The real causes of oil supply hiccups

After listening to accusations and counter-accusations about the cause of the shortage of petroleum products over the past fortnight, I will attempt to summarise what I understand to be the issues.

It is true that demand has resurrected mainly due to lower prices and increased aviation business – all good news for the country and the consumer. Again, December is a motoring month, especially when there are no rains.

The Kenya Petroleum Refineries, Kenya Pipeline Company, Kenya Revenue Authority, importers and Kenya Power and Lighting Company may all have directly or indirectly contributed to the shortages. The important thing is to learn and improve the supply chain efficiency for the future.

The marketers have expressed frustrations at the inability of the refinery to convert crude oil into sufficient quantities of the right products, especially premium gasoline.

When this happens, only supplementary imports can rescue the situation. With a refinery in urgent need of an upgrade, this will continue to be an expensive problem both to the economy and the consumer.

Power fluctuations and outages have also consistently interfered with the ability of the refinery to meet production targets, and this will be even worse as hydro power performance will inevitably deteriorate over the next few months as River Tana flow continues to diminish.

Even worse will be flow of water to the refinery, which requires tonnes each day for cooling and steam generation.

Teething problems

KPC commissioned a new set of pumps at a time when the country was low in stocks. Commissioning a new pumping system and tying it in to an existing running system always has teething problems, and this is always expected.

At a supply meeting in late November, marketers expected the system to stabilise within one month. However, KPC may have given people false hope with the timing of the commissioning ceremony, which has not been made any smoother by the quality of power supply.

Steady voltages are essential when running in new high capacity motors. KPC does not need the entire 880 cubic metres, as this is the maximum capacity for future years, and may only require pumping rates of about 600 cubic metres to meet the current demand.

As the KPC was commissioning its new system, there were stocks of gasoline in various storage tanks in Mombasa. KRA documentation procedures may have made it difficult for marketers to move supplementary premium gasoline to upcountry locations by road.

Even if KRA were to ease documentation, there was still the extra cost of road transport to upcountry consumers. Road transport is more expensive than using pipeline and, with the prices coming down, marketers may have found it difficult to pass on the cost to the consumers and opted to wait for the KPC system to stabilise.

The above are a just a few symptoms of a petroleum infrastructure that is insufficient and certainly disjointed. This may not be the correct vehicle for achieving Vision 2030, unless action is taken to review the petroleum infrastructure as strongly proposed during the Energy Conference recently held in Nairobi.

KPC is just a part of the petroleum supply chain, and addressing the pipeline capacity alone only resolves a part of the system problem.

There are the crucial product entry issues, such as the tanker dockage at the port, imports receipt storage capacity and refining efficacy, which all need to be analysed and acted on for adequacy and efficiency.

There is also the issue of sufficiency of Nairobi storage and loading capacity, considering that Nairobi accounts for about 60 per cent of the total national consumption.

As long as the government insists on the refinery supplying 60 per cent of Kenyan hydrocarbon requirements, then it must be prepared to move fast to modernise it, otherwise it will remain an expensive bottleneck to the entire supply chain. The government needs to move fast to resolve the shareholding issues and commit finances to upgrade the refinery.

Further, the government will need to quickly come up with crude oil and product supply systems with sufficient regulatory, legal and financial guarantees that protect both the importer and marketer from financial exposure, as is currently.

The open tender system as it is today is voluntary and only the importers willing to take risks will import, and this does not augur well for the country’s security of supply. The supply system should have sufficient legally enforceable penalties and guarantees.

When oil prices are on a downward trend, it is normal for importers to act cautiously and avoid overstocking so as not to be caught with expensive stocks to be sold at a loss, and this may have generally resulted in lower stocks in the system than is normal.

That is why the Ministry of Energy should ensure that legally required minimum stocks are maintained by all marketers.

Eventually, the government should implement the strategic stocks programme. Again, the government should think very carefully about the timing of the introduction of price controls at a time when the supply infrastructure is insufficient and inefficient, otherwise supply chain disruptions will not disappear.

In a price regulated environment importers and marketers will always behave like business entities and react to supply hiccups only to the extent defined by the prices fixed by the controller, and will avoid to go the extra mile if it results in losses. Unfortunately this is the difficult reality of a price-regulated environment.

Finally, with Uganda’s crude oil production and local refining tending toward reality, the Kenyan government should in future incorporate this development in every decision they make on petroleum infrastructure investment.

Mr Wachira is the General Manager, Petroleum Institute of East Africa