Kenya to lose regional fuel market

The image of a visibly angry Energy Cabinet Secretary Charles Keter moving from one petrol station to another two weeks ago pouring adulterated fuel in Nakuru not only raised eyebrows but also questions why he was doing a job that would ordinarily be done by junior ministry officers.

In the end, seven fuel companies had their licences cancelled. But Mr Keter has a bigger reason to worry.

Data seen by the Sunday Nation shows that Kenya’s position as the preferred petroleum products importation route for landlocked East African nations could be slipping out of its hands despite a surge in local consumption that has led to a phenomenal growth of the market.

In just five years, the number of petrol stations has grown by 23 per cent from 1,382 to 1,707 while marketers have doubled from 47 to 87, according to the Energy Regulatory Commission (ERC), signifying growth in the local market.

But on the regional front, all EAC countries apart from Uganda and Tanzania have since the beginning of the year reduced the amount of fuel they import from Kenya due to concerns over adulteration.

So dire is the situation that Rwanda, which imports on average 60 metric tons of diesel through Kenya, completely stopped doing so in July opting for Tanzania which it claims has cleaner fuel and has a bigger axle load limit offering better economies of scale.

Burundi, too, has since May not imported any diesel from Kenya.

This year it has only imported kerosene through Kenya in March and May, jet fuel for only three months while its importation volumes of petrol have dropped from a high of 2,121 metric tons in January to zero in July.

Likewise the DRC, which in January imported 11,425 metric tons of diesel, had by July reduced importation of the fuel through Kenya, mostly used by commercial vehicles by 14 per cent to 9,817 metric tonnes.

And it has everything to do with fuel adulteration, a vice where unscrupulous dealers mix kerosene with other petroleum products in order to increase volumes.

For a long time it was applied to products meant for local consumption but has now widened to the export market, causing the government sleepless nights.

“What these dealers don’t realise is that their greed for quick money is only short term because, in the long run, we are going to lose these markets and they will have no one to export to. It will be foolish to make quick money and lose a whole market,” Mr Keter told the Sunday Nation.

“Right now we have already lost the Rwandese diesel market but we will not let these unscrupulous dealers win even if it means me going round doing the testing myself,” he said.

FUEL MARKETS
Refined petroleum, which forms 13 per cent of Kenya’s total exports, is the country’s third largest export product after tea and cut flowers.

Last year, Kenya exported a total of 2 billion litres to the five East African countries and the Democratic Republic of Congo, raking in $700 million.

According to the Kenya Pipeline Company (KPC), Uganda is currently Kenya’s biggest buyer of petroleum products, importing 1.16 billion litres last year.

It is followed by South Sudan, DRC and Rwanda which imported 461 million litres, 303 million litres and 32 million litres respectively.

But with the flower industry facing stiff competition from Ethiopia, the government is keen on increasing its refined petroleum exports by taking advantage of economic growth in its landlocked neighbours which is driving demand.

This strategy is aimed at establishing a ready market once the country starts extracting its own oil next year.

But Tanzania’s President John Magufuli's efforts to transform his country, which also has access to the Indian Ocean, into the preferred petroleum import route for the landlocked EAC countries, is already threatening to eat up Kenya’s share.

The country’s southern neighbour- turned-economic rival has already ratified its axle load limit to 56 tonnes which matches the rest of the countries.

Kenya’s limit is 52 tonnes. And if you consider the fact that 80 per cent of petroleum products in Kenya are transported by road, exporters can move more volumes at cheaper prices in Tanzania.

Experts say the solution lies in making the price of kerosene level with petrol.

“We need to bring the excise duty higher so as to do away with the vice completely. This is how Tanzania has managed to eliminate adulteration,” Ms Wanjiku Manyara, the Petroleum Institute of East Africa (PIEA) CEO, says.

“The only problem is the capital cost of acquiring a gas cooker, but after that it is cheaper than kerosene and that is where the government needs to kick in,” she says.

The ERC late last year reintroduced tax on kerosene after President Uhuru Kenyatta assented to the Excise Duty Bill.

But diesel and petrol attract a road levy charge of nine shillings a litre that does not apply to kerosene.

This was evident on Wednesday when the ERC gave its monthly fuel pump prices review that still shows a variation in the prices of kerosene, diesel and petrol despite a marginal drop in all their costs.

INCREASES TAXES
In Mombasa, where all petroleum products imports first land, petrol now retails at Sh87.99 per litre, diesel at Sh79.08 and kerosene at Sh56.27, something even the energy regulator is uncomfortable about.

“The long term solution on adulteration that ERC is negotiating with other arms of government is the increase in the tax levied on kerosene to the same level as diesel so as to completely remove the incentive for adulteration,” Edward Mwirigi, ERC acting Petroleum Director, told the Sunday Nation.

He said the current tax differential between diesel and kerosene stands at Sh21 per litre.

But even then, levelling the cost of kerosene with petrol will only be part of the solution and will largely be a political as opposed to an economic decision, putting the government at a crossroads

Increasing its price will push a majority of homes who cannot afford clean energy to firewood or charcoal but eliminate adulteration.

And even after achieving this, the government still has to consider if it will increase the axle load capacity to 56 tonnes to be at par with the region, but risk destroying the country’s roads.

Article 90 of the EAC Treaty provides for the adoption of a common axle load to facilitate transit transport in the region, which is a key pillar of integration.

But in October 2008, President Mwai Kibaki issued a directive reducing the number of axles allowed on Kenyan roads from four to three, lowering the limit of the gross weight of a truck to 48 tonnes.

This was in 2013 but currently it is 52.

“It is a tough decision to make but the solution lies with fast-tracking the construction of our new pipeline from Mombasa to Malaba which will take trucks off the road and completely eliminate adulteration,” Mr Keter says.

“Once complete, the new pipeline will have the ability to pump 2,630 cubic litres per hour in the first phase, up from the current 830 cubic litres per hour, on the current pipeline, which is more than 10 years past its lifespan, and is prone to leakages,” he says.