Four islands to launch ambitious project

NOVEMBER 2009

Four islands of the Pacific will this month launch an ambitious and never before tested system of fighting rising fuel prices—a bulk procurement of petroleum project that its advocates claim will save the islands’ economies millions of dollars annually.
Spearheading the project is the Pacific Islands Forum Secretariat and it involves the small islands states of Cook Islands, Nauru, Niue and Tuvalu.
By the time you are reading this, the Forum Secretariat would have announced the management company that will implement the project’s first phase, which will among other things see an assessment carried out on the petroleum standards and requirements of all the four participating countries.
Tenders for phase one was called in June this year.
“We have tendered this internationally, we received a number of proposals, the proposals have now been assessed by an independent panel, a preferred tender has been identified and we are finalising the contract negotiations with that preferred tender,” Forum Secretariat official Edward Vrkic told ISLANDS BUSINESS magazine.
“The first phase is really the design and assessment, consultation period.
“So it’s where we have gone to the market, we have asked for a certain skill set and that skill set will include petrol management expertise and starting the process of consultation not only with government but with the industry about what would be feasible and what would not be feasible.”
Vrkic is the executive officer of the Pacific Plan Office at the Forum Secretariat.
When he spoke to ISLANDS BUSINESS at his office in Suva on the final week of October, he said the announcement of the winning bid for the first phase would be made shortly.
During the interview, he would not be drawn into discussing any matter that would disclose the identity of the winning company, even the total number of bids the Forum Secretariat had received.
Key milestones: Neither would he disclose the fee this company would be paid, except to say the Forum Secretariat was footing the entire cost of the exercise.
Between now and the first quarter of 2010, the management company or consultant will be required under the terms set out in the tender document to deliver on what it termed the six “key milestones.”
These are:
• Assessment of national standards and requirements of petroleum products for the four participating countries.
• Procurement strategy detailing the tendering model to be used to procure collective services, project specifications and key milestones.
• Risk assessment presenting options and recommendations for consideration by current and prospective signatories.
• Draft commercial contract for goods and services.
• Provide final commercial contract for goods and services.
• Offer all associated tendering documentation and services necessary for successful tendering of a commercial contract for goods and services required.
Once the assessment and a petroleum procurement or purchase plan is identified and approved, phase two of the project will kick in—which will start with the calling for bids from oil companies to supply and distribute the petroleum requirements of participating countries in the region.
“Ultimately, the vision is that we will have one firm supplying petroleum to those that are interested,” said Vrkic.
“It’s fair to say that we are not naïve about some of these things. This is still very new for the Pacific. The Pacific has a very long history of regional responses but this one is particularly interesting because of the potential economic impact it offers.
“The second thing to remember in all of this is I think in terms of this exercise, it’s new, we’re still grappling around a bit.
“On paper, we can see how it will work but when we started talking about government procurement, legal codes, what the attorney-general would be prepared to recommend to government, what the industry thinks is suitable, etc, it becomes very complicated.”
It is its complexity that saw Vrkic and his team of experts at the Forum Secretariat wracked their brains over the best way to deliver on the Pacific Islands leaders’ decision to produce a workable plan on meeting their fossil fuel needs.
Unhelpful too has been the level of criticism the team has received from certain quarters of the oil industry in the region.
“There is not an ethical company on the planet that will allow someone else other than the management of that company to set the ‘terms and conditions’ of multi-million negotiations,” an oil distribution company executive in Solomon Islands wrote in an email he had sent to a senior official of the Forum Secretariat.
“We certainly will not. And in those negotiations, we will seek the best deal for our shareholders.
“Not the best deal for the ForSec (Forum Secretariat).
“Not the best deal for the SIG (Solomon Islands Government).
“Not the best deal for the citizens of Fiji or Tuvalu.?
“Not the best deal for the ‘rest of the parties to the MOU.’
“But the best deal for our shareholders, period.”
Concerns: The author was apparently furious because concerns he has about the project were not acknowledged by the Forum Secretariat.
He even questioned the capabilities of Vrkic and his team to manage such a big and complicated commercial enterprise.
“We are currently negotiating our next supply contract,” this man’s email reads.
“As an example of the kind of things that we will weigh heavily in making our choice, we need technical backup from our supplier in several specialised fields.
“One is the auditing of our airport operations which has to happen twice a year. Another is the testing of the fuel before it can be released.
“A third is the official certification of our airport fuel delivery and handling procedures.
“The final one is the training of our staff in a host of specific technical areas. These are not minor issues.
“We will likely knock one of the supplier possibilities out of the running entirely, simply because they can’t provide some of these ancillary services.
“For example, retailers get racks and promotional materials and bowsers and lubes.
“Will your project provide all of these? Have you thought about whether you want to provide them or not? Have you even heard of these issues?”
Vrkic was aware of the email and its author, but declined to be drawn into giving a response.
But it is clear that in deciding to outsource the management of the proposed petroleum bulk procurement project, the Forum Secretariat is putting to rest criticisms that its officials are not qualified to handle such complicated and highly technical works.
Said Vrkic: “The thing to remember in all of this is that we are not going to influence the price of global oil by doing this.
“What we are looking to do is to capitalise on the efficiency in the supply chain.
“So instead of having you know all these different ships, all these different routes supplying petrol to different countries, different grades to different parts of countries, we are looking at achieving efficiency through greater standardisation.
“To give you an anecdotal example, instead of having a ship go to a country half full, and another ship go to another country half full, we can potentially have one ship to service both countries.
“That’s really what we are looking at. We are not going to influence the price of global oil because our consumption across the region is approximately 40,000 barrels per day. Global consumption is 80 million barrels a day.”
Will distribution efficiency lead to cheaper pump prices in the islands?
Vrkic and his team certainly hope so.
“Ultimately the hope is that we can produce savings for the consumer but also more fundamentally, we will produce savings for the national coffers.
“Specifically, the Pacific is 98% dependent on fossil fuel.
“The reason why that is significant is that large amount of energy generation in the Pacific is through petroleum products—for example, fuel for generators to run electricity is petroleum based.
“So often governments are involved if not for procurement, but in consumption, e.g. through utilities, and distribution and this in itself varies from country to country. There is no one model.
“But ultimately governments have a significant role to play in the procurement and management of petroleum and distribution.
“What we are saying is if we start to standardise some of that and start to eliminate some of those costs, ultimately it’s really attacking that supply chain to bring about efficiency in distribution.
“Now some members of the industry have told us this is potentially a good way to go forward.
“That’s why we are having this assessment, that’s why this project is being taken.”
But how much really are the participating countries expected to save once the bulk purchase scheme becomes operational?
An information circular circulated by the Forum Secretariat to its member countries last year spoke of savings to the tune of millions of dollars.
Work on projected savings was started by the Secretariat’s former petroleum expert Jarred Morris, whom Vrkic acknowledged as the one who conceptualised and championed the whole idea.
“A preliminary assessment undertaken by the Secretariat suggests that procurement efficiency savings will vary between 2 to 15% of the value of the import,” said the information circular.
“For example, the cost of petroleum products in the region’s Small Islands States (SIS) totalled approximately US$120 million per annum.
“Greater efficiency in procurement is expected to deliver sayings between US$3 million and US$10 million per annum to the SIS and FSM (Federated States of Micronesia) alone.”
The same document did point out that “at least eight signatories are required to ensure the successful implementation of the project”.
Yet only Cook Islands, Nauru, Niue and Tuvalu have signed up when tenders for phase one were called.
Option: In April, this year, Forum Secretary-General Neroni Tuiloma Slade announced that FSM and Tonga have also expressed interest in the initiative.
Papua New Guinea is said to be considering the model too.
Said Vrkic: “We had the option of waiting until we have more signatories but we thought it would probably not be in the interest of the countries that have signed up.
“I think it will probably see more signatories as this work starts moving.
“The fact that it began when it was picked up by the Forum leaders, it was again picked up by energy ministers, it was again picked up by FEMM (Forum Economic Ministers Meeting), suggested to us that members are still very interested in this process.”
A former analyst for a large oil company in the Pacific who spoke to the magazine on the condition of anonymity believes the Forum’s bulk oil purchase scheme would only work if it could generate savings for participating countries.
“Oil companies will want segregated market for the premium margin,” this expert said.
“To improve your purchasing power, you will try and get as much volume as possible to negotiate with the suppliers.
“That’s why the Forum is doing this. The Forum is the facilitator, but they will need some experts to do this.
“If the savings are huge, I think everything else will fall in place.
“There’s about 1.9 billion litres that come to the region including PNG and Fiji.
“The economics work on making the supply chain as efficient and effective as possible.
“Right now, they are doing milk runs around the Pacific including Solomon Islands which is taking about 1000 tonnes off a vessel that is capable of delivering 40,000 tonnes.”
Vrkic said if all goes according to plan, the first transaction will take place in late 2010.