Tight purse strings choke small oil firms

Small oil marketing companies are unable to import crude and refined oil products into the local market because of limited financial facilities.

According to Petroleum Development Consultants (PDC), many firms don’t have the capacity to participate in the open tender system (OTS) as banks have set stringent lending terms after the collapse of Triton Petroleum.

Triton, which was put under receivership on December 19, 2008, owes about Sh7 billion to the Kenya Commercial Bank, Fortis Bank of Netherlands, PTA Bank and Glencore International among other financial institutions.

Banks will lend the funds required for the acquisition of stock, whilst retaining ownership of imported fuel until payment is received.

They at times request a cash cover of 20 per cent to stand in for the risk of market price falling below purchase price and administration costs.

It is compounded by advance tax payment to the Kenya Revenue Authority for imported fuel within four days of warehousing which is a major cost item. Total tax ranges between 40 to 50 per cent of landed cost.

All imports of crude oil and refined fuel are through the OTS which is coordinated by the Ministry of Energy.

Fluctuation of oil prices has made trading conditions in the country’s oil sector challenging.

“OTS mitigates difficulties posed by these fluctuating prices as all players obtain crude oil and refined products at the same prices. This makes price homogeneous across distribution,” said PDC.

It said implementation of Single Entry Point (SEP) requires that all refined oil products enter the Kenyan market through one point which helps to level the playing field for local oil marketers.

Industry cargoes have priority at when ships berth in Mombasa, whether or not to arrive within their date range and this minimises demurrage exposure to the OTS imports.

According to Petroleum Focus Ltd, OTS was introduced in 2004 to facilitate competition by unbundling fuel procurement and marketing operations, and removing barriers to entry of indigenous operators.

“All licensed importers have equal access to crude oil and products at competitive prices, supplied centrally through competitive bidding creating a level playing field for all companies,” said Petroleum Focus director George Wachira.

He said the objective of OTS was to create an orderly market place to reduce energy costs in Kenya through the economies of scale. The system directs that sellers must be licensed by the Energy Regulatory Commission.

The challenges posed by imposition of SEP have been addressed by the government allowing the Shimanzi Oil terminal and Kenya Petroleum Refineries Ltd (KPRL) facilities as alternative entry points for products besides granting permission for road haulage of fuel from Mombasa.

The government has made it mandatory for all imported oil products to be discharged at Kipevu Oil Storage Facility (KOSF) in Mombasa while OTS has facilitated efficient data collection at national level.

PDC said price charged to buyers is obtained from a standard cost build up that reflects various elements and the only variable that is subject to competitive bidding process is the freight and premium.

“The company with the lowest bid wins the tender to import the crude oil, finance the import and have it discharged into KPRL tanks in Mombasa and raise invoices to buyers for their respective shares,” said PDC.

Unit price charged is the same for all buyers irrespective of quantity bought and this translates to a common cost structure. The title to crude oil is transferred only after a buyer has paid for their share of the cargo to the importer in full.

Payment for OTS crude oil is due 20 days from Bill of Lading date. Late payments attract hefty penalties in form of 8 per cent interest above base rate.

Any buyer who has not settled their dues is declared to be in default after the 50th day and risks losing their oil trading license apart from being disallowed to participate in future OTS tenders.

Mr Wachira said an importer approaches a bank for a letter of credit facility, secured under the normal bank loans and credit facility and is often on balance sheet.

“Most major oil companies give support to their affiliates by trading cargoes on open credit terms subject to tight remittance schedules,” he said.

Oil majors absorb over 80 per cent of quantities imported under the OTS. The risk of default is on small organisations.