleum per day. Currently, INDENI is only able to process between
TAZAMA has continued to have various problems mainly depot in Eastern province was at 8% Determinants of fuel prices: Important to note that the domestic 300,000 litres and 700,000 litres of petroleum per day. This is an indication
due to the under utilisation of the pipeline facility as well by close of December, 2019 (ERB, prices of petroleum products are mainly affected by a rise or fall in that the refinery has challenges in operating at full capacity.
RECOMMENDATIONS
as an aged infrastructure which requires upgrading. 2019). The objective of the depots international oil prices and the exchange rate of the United States
is to decentralize the distribution dollar to the Zambian kwacha. Also worth noting is that increases
of petroleum products and provide in the local fuel prices have a tendency to trigger a general rise in 1. The Government is urged to revisit and reform the controls
TAZAMA Pipeline B. INDENI REFINERY
relief to the Ndola Fuel Terminal. the cost of goods and services i.e. inflation. and taxes that govern the petroleum procurement system in
INDENI is Zambia’s sole refinery and is located in Ndola. It is
owned by Government and refines the petroleum feedstock
CONSUMPTION BY ECONOMIC SECTOR
order to allow greater competition in the market, which may
received through the TAZAMA pipeline. E. OIL MARKETING COMPANIES
Oil Marketing Companies (OMCs) The retail sector accounted for the highest proportion of diesel consumption at 39.5 percent in
2019 followed by the mining sector at 32.3 percent. The proportions for both sectors increased
ultimately eliminate any expensive procurement procedures.
As in the case with TAZAMA, once there is a consistent flow distribute and market petroleum during 2019, compared to 2018. Meanwhile, the non-mining sector recorded a decline in
of petroleum feedstock, INDENI Refinery should be able products, locally. All Oil Marketing consumption of 3.7 percentage points from 32 percent in 2018 to 28.3 percent in 2019.
to run at almost full capacity and perform better. When Companies in Zambia are required 2. The long-term solution for the petroleum sector in Zambia
Diesel consumption by economic sector in 2019 and 2018
INDENI is fully operational (in its current state) it offloads to be registered with the Energy
is to liberalise it. OMCs or the private sector need to be
To Ndola about 600,000 litres of petrol daily on the Zambian market. Regulation Board (ERB). The products Imports of 37.7% 39.5% 30.4% 32.3% 32.0% 28.3%
(Zambia) Zambia’s daily consumption of petrol is approximately 1.3 uplifted by OMCs are mainly, Petrol, Finished 40% responsible for the procurement of the country’s petroleum
million litres of petrol, while diesel stands at approximately Kerosene, Diesel and Jet fuel. Other Petroleum 30%
2.9 million litres per day. products such as Heavy Fuel Oils, needs. This may reduce the financial burden on the Treasury
Products from the 20%
LPG and Bitumen are sold directly to Region 10% and possibly free up resources to other sectors.
C. NDOLA FUEL TERMINAL large users and uplifted from INDENI 0%
The Ndola Fuel Terminal was constructed for Refinery.
5 the sole purpose of storage and distribution of 8 Year Retail Mining Non-mining 3. Government is urged to stiffen measures to ensure that there
petroleum products. The fuel terminal is the selling 2018 37.7% 30.4% 32.0%
is uninterrupted flow of petroleum products into the country
point of refined petroleum products from INDENI 2019 39.5% 32.3% 28.3%
Refinery. The products are sold to privately owned to guarantee supply and ensure stable and predictable prices.
Oil Marketing Companies (OMCs) who distribute
and market petroleum products, locally. 6 7
Similar to the trends observed in the previous year, petrol consumption was predominantly retail 4. Taxation: The introduction of Vat Added Tax (VAT) Zero-Rating
accounting for 97.4 percent in 2019, followed by the non-mining at 2.4 percent and mining sector
at 0.2 percent. Figure below shows petrol consumption by economic sector in 2019 and 2018. by the Government of Zambia was a move in the positive
Petrol consumption by economic sector in 2019 and 2018 direction. The idea behind the amendment was to lower the
88.2% 97.3% 0.3% 0.2% 11.5% 2.4% price of petrol and diesel for ease accessibility by the people.
Train 100%
In this case, consumers are able to purchase fuel at a cheaper
75%

50%
rate that will eventually increase the demand for fuel enabling

25% suppliers to continuously stock fuel in their depots. However,

0% the move by the Government will tend to reduce the ZRA tax
INDENI Refinery (Ndola) Ndola Fuel Terminal Road Filling Station (Countrywide)
Year Retail Mining Non-mining
revenue base. Therefore, the Government needs to consider
2018 88.2% 0.3% 11.5%

2019 97.3% 0.2% 2.4%

other measures that will stabilize the ZRA revenue collection
and not further tighten the fiscal space.
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