To say that oil is big business in Africa would be an understatement. It is in every sense what keeps the wheels of the continent’s economy turning as Africa’s crude oil production capacity, particularly in North Africa, Nigeria and Angola, fuels over 10% of the world’s petroleum needs. However, what is often forgotten is that local demand for oil and oil related products continues to parallel Africa’s phenomenal rate of economic growth, itself on track to expand by as much as 40% by 2020. Such predictions have in turn spawned a potential long-term investment boom in the downstream oil product supply business - all the way from sea ports and tank farms through to pipelines and rail cars. It is all seen as vital to securing the fuel supplies essential to driving Africa’s continued economic growth. Dynamic Economy Of all the continents of the world Africa is arguably the one with the biggest capacity to surprise. Once raven by conflict, famine and disease it is now one of the most dynamic and fastest growing economies in the world, outpacing even East Asia and Japan and earning it the label ‘Lion Market’. To the casual visitor the most obvious evidence of this new-found prosperity are the Mercedes and BMW dealerships that jostle for position alongside up-market shopping malls and designer clothing stores in some cities. Meanwhile the airports bustle with wealthy holiday makers, businessmen and the new breed of African entrepreneurs. Among them are the oil men. But not just the geologists, roustabouts and overalled engineers who are the bedrock of the industry. Increasingly they are the traders - the dealers in crude oil, refined products, petrochemicals and gas - whose uniform is a suit and tie and whose toolkit is a smartphone and a laptop. And there is a change amongst the traders themselves as international oil majors like Shell, BP and Chevron sold up and exited the African downstream market to concentrate their efforts on the upstream exploration and production sectors. The void left behind has been quickly filled by a combination of experienced international oil traders and a new generation of independent traders and marketers; smart enough to spot an opportunity, agile enough to capitalize on it, they have built up exciting new trading businesses. And unlike the now departed oil majors, they are more willing to take greater risks for smaller margins. But oil trading - like trading in any commodity - is a business that favors the brave, as David Bleasdale, executive director at specialist African oil industry consulting and training firm CITAC, explains. “Above all else, trading in Africa is about managing risk. By turns traders avoid, embrace and value risk and seek to profit from its management. It’s almost like they have risk in their DNA,” he says. “The most successful traders are those willing to invest in order to exploit risk structures. They do this by building efficient, best-in-class operations, by leveraging their detailed knowledge of market movements around the world and by keeping price risk to an absolute minimum.” Today the trading companies working in the African downstream sector are a far cry from those of the early days. They are a highly professional, highly motivated group with companies ranging in size from big international firms with 1,000-strong trading teams through to independents with perhaps 10 or 20 people. It’s a business that tends to be dominated by strong personalities, many of whom have had to be prepared to take some really big risks along the way, but have also quickly learnt how not to repeat mistakes and to control their operations and risk. Financing Unquestionably the biggest challenge for trading firms is financing. Traders need money to do business. And the bigger the business the bigger the pockets needed to finance it. At today’s prices a cargo of crude might be worth on the open market upwards of 125 million US dollars. But a combination of the Eurozone crisis and the new Basel III legislation has impacted trade and project financing significantly. While larger trading firms have access to their own funding from retained profits or a corporate parent company, smaller trading houses are competing for letters of credit. And all the while those lines of credit are becoming more and more expensive. Those trading companies that can demonstrate they have the right systems, procedures and compliance measures in place are the ones most likely to get the funding they need. There is little or no room any more for companies run on spreadsheets. Financial institutions expect to see fully integrated trade/risk and back office solutions, together with the right security and policies to oversee their correct use. “These days we recommend everyone in trading to have an integrated risk-management system,” says Bleasdale. “But it’s not something to embark on lightly. It means total buy-in from the top down and it means proper user training and supervision. “There are technology and implementation imperatives too. Those systems that are more flexible and quicker and easier to install are always to be preferred. So are those that impose the least demands on computing hardware, infrastructure and local support. And of course there’s the training overhead to consider as well. Any system must be easy to learn and then easy to use once learned. “The real mission for traders is one of managing risk. It’s the old adage - if you can’t measure it you can’t manage it. You’ve got to be able to identify risk, measure it and then do something about it.” Hidden Costs The product market in West Africa in particular - where the bulk of trade is in refined products coming into the region from Europe - points up another crucial requirement for the systems used by traders. With no real distribution infrastructure to speak of - pipelines for example - product is invariably offloaded from ships into harbor-side tank farms then transferred to road tankers for onward delivery to counterparties. The potential for demurrage - the extra cost of offloading delays tying up expensive transport - and for contractual penalties against delivery delays, cannot be underestimated. It is for this reason that many traders are using their trade/risk management systems to also run their supply chains. “These are the hidden costs of oil trading. And they are all part of the business of managing risk and exposure,” says Bleasdale. “It’s easy to forget that a ship may have to sit outside of Lagos for three months at a cost of twenty thousand dollars a day. It’s all about managing and avoiding those issues with efficient supply planning, by ensuring an efficient port operation and by ensuring the counterparty you are dealing with is a strong and stable company.” Some trade/risk management systems now include functionality for physical operations including storage, logistics, inventory management, transportation scheduling and demurrage management. Such facilities are key to minimizing and containing risk and maximizing profitability on trades. Infrastructure Another challenge facing users in Africa is the availability of broadband and the Internet, not to mention the reliability of the connections that do exist. While infrastructure is slowly expanding, estimates are that only five and a half percent of the population has access to an Internet connection, with the vast majority of those connections being in South and North Africa. Mobile networks, in contrast, have grown massively in the last five years and the country is forecast to have around 735 million subscribers by the end of 2012 - 65% of the total population - according to the GSM Association. Uptake of mobile data services is increasing steadily too. For traders in certain parts of the country a mobile data connection may be the only option, or potentially the most reliable option. To trade oil and petrochemicals in Africa it is also necessary to get to grips with unique and often complex trading conditions that are not encountered in any other part of the world. For example in Nigeria - a country heavily dependent on gasoline for transportation, gasoline prices are subsidized by the government. This has created a thriving market for product shipped mainly from European ports of Amsterdam and Rotterdam. Subsidies can skew market prices in neighboring countries reliant on more expensive locally-produced and refined products. This causes traders to work extra hard to juggle pricing against safety, distribution and economic risk in the supply chain. Some manage this by creating multiple trading companies and transferring cargos between them, creating still more layers of complexity in the management of price and risk. Trade/Risk Management Given the unique challenges of the African market some trade/risk management solutions - more commonly known as Commodity Trade Risk Management (CTRM) solutions - are more suited than others. Topping the list - especially for the smaller independent traders and for some majors too - are the Software-as-a-Service (SaaS) solutions. Unlike their desktop software or client/server counterparts they require no upfront investment in computing hardware, infrastructure or support resources. Instead users access SaaS solutions through their regular Web browsers. It is the vendor company that provides all the back end computing and data from its own facilities, making it available to customers securely via the Cloud. Such solutions are also quick to install, configure and deploy, typically going from contract signing to fully up and running within a few days. This is in stark contrast to the weeks and months required by other systems. But one vendor in particular has earned something of a reputation in Africa for its deep understanding of the market and for the way it has created solutions finely attuned to the unique needs and challenges. That company is the London-based Aspect Enterprise Solutions and it has become the dominant CTRM player in Africa. Ghana and Nigeria alone account for some 16% of its customer base and it has users also in Angola, Republic Of Benin, Congo, Cameroon, Cote d’Ivoire, Kenya, Mali, Senegal and South Africa. “African traders face a number of challenges unique to the continent, among them complex legislation and pricing structures together with the need to monitor exposure and value in real time throughout the trading day,” explains Yagnesh Savania, the company’s EMEA sales director. The flexibility of Aspect’s product architecture and its Cloud delivery mechanism means the company can easily customize and localize to accommodate these and other specific needs, then roll out the results for all customers immediately with no significant impact on live trading. Cloud delivery means trading companies need no in-house IT resources. “We believe we understand the African market better than any other CTRM vendor and that’s why we’re seeing the market polarizing around Aspect’s technology. It’s a massive vote of confidence from what is a key trading community,” adds Savania. Recognition Independent recognition of Aspect’s achievements in Africa has come from the influential CTRM research, analysis and consulting firm CommodityPoint. In a recent report the company said Aspect had achieved what it described as ‘...remarkable success, in West Africa in particular’. ‘Aspect’s unique combination of products and platform appears to enable the company to enter markets and territories where there is little in terms of competition, and provide workable solutions and a reasonable cost and without significant investment in hardware and infrastructure. One product builds on the other easily and relatively seamlessly providing the company with stepwise up selling opportunities. In turn, this has allowed the company to grow faster than the market’, the CommodityPoint report concluded. David Bleasdale at CITAC, while harboring some reservations about the SaaS software model in an environment of sparse Internet availability, is also enthusiastic. “Aspect’s system is flexible and quick. It’s quick to learn and doesn’t require intensive training. It shows there is a way to get people off spreadsheets. Yes, Excel is easy too but it’s very difficult to audit and can be prone to unaudited errors.” But perhaps the best testament of all is from the traders themselves. Established in 2009, Ghana’s Sage Petroleum is the country’s largest licensed oil trading firm importing a range of products including crude oil, gasoil, LPG and fuel oil for local fuel products distribution companies. With plans for significant growth in the year ahead, Sage has developed a robust risk management strategy to provide both security and value for its clients and partner organizations. CEO of Sage is Emmanuel Egyei-Mensah. “We chose AspectCTRM to manage and support our activities. It gives us real-time insight into all aspects of our business including stocks, logistics, finance, profitability and risk exposure. Our philosophy is to actively identify risks, obtain information about the risks and manage them effectively. That is our culture, which runs through everything we do. “From the outset it was apparent that Aspect has put real thought into engineering a system that’s right for the local market. We particularly like the way we can customize it ourselves to suit the way that we work, rather than having to fit in with someone else’s idea of how we should be doing things.” His comments are echoed by Mohamed Julien Ndao who is responsible for business development and trading of refined products on the West Africa desk at Addax Energy SA. “I like the way I can customize pages the way I want, so I don’t waste time with information I don’t need. Aspect is very user friendly. Plus I travel 50% of the time, so the mobile service is important to me and my clients. I’m able to see where the market is to make decisions all the time,” he says. Casting an experienced and independent eye over the trading industry in Africa, CITAC’s David Bleasdale believes it is a business that has come on in leaps and bounds in recent years. “There has certainly been a big improvement in professionalism and control throughout the trading community. Today we have reached a point where it is only the strong, really professional players that remain: the companies that work well and perform. That includes everyone from the big international oil traders through to the smaller indigenous players who are trying to grow,” he says. “And there can be no doubt that properly executed trade and risk management systems have a vital role to play in the industry’s development going forward.” www.citac.com www.aspectenterprise.com