Fuel levy surprise awaits motorists in oil storage deal

Motorists and other oil consumers will be charged higher fuel prices if a Dutch oil trader and its local partner have their way in a planned new oil storage deal.

VTTI Inc of the Netherlands and Riva Oils Ltd are about to commit the Government to a lopsided deal that will compel it to introduce new a fuel levy which will be shouldered by Kenya’s already over-burdened oil consumer.

The Sh2.4-a-litre fuel levy on petroleum products is to be introduced by the Energy ministry if the deal is signed.

Saturday Nation has learnt that an inter-ministerial committee that has been negotiating with VTTI since February this year has completed the negotiations and handed its recommendations to the Treasury for final approval.

According to the paper trail seen by Saturday Nation, VTTI, which is part of the World’s largest oil trading conglomerate with interest in refineries, oil terminals and tank farms across the globe, has negotiated a sweet deal with the inter-ministerial committee.

According to the terms, VTTI is over the next three years to build 13 mega tanks in Nairobi with a capacity to store 300,000 cubic meters of refined petroleum products for the country’s strategic oil stocks.

VTTI has estimated that the construction of the tanks, which will be connected to the Kenya Pipeline Company system, will cost $119 million.

Once the massive tanks are built, they will be leased to the state-owned Kenya Pipeline Company on a long-term basis, which means that VTTI will be allowed to build the storage and dump them on the State-owned company.

Documents seen by Saturday Nation show that the parties have agreed that the pipeline will be made to commit to lease the tanks for 20 years.

The third part of the sweet deal and which is perhaps even more controversial is the tariff to be charged to KPC and the government for storing the strategic oil stocks.

It is recommended that VTTI be paid a monthly tariff of $6.29 per cubic metre which will be passed on to the consumer through the new levy to be called the “strategic reserves levy.”

This is a mega transaction involving big money. To appreciate just how sweet the deal VTTI and Riva Oils are about to pull off, multiply the tariff of $6.29 or Sh534.65 (at Sh85 per dollar) per cubic meter by 300,000 cubic meter which is the volume the government wants to store as strategic reserves all the time.

Then multiply by 12 months in a year and you are talking about an annual rental income of Sh19 billion for VTTI and Riva Oils.

How was the monthly tariff arrived at? Several factors, including goodwill on land, interest on loans, repayment period, the cost of electricity and return on equity.

The most controversial in the assumptions used in computing the tariff is, however, a figure of $6 million (Sh510 million) for goodwill on land.

Why is VTTI paying $6 million as good will on land when the land on which the tanks would sit is property leased from the Kenya Railway Corporation that measures a mere 4.7 hectares?

According to working documents by the inter-ministerial committee, the estimated market price of the plot in question is Sh160 million, which is 30 per cent lower than the parameters assumed in determining the fuel levy.

The monthly rent is but only one aspect of the fuel levy. What will hit the consumer harder is the cost of the stocks to be stored in the tanks.

The consumer will be forced to fork out a total of Sh22.2 billion which is the estimated cost of the strategic reserves.

Going by the figures in the inter-ministerial committee documents- each litre of diesel, petrol, kerosene, heavy diesel and fuel oil, will be charged at least Sh1.89 as strategic reserve levy.

Add this to 0.535 per litre for the monthly rent for hiring the tanks and you get Sh2.4 a-litre fuel levy.

Clearly, VTTI is going into the deal with major advantages. The business is guaranteed; a 20-year lease complete with a fuel levy to service the project’s financing costs.

Why is VTTI being offered such a lucrative deal without having to compete with other interested investors? As a state corporation, the Kenya Pipeline Company is bound by public procurement laws and regulations and the new guidelines on public-private partnerships, which appear to have been circumvented.

Inevitably, the deal is bound to provoke outrage from critics especially from within the petroleum industry.

Many industry insiders interviewed argued that a more competitive tariff could have been achieved if the deal was subjected to competitive tendering.

“Oil companies should have been invited to come up with what is known as a request for proposal,” said an oil industry insider.

Given that the decision right now is to finance the building of storage tanks through a new fuel levy, why can’t the assignment of building tanks to store strategic reserves be given to a public entity, either the National Oil Corporation of Kenya or KPC?

After all, the Government has all along declared intention to allow National Oil to buy and keep the country’s strategic reserves.

In 2006, the government mandated National Oil through a legal notice to establish strategic petroleum reserves to be stored at KPC tanks. The thinking at that time was that the Treasury would fork out money to National Oil to finance the imports.

The plan was held back due because of lack of money and also because the introduction of a fuel levy to fund strategic reserves had not been agreed on.

Why the government has now decided to single-source VTTI to do the assignment under terms manifestly in favour of the foreign investor is clearly a most intriguing question.

Then there is the issue of monopoly. Two years ago, VTTI’s mother company, Vitol, acquired a 40 per cent stake in Shell Kenya, the third largest marketer in Kenya, with several terminals particularly in Nairobi and Mombasa.

Last year, VTTI bought the biggest private storage facility that used to be owned by the troubled Triton.

The tanks VTTI purchased from the liquidators of the assets of fugitive businessman Yognesh Devani can store up to 110,000 cubic meters.

Critics say that if the deal to build the mega tanks is given to VTTI, Kenya risks ceding too much control of downstream assets to one private player.

The location of the mega tanks near KPC depots and terminal in Nairobi and adjacent to several other oil depots is also proving to be contentious as it will result in storage terminals with a total capacity in excess of 500,000 cubic meters being located within less than two kilometres radius of one another in a densely populated area.

The trend all over the world has been to move oil depots far away from densely populated areas.

The UK’s Buncefield Report that was commissioned after the Bunncefield fire tragedy warned against citing petroleum terminals near highly populated areas.