State accused of failing to pay oil companies over Sh10bn refunds

Oil marketers fear they may not be able to afford the cost of importing products after the government failed to pay billions of shillings it owes them.

The companies say they are owed more than Sh10 billion, with some of the debts dating back to 2013, when the government stopped refining oil at the Mombasa plant.

And they are now pointing an accusing finger at the Energy Regulatory Commission (ERC) and the Ministry of Energy, which they say are not doing much to help them even after they accepted payment in instalments.

Their lobby, the Petroleum Institute of East Africa (PIEA), says it has suggested payment over five years to recover the money so that its members do not increase pump prices, but nothing has been done.

While they claim they would have held steady if there was demand for their products since they would sustain themselves through moving volumes, the firms say the reverse is the case. They say their products are not moving as fast as they should.

In the past two months, for instance, demand for diesel has dropped by about 45 per cent, with daily consumption falling from seven million litres to about 4.8 million.

'HOSTILE REGULATOR'

The net effect was some companies, including the state-owned National Oil Corporation, which takes a big quantity of products to enable it to act as a market stabiliser, were left with stocks they could not dispose of immediately, leading to discounting the prices.

The matter seems to be getting out of control, with strongly worded correspondence seen by the Nation being exchanged between PIEA chairman Polycarp Igathe and ERC Director-General Joe Ng’ang’a.

To resolve the matter, several meetings have been held, including with the Ministry of Energy. The last meeting was held on August 18, at the Serena Hotel, Nairobi, where issues affecting the industry were discussed.

Surprisingly, the ERC, being the key implementer of the resolutions, did not attend the meeting. The next meeting between the industry and the government will be held next month, when some of the companies say they will have gone bust.

Mr Igathe, when contacted yesterday, acknowledged the issues were of great concern to the industry and declared the ERC a hostile regulator, warning that the downstream petroleum industry will soon grind to a halt if the government does nothing to fix the situation.

ROAD MAINTENANCE LEVY

“The hostility of the regulator is killing the industry. The ministry seems incapable of moving (the) ERC. Must we always be moving to court on every issue even those that can be resolved amicably?” he asked.

The companies are demanding about Sh800 million already remitted to the Kenya Revenue Authority as a road maintenance levy for the period between July 15 and August 2015. During the period, the KRA collected Sh3 for every litre of fuel. The companies are supposed to recover their money as a result of one month’s lag on the ERC’s price cap announcement and the implementation of the levy.

In other words, the KRA and the ERC did not synchronise the commencement date of the implementation of the levy, resulting in KRA getting the money before the ERC put in mechanisms to recover it.

Mr Ng’ang’a says the companies were fully compensated in the pricing cycle for the period between August 15 to September 14.

“We are not persuaded as yet why the oil companies need to double charge this cost. We have also confirmed from (the) KRA that the RML was charged as provided in the legal notice,” he says in response to questions sent to him by the Nation.

PAYMENT PROCESS STALLED

The companies further want about Sh7 million in what is called the "yield shift" compensation, which arose from the inefficiency of the now shut Kenya Petroleum Refineries Ltd, where marketers were supposed to refine their crude oil.

Because of such inefficiencies, marketers would get fewer products than expected once crude oil is processed, in which case the loss is borne by the KPRL shareholders.

The shareholding is shared between the government and Essar Energy Overseas Ltd. Refining crude has been discontinued and the refinery has been turned into a storage facility.

At the time the refinery was closed, the government hired a consultant to establish the liabilities of the company, which concluded the oil marketers should be compensated to the tune of Sh7 million. It was agreed that the ministry and the ERC would work with the Cabinet to facilitate the payments.

The Nation learnt that while the ministry has done its part, the ERC is yet to act, thereby stalling the payment process.

Without giving details, Energy Principal Secretary Joseph Njoroge, in an SMS, said there was a meeting two weeks ago when the matter was discussed.

“On the issue of yield shift, we had a meeting with the oil companies, discussed and agreed on the subject”, said Mr Njoroge.

PRICE CAP FORMULA

Minutes of the last meeting between the companies and the ministry seen by the Nation say the ministry and the Treasury joint Cabinet memo should be reviewed by the ERC and tabled for approval to enable the energy commission to include yield shift recovery as prudent cost in the ERC price cap formula. This is why the companies are accusing the ERC of inaction.

For his part, Mr Ng’ang’a did not say whether or not the ERC had given its input in the Cabinet paper to fast-track the process.

All he said was that although he was aware the parent ministry was handling the matter, he put a damper by saying the relationship between the refinery and oil marketing companies was contractual and that the yield shift issue should be dealt within the context of the signed contract.

Whether such thinking is the reason the ERC has been slow in giving its input to the Cabinet paper is hard to say.

Another contentious issue is what is referred to as escalation/de-escalation, which they say was as a result of an error in the Open Tender System (OTS), which resulted in an unintended cost penalty to two importers.

During the meeting with the Energy ministry, it was agreed that the ERC should take the necessary action to enable the recovery of the differential based on price formulae computation.

OPEN TENDER SYSTEM

But again, the ERC is yet to act, with the two importers saying they are on the verge of incurring losses as a result. One of the importers listed on the Nairobi Securities Exchange has expressed fear that this loss may affect its profit margins since there is no guarantee the government will act before they close their books for the year.

The ERC boss, for his part, says the two companies breached the terms of the open tender system (OTS) agreement, something they acknowledged and which prompted the commission to incorporate into the pricing formula only the portion of costs that were covered by the prevailing OTS terms and conditions.

“Imports of super petrol, diesel and kerosene into Kenya are subject to the OTS terms and conditions. Oil marketing companies consent to the terms once they are licensed. The conditions flow from, and are supported by, Legal Notice No. 24 of 2012.

"Hence the provisions of the OTS agreement are binding and any change of conditions in the absence of an addendum is not acceptable. In the case of the two companies, OTS conditions were clearly breached and this has been acknowledged by (the) industry in letters to the Commission. Hence the Commission only incorporated into the pricing formula the portion of costs that were covered by the prevailing OTS terms and conditions,” says Mr Ng’ang’a.