Pricing Mechanisms

The Challenge: A customs union which controlled the pricing and imports of refined petroleum products into a number of African countries was under attack from its stakeholders over the fairness of its pricing mechanism. Making matters more complicated was the fact that the mechanism needed to be deemed fair by a plethora of stakeholders with competing interests. These included refiners, oil companies, government agencies, consumer groups, market participants, shipping companies and oil traders.

The Solution: In coordination with the key stakeholders, JBC developed a new pricing mechanism that is transparent in its build up and reflects actual costs elements involved in importing refined products into the customs union. Transparency was key in building trust and confidence in the new mechanism as all stakeholders can track changes in specific market conditions and how these changes will impact import prices without having to call into the question the entire pricing system.

Our Approach: A key element for successfully reaching a consensus with the stakeholders was to have them involved in finding the solution from the beginning. To ensure this ‘buy-in” JBC worked closely with the stakeholders involved in the supply chain. This also allowed the consulting team to establish the real costs associated with importing refined product into the customs union. These costs which took into account market realities including accepted norms for purchasing, pricing and shipping of refined products where used to develop economic models to evaluate the commercial alternatives for fuel imports from the relevant major refining centres to the customs union under different scenarios. Once completed JBC designed suitable market related adjustments that needed to be made to sustain product availability taking into account spot versus term supply premiums, quality difference premiums and changes in freight costs.

The Outcome: The countries of the customs union in agreement with the oil industry and other stakeholders agreed to use JBC’s pricing mechanism. The JBC pricing mechanism was then enacted in legislation that is still in place today.