Calls to cut fuel costs fall on deaf ears

Oil companies increased pump prices for the second week, taking advantage of disputes in the sector to make a killing.

They are now making as much as Sh12 profit a litre, as the Ministry of Energy impotently appeals to them to cut their prices by at least Sh5. The big oil companies are boycotting meetings called by the Energy ministry, saying that the determination of prices is a private matter.

The cost of energy affects everyone and everything across the economy.

Shortages being currently experienced might be largely caused by a new system introduced by the Kenya Pipeline Company.

KPC has introduced a system called batching, where the fuel is being pumped in batches from the Kipevu storage in Mombasa. If an oil company’s fuel is not in the batch, then they go without fuel or apply for an advance from the KPC.
Fuel tanks full

Previously, once a company had cleared its fuel and paid taxes, it could fetch from the KPC depots.

Industry sources said some companies were unable to access stocks, even though the fuel tanks are full. Last week, Energy permanent secretary Patrick Nyoike said: “Products are now flowing well, we have since resolved the issue between Kenya Revenue Authority and the Kenya Pipeline Company. Marketers are now collecting stocks.”

Nation inquiries, however, indicate that the batching is still continuing, hence the shortage.

“Previously, once you cleared with the Kenya Revenue Authority in Mombasa, KPC would credit your stocks in Nairobi and release them. But with batching, you have to hope that your products are in the batch supplied to Nairobi,” said an industry source who did not wish to be identified for fear of antagonising the authorities.

The issue was the subject of two industry meetings on Monday and Tuesday. The Monday meeting largely focused on ullage, while on Tuesday the marketers held a tendering meeting for the importation of crude.

“Even the request of advance from KPC is not coming through and soon this problem might hit neighbouring countries,” the source said.

Already pump prices in Kampala have started rising due to hoarding in anticipation of further shortage.

Refused discussions

Those most affected by the new systems are the big oil companies, Shell Kenya, KenolKobil, OiLibya and Total Kenya. The four have a wide footprint of pump stations in Nairobi and around the country.

The industry has taken advantage to make profits, which the ministry describes as “unacceptable”.

On average, the pump price currently stands at Sh98 a litre of super petrol at most stations in Nairobi.

“They refused to discuss the issue of pricing with me saying it’s a liberal market… I appeal to them to at least lower the price by Sh5,” Mr Nyoike said recently.

The ministry now estimates that some companies are making as much as Sh12 a litre in profit. A fair price would be Sh87.35 a litre, but even the government-owned National Oil has joined the profits frenzy.

Attempts to control the escalating prices have largely failed. In 2008, the Energy Regulatory Commission (ERC) published a draft formula for setting maximum prices of petroleum products.

However, the National Economic and Social Council shot down the proposal, arguing that regulating the price of petroleum products would open up agitation for controlling the prices of other goods, with disastrous results.

Analysts believe the increases over the past fortnight could also be related to manoeuvres by some of the oil majors who are said to be holding back to see how the recent escalation in the protracted dispute between one of the major players, Kenol Kobil, and the Mombasa-based Kenya Petroleum Refineries Ltd (KPRL), will affect both supplies and prices.

The market is currently grappling with the effect of KenolKobil's exit from the business of refining crude.

Under what is known as the base load rule, all marketers are required to process 1.6 million tonnes of crude at the refinery yearly, according to market share.

But following the suspension of KenolKobil from the refinery, and even after KenolKobil’s quota at the refinery was re-allocated to other marketers, oil companies have been lobbying the government to relax the base load rule so as to reduce crude oil cargoes.

Analysts said the current upward pressures on pump  prices was a result of manoeuvres by some of the major players to take advantage of the uncertainties over re allocation to other players of Kenol Kobil’s share of crude imports.

With some of the larger players having increased retail prices, smaller players, who invariably tend to copy bigger players, have followed suit.

The current spate of high pump prices is bound to re-ignite the perennial debate on monopolistic practises by oil companies in Kenya.

Despite the emergence of independent marketers in recent years, the oil marketing business is dominated by a handful large players with less than five companies controlling 80 per cent of market share.

Although it is difficult to prove cartel-like behaviour, the circumstances that allow cartels to operate exist. Basically, prices are not only similar, increases are effected uniformly.

Despite the fact that the Nairobi region is by far the largest consumer of petroleum products, prices in the City are higher, a sign that oil companies deliberately angle to maximise margins in areas with heavy consumption.

Price competition in the industry is also inhibited by the so-called Open Tender System (OTS), an arrangement whereby one marketing company imports refined petroleum products on behalf of all other marketers.

It creates conditions where no individual firm is motivated to lower prices in order to sell more. Marketers will not lower prices because they are guaranteed sales at high prices because supply is fixed in the short run under OTS.

In August  2005, the Head of Public Service, Mr Francis Muthaura, appointed a task force to investigate  cartel-like behaviour in the oil industry.

The task force came out with several recommendations, including the strengthening of Nock’s role as stabiliser of prices in the market and the unbundling of the petroleum industry to separate retailing from wholesaling.

The recommendations are yet to see the light of day.