The perception of Lebanon’s oil importing companies as a cartel of money-making executives feeding off the backs of the people is an easy one to buy into, especially in an import-driven economy such as ours. But as any journalist knows, there are at least two sides to every story, if not many more.
“We are always accused of being people that are making fortunes, which is not true,” pleads Dania Nakad, general manager of Wardieh Holdings (Wardieh) — the self-proclaimed largest Lebanese-owned private sector oil company — and the recently appointed vice president of the Association of Petroleum Importing Companies (APIC), the industry’s lobbying body.
“During the war when the country was just a bunch of mafias and there was chaos everywhere you could say that the oil industry was a cartel, because there were two or three importers with control over the few ports,” she says, adding that such is not the case anymore.
Wardieh is probably best known in Lebanon for its gas stations, and the fact that it used to be owned by Exxon-Mobil before the later decided to exit the country. Yet the company does not own most of the stations that brandish their name.
Instead, Wardieh’s main revenues come from the import of petroleum and other oil derivatives ranging from diesel to petrochemicals. It signs supply contracts with gas station owners and finances the underground tankers and station equipment. While this has proved profitable for Wardieh, there have been a few hiccups.
Last year, a Wardieh gas station exploded near Beirut’s Adlieh district killing three and wounding 14 others. Nakad explains that the incident was a result of a panic-stricken owner, looking for his employee, turning on an electricity switch that had been shut off after fumes were detected in a storage area “that should not have been there”.
The leaking underground tanker had been identified and subsequently filled with water for safety, but apparently this was not sufficient to prevent the incident. Nakad says that no charges were pressed because it was obvious where the fault was and “a few moths later the station was up and running; we are still with them, them with us, but we lost Joseph,” says Nakad, referring to the station’s former owner.
Explosions aside, oil importers also have to take on significant credit with gas stations that pay post-factum while they pay their suppliers and the government in advance. “I have no protection. So what if I have a contract with a station? If he doesn’t pay me I can sue him, go to court, spend a million years there and meanwhile he’ll have zeroed in his account and when the court tells him to pay, he’ll say he’s bankrupt, so what have you gained,” says Nakad. “If you want to be really smart you can steal a million dollars tomorrow and just sit in jail for three months! Honestly, this is the case today.”
Closing the pump
At present there are just 12 companies licensed to import oil into Lebanon. More players are not involved due to the large investment needed for storage, transport and infrastructure, coupled with the need for access to land on the seashore suitable for such an operation.
Wardieh’s total assets, for example, are valued at $100 million, according to Nakad. She describes last year’s turnover as “excellent” and revealed to Executive that the company raked in revenues of “something like $340 million.” That is because oil prices stayed relatively stable throughout 2011. But now that oil prices are dropping again “since April we are witnessing another crash,” similar to that of 2008 when prices plunged from around $147 per barrel to below $50.
But with such revenue-to-asset ratios it’s little wonder that many say oil importers are running a racket. Oil importers have been accused of acting like an oligopoly and fixing prices. These companies bid for petroleum on the international market in groups in order to be able to buy up whole tankers, as opposed to half-tankers or less, thus allowing for better prices. Wardieh currently groups up with Total and IPT to bid for ships in the Lebanese market. Nakad denies that there is price fixing between the three large groups who usually engage in the bidding, but concedes, “In the absence of a government, the absence of a ministry and the absence of a strategy and policy, we do what we can to safeguard our basics.”
“At some stage ministers like to flex their muscles, and that applies to the current and previous ones who say ‘we want to import [gasoline]’. We tell them, ‘please do, we beg you to do it’,” says Nakad. “It would be better for us because then we wouldn’t have to have all this expensive equipment, open up letters of credit for millions of dollars, and take the risk in a country where Israel can come tomorrow and bomb our facilities whenever they feel like it. Instead I would just simply go to the [government] refinery every day, as I do today with the gas oil [red diesel], and take my stock and sell it to market.”
Caught red handed
At present the government only imports ‘red’ diesel — diesel with high parts per million (ppm) of sulfur, at around 500ppm — while the private sector imports ‘green’ diesel, at around 350ppm. Lebanon’s government-owned petroleum refineries have been out of commission since the Civil War, and perhaps that is a boon given the amount of corruption recently uncovered at their existing facilities.
At the beginning of the year, the government offered a one-month subsidy on red diesel, which removed the value added tax for distributors, the savings of which were passed on to end consumer. A report issued earlier this year by the Audit Court, Lebanon’s government spending oversight body, said that during the last days of the subsidy period government-run facilities in Tripoli and Zahrani continued to sell at the subsidized prize, with 101 of 215 licensed distributers of oil products suppling the red diesel on the last day of the subsidy. The distributors then sold the product at non-subsidized prices.
“I told one of the people who bought, ‘tomorrow morning if you are smart you go and take a credit note from all the people you sold to with the higher price because this will not pass and the files will be opened and heads will roll,” says Nakad. “Another calls me and says he made $50,000 [in profits off the deal], I told him go and sell at the lower price because I was sure that their will be a scandal. He thanked me a month later.”
The Audit Court eventually blamed the government, the consumer protection authority and the companies that made millions of dollars of profits but no one has yet been held accountable. “You think the guy at the door or the accountant makes the decision to extend working hours until after midnight,” she asked rhetorically. “When the big ones fall, it’s the little ones that take the blame. The issue was cooled off and tucked away, not because there was a guy at the door who made a decision, there were big people behind it and if it gets to the courts they’ll find a scapegoat.”
No margin for error
Even if things look good for oil companies, margins may not be as lucrative as one is inclined to believe. In 2002, the Lebanese government commissioned the international accounting firm PriceWaterhouseCoopers (PWC) to carry out an assessment of the pricing structure of petroleum in the country. The study suggested a structure whereby the oil importers would make a 5 percent profit margin on the cost of their product. Other elements included in the pricing structure were the government’s excise tax, currently at $2.67 per jerry can (20 liters) of 95-octane gasoline, value added tax (10 percent), insurance, additives and other costs to the consumer.
Since then, however, Nakad says they have had to incur further costs associated with increases in additives, operational expenditure, invested capital and others, such as a war risk premium that was imposed after the 2006 war with Israel, effectively bringing the margin to 3 percent of the cost of product. The three percent figure was also confirmed by another general manager of an oil importing company that spoke on condition of anonymity. “I dare anyone to identify one commercial sector that can do with 3 percent profits. The dikenjeh [shopkeeper] next to your house won’t accept a margin of 3 percent,” says Nakad.
Nakad says that APIC commissioned PWC to do another study in 2010 to update the price structure, and the brief was presented to the previous and current Ministers of Energy and Water, who have not responded. That is why gas stations have gone on strike several times since, says Nakad, closing down gasoline supply in the country.
“You think the international names got out of Lebanon because they don’t like the country or because of the weather?” she asks. “It’s not rewarding. Put the money in the bank. You get more and it’s secure!”
A plausible solution for the industry, she says, would be for the government to crack down on the estimated 2,000 unlicensed stations in Lebanon and stop giving out new licenses to stations, which have reached some 5,000 across the nation. “We are not asking for the government to take [the PWC study] and just implement it, but do something in between, make a compromise.”
Nakad admits that if the companies got their way then consumers would bear the brunt of higher prices. “The awkward situation that we are in is that, whatever demand we have, it is going to be reflected on the end users because the government wants to maintain their income from the jerry can,” she says. “But we are not supposed to be the financier of the cabinet. The government should not rely on gasoline, which is a consumer good, as a source of income because it is places the burden on the backs of the people.”
This article was first published in Executive magazine’s July 2012 Lebanon issue