30 SEPTEMBER 2008 HIGH OIL PRICES AND POSSIBLE SOLUTIONS FOR ZAMBIA

Profile Andrew N Kamanga – Managing Consultant ENFIN Solutions Limited Energy, Mining, Infrastructure and Financial Advisory.

Presentation Outline 1.Global picture on Oil Industry 2.Zambian Fuel Supply Chain 3.Recent Price Reductions 4.Taxes on Petroleum prices 5.Regional Comparison 6.Possible Options

Global Picture Historical Perspective Mid 1980’s to September 2003 average price US$ 25/ barrel Between Sept 2003 to Aug 2005 price between US$30 – US$60/ barrel June 2008 price peaked at just over US$150/ barrel

JanFebMarAprMayJunJulAugSeptOctNovDec OMAN CRUDE PRICES ON THE INTERNATIONAL MARKETS (US$ / BBL)

Demand World demand for crude oil grew by average 1.76% per year from 1994 to 2006 ( highest growth between at 3.4%) United States of America remains the largest consumer of oil ( m barrels per day to over 20.7m barrels per day in 2008). China Increased its consumption from 3.4m barrel per day to over 7m barrels per day over the same period. India increased its consumption from 1.5m barrels per day to 3m barrels per day Current daily demand projected to reach 118m barrels per day.

Supply An important contributor to price increases has been slow down on oil supply growth Global Oil production decline is the main long term fundamental cause. Currently there is a limited amount of fossil fuel which is presently being consumed at higher rate The remaining fuel reserves are more technically difficult to extract even with improved technology The remaining fuel reserves will only be more economically feasible to extract at extremely high prices In the long term prices will continue to rise until new market equilibrium is reached i.e. supply satisfies world wide demand

Possible Mitigation Increasing the supply of crude oil to meet immediate demand Finding substitute for crude oil – alternative energy sources such as bio fuels Decreasing the demand for crude oil- reducing consumption “ A free market rations an increasingly scarce commodity by increasing its price and a higher price stimulates producers to produce more and consumers to consume less while possibly shifting to substitutes.”

FEEDSTOCK CRUDE OIL IMPORTER (GRZ/TAZAMA) TAZAMA (PUMPING FEE) INDENI (PROCESSING FEE) NDOLA FUEL TERMINAL (THROUPUT FEE) WHOLESALE (TAZAMA) RETAIL (OMCS)

MonthPremium (K/L) Diesel (K/L)Kerosene (K/L) Crude Oil (USD/BBL) Jan – 087,0205,8414, Feb – 087,0205,8414, Mar – 087,0205,8414, Apr – 087,6166,3884, May – 087,6166,3884, Jun – 087,6166,3884, Jul – 088,3557,2375, Aug – 089,4588,1905, Sept – 087,6917,264

KWACHA/ LITRE PREMI UM DIESEL KEROS ENE

1. EXCISE DUTY 01-Jan-0830-Jun-0824-Sep-08 Petrol60%45%36% Diesel30%15%7% Kerosene15%0% TAXES 2. 16% 3. IMPORT 5% - CRUDE OIL / FINISHED PRODUCT

BotsMalMocNamRSASwaTanZam Mogas Gas oil Kerosene BotsMalMocNamRSASwaTanZam Mogas ,522 Gas oil ,383 Kerosene ,200 REGIONAL TAX COMPARISONS REGIONAL PUMP PRICES

Possible Solutions Reinvest in infrastructure – Pipeline and Refinery Consider private sector participation – crude oil importation (OMC consortium or open market), Concessioning of Pipeline and Refinery ( partly private) Consider taxes to be collected K/ per litre ( will be consistent with budget provision) Zero rating of VAT – Allow consumers in productive sectors such as agriculture and manufacturing to claim input VAT in full.

Conclusion Need to have a predictable fuel supply on the market – Long term crude oil contracts and financing arrangements Regulation should focus on market performance – ERB should not be limited to announcing price of fuel.