1.Introduction

Zambia’s total petroleum requirements are met through imports because the country does not have any proven reserves of crude oil. The petroleum industry in Zambia is made up of TAZAMA Pipelines, which is owned, by the Governments of Zambia and Tanzania, Indeni Refinery, which is jointly owned by the Government of Zambia and an international oil company, Total Outre mer and the Ndola Fuel Terminal, which is also owned by the Government of Zambia.

There are 18 Oil Marketing Companies (OMCs) involved in the distribution and retailing of petroleum products. The downstream is also made of various fuel transporters and dealers contracted by OMCs to transport fuel by road from the fuel terminal and operate service stations respectively.

The wholesale petroleum prices are regulated by the ERB due to the monopolistic nature of the industry. Indeni currently carries out the importation of feedstock. With respect to pump prices, the Government liberalized pump prices in June 2001 as part of its economic reforms. ERB therefore takes on an ex-post monitoring role for pump prices whilst regulating ex-refinery gate prices. There are established margins for OMCs, dealers and transporters and ERB ensures that prices remain in a reasonable band to ensure that the consumer is not overcharged.

2. Pricing of petroleum products

The pricing of these products was initially on a cost build-up (cost plus) basis. However this approach was not providing any incentive to the crude oil importer and refinery to improve efficiency. Therefore in June 2004, the Energy Regulation Board (ERB) introduced Import Parity Pricing (IPP) of petroleum products. The refinery’s wholesale prices for petroleum products are benchmarked to the cost of buying a finished product on the world market and transporting it to the market in Zambia. In order to allow for fair comparability, it is assumed that the landed cost of the finished product would be calculated as the CIF price to the sea port (Dar-es-salaam) plus the equivalent cost of transportation using a combination of rail and road transportation (rail/rode mode). ). A discount factor is also applied to the determined IPP price. The purpose of this is to take account of the benefits of the country owning infrastructure, i.e. the TAZAMA pipeline.

3. The Import Parity Pricing Model

The Pricing Model takes into account the following factors:

i) Cost of Product (based on FOB prices in the Singapore, ArabianGulf, Mediterranean Markets)

Monthly Averages are used in computations of:

95 RON Unleaded

Gas Oil 0.25 %

Kerosene; the price for Jet A-1, Aviation Turbine Fuel is derived from this Kerosene price.

2. Cost of Freight from place of sale to Dar-es-Salaam (C&F)

Standard international tariffs for voyages from the Middle East to East Africa are used as a base.

Monthly averages from Platt's Clean Tanker wire for World scale AG-EA for a 30,000 Kt vessel are computed

Example: Monthly average = 508.89

Book freight from World scale = 7.69

Freight Cost = 508.89 x 7.69= $39.13/mt

100

3. Quality Discount

4.Traders margin = US$5/mt

4. Insurance = 0.15% of Cost and Freight (C& F)

5. Ocean Losses = 0.3% of CIF

6.Wharfage (Harbour charges) = 1.25 % of C&F

7. Demmurage days

8. Handling Charges = $0.85/mt

9. Financing Charges = 7.42%

  1. Inspection and Marking fees
  2. Dar Throughput fee = $15/mt

12.Terminal Fee = $ 5/m3

13.Import Duty = 5 %

14.Losses Incurred by both TAZAMA and INDENI

15.Excise Duty = 45% Petrol, 15 % Diesel & Kerosene 15%

16.Road Levy = 15 %

17.Handling and storage losses at the Terminal

18.US Dollar to Kwacha Exchange Rate

The Pump price is derived as follows by the OMCs:

1 / WHOLESALE PRICE TO OMC / a
2
3 / Terminal Fee / $5/m3 / b
4
5 / Road Levy / 15% / c
6
7 / Excise Duty / 45% / d
8 / 15%
9 / Ex Refinery Gate / K/M3 / E=(a+b+c+d)
10
11 / Transport Margin / 2.6 cents/litre / f
12
13 / TOTAL (Excl VAT)
14
15 / OMC Margin / 6cents/litre / g
16 / OMC Cost of Finance / h
17
18 / TOTAL (Excl VAT) / I=(e+f+g+h)
19
20 / Dealer Margin / 4 cents/litre / j
21
22 / PRICE TO DEALER / K=(i+j)
23
24 / ERB Fees / 0.70% / m
25
26 / Strategic Reserves Fund / K/litre / n
27
28 / Price before VAT / P=(k+m+n)
29
30 / VAT / 17.50% / q
31
32 / Pump Price / R=(p+q)

Current agreed margins are 6 c/l for OMCs, 4 c/l for Dealers and 2.6 c/l for Transporters.

Advantages of the IPP Model

  1. The price of product has been linked to international market prices allowing limited hedging (cushioning) opportunities
  2. Both gains and losses due to price movements are reflected in the prices.
  3. The methodology used to arrive at the price is transparent.
  4. The model was developed through stakeholder participation and is subject to review every six months.
  5. Prices can be recalculated every month to reflect exchange rate changes and price variations.
  6. The refinery makes income from refinery margins as they exist in the world market.
  7. Gains made from increasing complexity of the refinery (adding more processes) are now tangible.
  8. Industry now has an opportunity to hedge against price variations thus improving planning.
  9. The model encourages the refinery to review its costs and level of losses.