In Africa, fuel quality is on the rise.


The African Refiners and Distributors Association (ARA) held its annual conference in Cape Town, South Africa last week. The meeting’s theme was “Achieving Clean Fuels in Africa”, a topic that has received much attention lately. In September of 2016 in a report released by the African Centre for Energy Policy (ACEP) partner, Public Eye, it was revealed that Swiss commodity trading firms are exploiting lax regulatory standards to sell to African consumers. (1) The long and comprehensive report documents the way certain traders take advantage of fuel standards in Africa that allow for high contents of sulfur that would not meet modern environmental regulations in Europe and other developed markets. The results are poor air quality in many African cities that have far less fuel consumption than major European metropolitan areas.

The report was not without its critics, including the Ghanaian National Petroleum Authority (NPA). (2) The now former CEO of the NPA, Moses Asaga said much of the criticism of the African authority was borne out of a lack of understanding of the authority’s responsibilities. While the report highlighted that many African nations, including Ghana, have sulfur standards that range as high as 300 times the levels in Europe and the United States, it did not comment on the costs associated with bringing nations into compliance with lower standards. For example, the NPA estimates that it would cost Ghana about 300 million US dollars to bring infrastructure into compliance to produce low sulfur diesels. These types of policy decisions therefore are not solely up to petroleum agencies like the NPA, but have economic impacts that go far beyond the operating budgets of such agencies.

And there is good reason to believe the NPA and other agencies do take their fuel quality seriously. For the past 4 years, the NPA has run a comprehensive fuel marking program aimed at ensuring stations are providing good quality fuel to consumers. (3) A side benefit of this program has been the reduction of subsidy abuse of kerosene and marine diesel, as well as tax evasion of on-road diesel and petrol by dilution. The program is working with technology provided by Authentix, with an estimated savings to the Ghanaian government of over $11 million, while ensuring the nations fuel supply is of high quality having minimal environmental impact.

This is a great example of how governments can effectively reduce fuel fraud and minimize subsidy abuse by adopting programs to improve the quality of the fuel supply chain. Effective fuel fraud prevention programs are designed and put in place to reveal the quality and condition of the supply chain. Often, merely shedding light on the various stages that make up the supply chain will improve the flow of fuel in the country by deterring fraudulent activities that thrive in the shadows. Ensuring integrity of the fuel supply chain also ensures minimal environmental impact by keeping fuels up to specification at the retail pump.

The most successful fuel marking programs involve a number of best practices which are adjusted and modified to meet the unique requirements of each country via an interactive program design phase followed by full implementation and operation. Regular program reviews and audits ensure the program is meeting or exceeding its stated objectives and return on investment (ROI). By stopping illicit trade of fuels through monitoring retail outlets for diverted subsidized fuels or diluted fuels, environmental impact of automobiles is kept to a minimum.

And that is why the focus of the ARA annual meeting was so promising. Ultimately, further raising environmental conditions in many Africa nations will require investment in the infrastructure of the fuel refining industry to produce low sulfur fuels. That investment will come from investors when they have confidence in a strong independent regulatory function in these countries that ensure the investments made in low sulfur diesel infrastructure will pay returns. With the good governance shown by agencies such as Ghana’s NPA, as new regulations are adopted, investors should feel good that there are strong independent agencies already in place to enforce and maintain these new standards.


Europol Confirms Link Between Organised Crime and Fuel Fraud.


Last week, Europol released its European Union (EU) Serious and Organised Crime Threat Assessment 2017 (SOCTA 2017)1. The SOCTA is “Europol’s flagship product providing information to Europe’s law enforcement community and decision makers. It serves as the cornerstone of the EU Policy Cycle for Serious and Organised Crime.” The report serves to inform member states on key priorities that Europol feels require inter-state cooperation to effectively combat. The 2017 report identifies about 5,000 international organised crime groups currently being investigated in the EU. That number is up from 3,600 groups in 2013.

But the 2107 report is interesting for another reason. For the first time, it calls out fuel fraud as a growing phenomenon amongst these organised crime groups. The linkage between organized crime and fuel fraud is not a surprise to Authentix. We have been a quiet partner to over a dozen foreign governments in the last twenty-years, helping them shut off the supply of illegal fuel to fund organized crime.

The illicit trading of fuel has many names: fuel fraud, fuel piracy, and fuel smuggling just to name a few. Most people, especially in the developed world, may never have heard these terms or realized that fuel fraud is such an important problem to solve. The illicit trade of refined fuels is estimated to be valued at $100B2, and fuel is the #1 most smuggled natural resource in the world.

If you happen to be reading this in the United States, you may be interested to know that the IRS estimates that 10% of our $23B downstream fuel market illegally crosses state lines to take advantage of lower taxes and higher selling prices in neighboring states. The United Kingdom knows all too well the correlation between fuel smuggling and organised crime as it has marked fuel traveling between Ireland and England for over 15 years to crack down on illegal funding of the IRA. The European Union estimates it loses $4B euros a year in excise tax revenue on fuel smuggling. Thus, fuel fraud is not just a challenge in emerging economies but very much a problem in developed economies.

What is fuel fraud? Fuel fraud involves the dilution, adulteration, or smuggling of fuels to exploit price arbitrage conditions in a market. When taxes and/or subsidies create a large difference in prices between fuel products, unscrupulous parties can take advantage of this price arbitrage by perpetrating various fuel frauds to funnel huge profits into their coffers. The schemes typically fall into two categories: tax evasion and subsidy abuse. In tax evasion, higher-priced taxed fuels are diluted by lower-priced fuels. The resulting mixture is sold as authentic high value fuel. When this scheme is carried out in countries that have both a subsidized and taxed fuel, it can result in government revenues being stolen twice. The government loses the taxes on the higher-priced fuels and pays for the volume of subsidized fuels used for the dilution. In addition, lower-priced subsidized fuels can be transported across national borders into countries without subsidization programs, and possibly even high taxes on the smuggled product.

While counterfeit drugs and designer goods gain large headlines, the billions of dollars of public funds being misappropriated by fuel fraud goes largely unreported. Stopping this activity, whether it is subsidy abuse or tax evasion, results in immediate positive financial impact on a governments budget without reducing a subsidy or increasing the tax burden of its citizens. When a government employs a successful strategy to curb fuel fraud, the benefits are not limited to fiscal policies. A large source of funding of organised crime and terrorist groups is cut off. It also stems the negative impact that fuel fraud has on the environment by ensuring the fuel supply in the country is unadulterated, leading to cleaner burning and better running engines in the country.

Authentix has been working with national governments and Oil Marketing Companies around the globe and has covertly marked over 1.5 trillion liters of fuel. In our experience, the cost of deploying and enforcing a covert fuel marking program returns value orders of magnitude on the investment. It is not uncommon for Vigilant fuel marking program to return USD $100s of millions in lost revenue in a year.
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2. “How Chemistry is Helping Defeat Fuel Fraud,” Alex Scott, Chemical & Engineering News, Vol. 94, Issue 5, pp. 20 – 21.