Oil marketers push for higher energy prices

ERC is set to conduct a study that will inform the frequency of review of the variables that comprise the fuel setting formula.

Thursday March 10 2016

A fuel pump at a petrol station. Oil prices have been dropping globally prompting gas companies to warm up to mergers and acquisitions. PHOTO | AFP

A fuel pump at a petrol station. PHOTO | AFP 

The Energy Regulatory Commission (ERC) is set to conduct a study that will inform the frequency of review of the variables that comprise the fuel setting formula.

The move could lead to higher prices at the pump, subjecting consumers to additional costs, above the current high energy costs.

The study has been informed by requests by oil marketing companies through the industry lobby, Petroleum Institute of East Africa, for inclusion of changes in inflation and interest rate charges in the fuel price formula.

“As the Kenyan industry is competing with world, the only way to retain investors is by having reasonable margins for investment. We are challenging certain elements in the formula so that they reflect the true position of the business,” said PIEA chairman Powell Maimba.

The study is being undertaken under the Kenya Petroleum Technical Assistance Project (Keptap) funded by the World Bank to a tune of Sh5 billion ($50 million). A consultant to carry out the study is yet to be hired.

CONSULTANT

“We have already prepared the terms of reference and sent them to the World Bank for approval. Once this is done we will begin searching for a consultant to undertake the exercise,” said Edward Kinyua, director for petroleum at ERC.

The last review of the rates was carried out in 2014, according to ERC. The ERC fuel pricing formula takes into account inflation as part of transportation rates while movement in interest rates is captured under the margins allowed to shareholders and retailers.

ERC relies on the formula to set monthly maximum prices for fuel. According to industry analysts, consumers have not fully benefitted from the drop in international crude prices as taxes and margins for oil dealers account for more than half of the cost of fuel per litre.

Since the closure of the Mombasa-based refinery in September 2013, the country fully relies on imported petroleum products, denying consumers the benefits of cheap crude oil.

Last month, energy cabinet secretary Charles Keter challenged oil marketers to uphold transparency, hinting that the government had shifted focus to their margins in a bid to secure fair prices for consumers.

Mr Keter said the ministry was studying the various costs lumped on a litre of fuel with a view to eliminating unnecessary ones through streamlining of operations in the petroleum import and distribution chain.

He specifically pointed out the provision for depot and pipeline losses, calculated as part of distribution costs that the pricing formula relied upon by the ERC that allows as compensation for oil marketing companies involved in importation and retail sales of petroleum products.

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