Petroleum Price Regulations on the Financial Performance of Oil Marketing Companies in Ghana, Part I

Inhalt

1.0 Abstract

2.0 Introduction

3.0 Petroleum Pricing

4.0 Financial Performance and Price Regulation

5.0 Determinants of Financial Performance of Oil Marketing Companies (OMCs)
Supply Chain Efficiency
Foreign Exchange Rates (Forex)
International Oil Prices

6.0 Empirical Review/Evaluation

7.0 Research methodology
Design of the Study
Analytical Model
Test of Independence
Differences in Financial Performance during Regulated and Deregulated Periods
Analysis of Variance (ANOVA) (Statistical Significance of the Model)
The Chi-square (χ[2]) Test for Independence

8.0 Conclusion and Recommendations

9.0 Reference

Abstract

Net oil-exporting and importingeconomies around the world are now struggling with the current scenario which they never anticipated to happen. For these countries, oil and gas play a very significant role in explaining budget surpluses. The decline has not only affected the government revenue and spending, but it also has an impact onthe private sector. In countries like Ghana, many companies are laying off workers and opting for other cost-cutting measures to counter the reduction in revenue. The primary objective of this study will be to work out the financial performance of oil marketing companies (OMCs) in Ghana during petroleum price regulation and deregulation regimes. The researcher adopts the event study design and sampling strategy of purposive random sampling techniques in this study. In this study, the researcher seeks to evaluate the financial performance of oil market companies (OMCs) in Ghana during petroleum price regulation and deregulation regimes. The study also found that, after the deregulation of petroleum prices, there was positive growth in the company's gross sales. The positive effect of the company's financial performance can be attributed to the introduction of the petroleum price deregulation in the downstream petroleum industry. This is to say that the deregulation policy was gradually impacting favourably on the financial performance of the company.

Keywords: Petroleum price regulation, Petroleum price deregulation, Return-on-Equity, Oil marketing companies, Chi-square, ANOVA, Trend analysis, Star Oil Company Limited, Ghana

Introduction

The world economy had not yet fully recovered from the great economic recession of 2008 that it had to face yet another major shock in the form of declining oil prices. The decline has resulted in surplus governmental budgets to deficit ones.And the once considered mostlucrative investment sector, oil and gas have become the least preferred. Many analysts believe that the main reason for the decline in oil prices is late November 2014 OPEC decision not to curtail oil production in response to global demand and supply factors (Baumeister, 2016). Others believe that an increase in the price of oil, to begin with, was the result of speculation rather than genuine supply and demand dynamics, and so it would balance out eventually (Einloth, 2009). Irrespective of the reasons for the decline in oil prices, oil-exporting countries around the world are now struggling with the current scenario which they never anticipated to happen. For these countries, net oil exports was a significant factor in explaining budget surpluses (Huntington,2015).

The decline has not only affected government revenue and spending, but it has also impactedthe private sector. In these countries, many companies are laying off workers and opting for other cost-cutting measures to counter the reductions in revenue. For instance, companies in Saudi Arabia's non-financial sectors have recorded an overall revenue reduction of 141.5% between the year 2013 and 2015 (Lele, 2016). But the fall in oil prices also has positively impacted various countries, especially oil-importing economies where cheaper oil has brought down the cost of living.

The economies of developing countries rely heavily on revenue from oil exports. In the case of Ghana, around 43% of budgeted revenue comes for oil. Other Africancountries like Nigeria (87%), Sudan (90%), and Algeria (96%)(as shown figure-2 below) also rely on oil exports for governmental revenue (Hutt, 2016).This chart shows countries by their dependence on exports of fuel commodities, which include natural gas and oil, as well as oil products. Government spending in turn impacts on corporate profits as government infrastructure and other projects are the lifeline of the economies. This study is intended to study the impact of declining oil prices on corporate performance in Ghana, especially in the downstream sector of the petroleum industry.

Figure-2: Economies and their dependence on oil revenue (Hutt, 2016).Abbildung in dieser Leseprobe nicht enthalten

Abbildung in dieser Leseprobe nicht enthalten

In addition to the terminable nature of the resource (i.e. oil and gas), there is also the uneasiness concerning inventory interruptions (Ebrahim et al., 2014). The most significant oil and gas accumulations in the world are situated in developing economies, and the exigency of the developed economies to predominate these accumulations as mentioned above powers major altercations, and brings about resource curse to the afflicted regions. There is also the hypothesis that speculations in the global commodities market, as stated earlier, also fuels or influences the price hikes (Acheampong &Ackah, 2015; Akosa&Ahmad, 2019; Ewing & Thompson, 2007;Fattouh et al., 2012;Van der Ploeg, 2010).

However, prices for petroleum products are also characterised by high volatility, often affecting the economic growth of developing countries which heavily rely on the same for energy production (Kojima, 2009; Kojima et al., 2010). Consequently, many developing countries have put in place various price control measures to minimise the impact of price volatility of petroleum products.

The primary objective of this study will be to work out the financial performance of oil marketing companies (OMCs) in Ghana during petroleum price regulation and deregulation regimes; with Star Oil Company (SOC) Limited as a case study in a qualitative and quantitative analysis on the repercussions of petroleum price regulations on the financial performance of oil marketing companies (OMCs) in Ghana. The study further seeks to ascertain the effect of petroleum price regulations on the trend of the gross sales of the oil marketing companies (OMCs) in Ghana and to determine if there is a remarkable difference in the financial performance of oil marketing companies (OMCs) during, both the regulated and deregulated periods in Ghana.

Petroleum Pricing

The economic principle suggests that regulation can either be structural or conduct regulation. Structural control or regulation denotes policies on market structure such as entry and exit rules; whiles conduct regulation regulates the behaviour of market participants through strategies such as price regulation as accordingly stated by Kay and Vickers (1990). Rogers (2003) showed thatprice control of petroleum products results in an increase in prices and often controls competition. Coady et al. (2006) also established that only sixteen (16) out of forty–eight (48) developing economies have a liberal pricing mechanism for petroleum products while sixteen (16) others employ the ad hoc basis by directly controlling and adjusting oil prices, including Ghana. The Organisation of Petroleum Exporting Countries (OPEC), influences global petroleum prices by using the pricing-over-volume technique. It coordinates and unifies various petroleum policies of the member countries. The member countries adjust the quantity of oil production to achieve stable prices and supply. OPEC members collectively control 81.9% of the total oil reserves while they also supply 43.5% of the global crude oil production (Khadartseva&Cherkasova, 2017).

The National Petroleum Authority (NPA) is the petroleum downstream regulatory body or agency in Ghana. It oversees, regulates and supervises the downstream petroleum sector or industry in Ghana. The Authority was established in 2005 through the ratification of the National Petroleum Act, 2005 [Act 691]. The Authority (i.e. NPA) puts in place the structures by which to license Bulk Oil Distribution Companies (BDCs) which supply petroleum products to the Oil Marketing Companies (OMCs) in Ghana. It also controls all imports of petroleum products into Ghana by the Bulk Oil Distribution Companies (BDCs). Also, it ensures uniformity in prices by the Oil Marketing Companies (OMCs) using the Unified Petroleum Price Fund (UPPF). It also employs full cost recovery based on Import Parity of Pricing (IPP) and for the generation of revenue for the national government. The Import Parity of Pricing (IPP) standard indicates the landed cost of refined fuel that comprises of the international market price (cost of goods), freight charges, customs and port fees, exchange rate, and insurance charges. It is also said to be the price of petroleum products at the Ghanaian port of entry. The benchmark maintains a sturdy correlation between the real or actual cost of fuel imports and global developments (Acheampong &Ackah, 2015).

Financial Performance and Price Regulation

Haq (2017) also evaluated the impact of price regulation on the financial performance of oil marketing firms in Oman, and in the study established that price regulation had a remarkable influence on the profitability or desirability of oil marketing firms due to changes in the market structure. Porter's (1985) competitive model posits that pricing is a dominant strategy employed by firms to compete effectively in a given market. Therefore, through price regulation, pricing as a strategy ceases to be a competitive factor in marketing.

A study by Njagi (2017) also investigated the impact of price regulation on oil marketing firms in Kenya using data for thirty–one (31) oil marketing firms for the period between 2006 and 2013. The research utilised the Chi-square test of differences to ascertain the impact of price regulation by comparing performance before and after price regulations. The study used Return–On–Asset (ROA) as an estimate of financial performance, and the outcome suggested that the installation of petroleum price regulation had an adverse repercussion on the financial performance of oil marketing firms in Kenya. The ROA of oil marketing firms in Kenya was significantly higher for the period before price regulation than for the period after price regulation.

Determinants of Financial Performance of Oil Marketing Companies (OMCs)

There is an absolute connection or effect on the gross revenue of oil marketing companies (OMCs) by the petroleum price regulation, as price regulation or control can determine the price at which the oil marketing companies (OMCs) sell their products. Therefore, the changes or factors likely to affect the financial performance of the OMCs are evaluated as below:

Supply Chain Efficiency

Supply chain management is a discipline that integrates the manufacturing companies with their suppliers and customers in an efficient way. According to scholars (Anderson, 2003; Hussein et al., 2006; Sibley et al., 1991) stated that supply chain has the capability to impact on the level of service delivery by oil marketing companies to its consumers. The scholars further added that, with faster availability of products, it serves as a key to increase revenue and achieve a profit growth for an additional time when the product is present in the market since the competitor is unable to offer such a product. Also, the availability and the information cost existing between companies in the supply chain network paves the way for a secure link that eliminates the timelines in the system. The increase of government regulations, as well as the level of competition in the market, is needed by the company to be active and achieve the expectations of its customers. The capacity of a company's supply chain network has the potential to react hastily to significant disruptions in either the product or services and this is likely to reduce the impact of sales on the supply.

Foreign Exchange Rates (Forex)

There is a direct influence on the cost of a product or service when there is a movement in exchange a rate between the local currency and the US dollar. According to Aress (2011), this is a reflection of the cost expenses on the product or service, and it determines the level or rate at which the company passes the change to the consumers. Kilian (2008a) stated that the price in the market acts as a measure for all global transactions that culminate in price fluctuation, which has not been experienced previously in the petroleum industry.

International Oil Prices

The price of oil at the global level has a direct influence on the cost of petroleum products. As stated by Angelier (1991), in the short term, the association between demand and supply will result in the fluctuation of oil prices, whose frequency and magnitude largely depends on the marketing arrangements for crude oil that is in stock within a specific timeframe. A study by Pirog (2012) which analysed the financial performance of the mega oil and gas firms including BP plc, Chevron, ConocoPhillips, ExxonMobil and Royal Dutch Shell plc between the periods of 2007 to 2011 concluded that the oil and gas industry becomes more profitable when there is a rise in crude oil prices. Therefore, since a surge in the global price of oil and gas have a propensity to manifest in the broad economic and political environment, as well as the emergence of new markets increases the profit growth of the firms, and this can be regarded as a windfall.

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