Responsible Fuel Supply Chain Management Just Makes $ense

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Illegal Fuel Trade, Supply Chain Integrity and Technology

By: Erwin Dorland, Advisory Program Delivery Manager, Authentix

When addressing the problem of fuel smuggling or fuel fraud, responsible fuel supply chain management isn’t just a simple question of doing the right thing – it makes financial sense.

Responsible management and minimising risks within the fuel supply chain will ensure quality and security of the supply chain.

Financial gain is often the key motive behind supply chain infiltration, as illegal practices can be extremely lucrative1. Often the legal and regulatory framework is weak, the risks are low and the financial gains can be high. As mentioned in a previous BLOG, in many cases, organised crime is involved, which contributes to the growth of this type of fraud.

Most countries have significant problems with lower taxed fuels being sold at higher taxed prices. For example, in Europe, diesel is sold at a lower tax rate for agricultural use, but is illegally used by road users, who are supposed to purchase higher taxed diesel. This type of fraud is preventing governments from collecting the right amount of taxes, which impacts government programs, the well-being of all citizens and the environment in which we live. In my experience, there are four key areas of focus to ignite action against the business of illicit fuel trade.

Visibility2, 3

Visibility refers to the ability to see what is going on within the supply chain. Fundamentally, having access to information will enable managers to make better decisions.

Information technology is at the root of supply chain management. With the advent of the Internet and the Cloud, information exchanges can involve many stakeholders and enables access to critical data 24/7.

Traceability

Traceability is closely related to visibility and refers to the ability to track the fuel’s provenance and maintaining a record of activities of the product flow.

Several tools are available to ensure traceability as fuel moves through the supply chain. The advancements in technology now allow stakeholders to tap into a variety of information sources for a balanced view of supply chain participants and risks. The fuel industry has a number of tools available, such as visible dyes, covert dyes, chemical markers, sealing of tankers, GPS tracking of trucks, dipping of trucks, and wet stock control to track products, to ensure quality and prevent fraud.

Integrity

National governments are increasingly being held accountable for policy actions and therefore the governments’ awareness of and commitment to high principles and business practices is increasing.

The exposure of irresponsible practice in the supply chain can result in severe damage to national governments’ reputation and citizens’ trust. For example, governments not collecting the available taxes and having the appropriate system in place to do so, might have a negative standing with citizens.

Transparency

Transparency refers to national governments’ engagement and communication with external stakeholders. Such engagement is designed to share the national governments’ practices with those that have an interest in the governments’ behaviour, including environmental and social performance. Supply chain issues are becoming more and more visible to citizens and stakeholders. Therefore, developing transparent information systems and processes to communicate sustainable supply chain practices is vital. For example, governments can use social media to inform and educate citizens about their approach to responsibility, by promoting supply chain transparency.

 

Ready for Action

To really support the initiative to stop fuel smuggling and fuel fraud, making the supply chain more resilient to supply chain risk involves attaining a good understanding of the supply chain and conducting analysis of the potential threats and the level of risk4. Technology can be used to verify fuel authenticity and tampering. The resulting information will need to be captured using the appropriate information technology and made visible to the appropriate stakeholders.

Among the considerations of the technologies to be used, must be the ability for the technology to pay for itself. Government and policy makers need to be educated regarding the risks of fuel adulterations and how the legal and regulatory framework need to work hand-in-hand with the introduction of technologies. Awareness needs to be created that no technology will provide absolute supply chain security, as there are always weaknesses to be exploited. The key is to understand the key risks and put tools in place to collect the appropriate information, so those risks can be managed.

Click here to learn more about how Authentix’s Vigilant® offering is helping governments prevent fuel fraud. You can also learn more about Assure™, our brand protection fuel marking program for oil marketing companies.

 

References

  1. Illicit Trade, Supply Chain Integrity, and Technology – www3 … – Illicit Trade, Supply Chain Integrity, and Technology, J Picard and C.A. Alvaranga
  2. https://dupress.deloitte.com/dup-us-en/topics/operations/supply-chain-transparency.html – The path to supply chain transparency, D Linich, University of Tennessee
  3. creating a transparent supply chain best practices – Global Supply ……  – Creating a Transparent Supply Chain – Best Practices, University of Tennessee
  4. Manage your supply chains responsibly – Business in the Community – How to: Manage your supply chains responsibly, Business in the community

How to Create a Secure, High-Quality Fuel Supply

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Introduction to Stop Fuel Fraud Blog Series

Every country around the globe is dependent on the use of petroleum products to move people and goods around, generate power and generally keep their economies growing. Because of this ubiquity in the economy, most governments have developed fuel taxation systems to fund essential services for the benefit of their citizens and at times, provide subsidies to lower prices for certain essential fuels.

The differential in price between taxed, high-cost fuels and subsidized, low-cost fuels creates an incentive for criminally-minded people to perpetrate fuel fraud. The money generated by this illicit activity has been used to fund drug cartels and other organized crime[1] as well as terrorists[2].

Fuel fraud happens in a variety of ways. One form is smuggling in fuel from a neighboring country where prices are low. A striking example is Guyana, a small country in South America that shares a border with Venezuela, where the price of diesel is subsidized down to US$ 0.01 per liter. Guyana follows the prevailing market price for diesel, selling it at about US$ 0.70 per liter, so the incentive to bring fuel via ship or overland from Venezuela is quite strong.

Fuel fraud also occurs when high-priced, taxed product is diluted with cheaper or low-tax fuel products. An example of this is when diesel fuel intended for use in agriculture or mining carries a no- or low-tax rate and is diverted into the high-tax road diesel fuel supply.

Adulteration is a common type of fuel fraud that occurs when other types of hydrocarbons are introduced in the fuel supply. These are typically low- or no-value inferior products such as solvents or waste oils, which then adulterate the fuels meant for vehicles. These adulterants are both a source of additional air pollutants and can cause malfunctions, component failure and safety problems for engines that combust these compounds.

Fuel fraud is a rampant problem in the world, siphoning off needed tax revenues, harming air quality and damaging vehicle engines. This is the first in a series of articles about the ramifications of fuel fraud and a detailed review of the many ways it can occur. Stay tuned through the end of the series to learn how a well-designed, comprehensive fuel marking program – the introduction of environmentally-safe chemical markers into the fuel supply chain – can pay for itself in recapturing lost tax revenue while providing timely, actionable insights that allow government enforcement personnel to combat illicit fuel trade in their countries.

A secure, high quality fuel supply strengthens confidence in the government, provides a level playing field for the companies that sell and distribute fuel in the country and keeps vital funds out of the hands of the bad guys.

 

By: Gail Moser, Director of Marketing, Authentix

 

[1] https://www.nytimes.com/2017/04/26/world/americas/mexico-fuel-theft-crisis.html?_r=0

[2] https://www.usnews.com/news/the-report/articles/2015/11/23/financing-terror-where-does-the-islamic-state-group-get-its-money

Fuel Quality is on the Rise In Africa

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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.

1. https://www.publiceye.ch/fileadmin/files/documents/2016_DirtyDiesel_A-Public-Eye-Investigation_final.pdf
2. http://citibusinessnews.com/index.php/2016/09/17/acep-displayed-ignorance-in-dirty-diesel-report-moses-asaga/
3. http://www.imaniafrica.org/2016/04/21/imani-africa-report-prevent-fuel-fraud-africa/