THE STATE OF PETROLEUM INDUSTRY IN EAST AFRICA The State of Petroleum Industry in E. Africa Petroleum remains East Africa’s major source of energy which drives the region’s commercial activity. It is considered the backbone of the region’s economy with price fluctuations in petro-fuels having a direct effect on the prices of other consumer goods and services. With uncertainties surrounding the fuel prices and supply and the impact on consumer purchasing power, there is need for consumer education and information on the underlying issues in the industry and global trends.

1. The State of Petroleum Industry in E. Africa<br />The petroleum industry continues to be a lucrative business stream for Government and oil companies but a huge burden for Kenyans. This is because they have to walk heavily under crushing weight of skyrocketing costs of consumer goods and services such as transport, thanks to recent fast-paced fuel price increases.<br />According to Central Bank of Kenya, petroleum is Kenya’s single largest import item accounting for a fifth or 20 per cent of the total import bill. The country spent Sh181.2 billion (US$2.2 billion) to import oil in the year ending February 2010.<br /> Rising fuel prices have led to increase in prices of essential commodities. Photo: Evans Habil/Standard<br />With so much money flowing into the industry, Government and dealers line up for a slice of the cake. Treasury directly takes around 30 per cent of the cost of fuel that Kenyans pay for.<br />From what a buyer pays for a litre of petrol at the pump station, more than Sh30 goes to the Government as taxes — the bulk of it as Excise Duty that stands at a fixed Sh19.51 — Sh9 as road maintenance levy and 40 cents in Petroleum Development Levy.<br />A further remission fee of 45 cents per litre is paid to the Government and a 2.25 per cent paid to get an import declaration license.<br />Currently a litre of regular petrol costs about Sh69 to buy and ship to Kenya. Marketers use Sh3 to transport the litre of petrol to inland Kenya, a figure that varies depending on how further inland their retail outlets are. All add up to about Sh103, leaving oil marketing companies with a margin of Sh9 for a litre of petrol retailing in Nairobi at Sh111.<br />While oil marketers have complained the Sh9 per litre they make is insignificant compared to their overhead costs, leading oil companies like Total Kenya and KenolKobil that have a service station network of over 170 and 150 respectively, have been recording impressive profitability.<br />Just recently Total Kenya announced Sh733 million profit before tax while KenolKobil sold petroleum products worth Sh101 billion last year leading to a 40 per cent growth in net profits to Sh2.7 billion.<br />Besides the huge taxes channelled to the Treasury, State parastatals like Kenya Pipeline Company (KPC) and Kenya Petroleum Refinery Limited (KPRL) also rake in billions from the oil industry.<br />KPC makes a revenue of Sh3 billion per year while KPRL makes Sh3 billion annually. KPC is largely a monopoly in the storage and transportation infrastructure of oil but high levels of inefficiencies have forced oil companies to seek alternatives like road transport to deliver products inland, which in turn pushes up the prices.<br />Storage<br />According to a report by Oil Industry Supply Co-ordination Committee, the inefficiencies that characterize Kenya’s petroleum storage and distribution account for as much Sh18 of the pump price. The report observes the pipeline operates at about half of its capacity, which affects storage at Kipevu and compels marketers to rely more on road transport.<br />Despite its shortcomings, KPC charges US$40 (Sh3360) per every ton that passes through its wide network of pipelines from Mombasa to Eldoret, which translates to over Sh3 billion in annual revenue.<br />A rule requiring that 70 per cent of petroleum be imported in crude form is also being faulted as part of the reasons why prices have refused to come down.<br />Though this regulation has been under contention due to inefficiencies by KPRL, it is a clear strategy to ensure the Mombasa refinery that is owned by the Government and Indian company Essar is not rendered useless.<br />Already, there are calls for closure of the refinery but Government has countered this by saying it would upgrade KPRL at a cost of Sh12 billion to make it more efficient. Besides, the Government and its agencies and big oil companies, there is also group of savvy oil companies that do not command huge market share in terms of the downstream business but have managed to smoothen their way to the lucrative trade of oil importation and are regular winners of the Open Tender System (OTS) contracts to import on behalf of the industry.<br />According to industry analysts, it is through the tendering system that oil dealers at the lower end of the supply chain make money. ‘Smart’ dealers make money by bidding for OTS to import the country’s monthly requirements.<br />OTS is administered by Ministry of Energy through a competitive tender process and the winning company is mandated to import on behalf of other players.<br />The issuance of the tenders to smaller dealers who later have to sell their allocations to bigger oil companies increases costs in the sense that the number of levels in the supply chain becomes more.<br />The Government’s recent move to lower taxes by a small margin pales against the astronomical profits that oil dealers and the Government rake in. When he announced the reduction of taxes on kerosene and diesel by 30 per cent and 20 per cent respectively, Finance Minister Uhuru Kenyatta also urged other players in the industry to replicate the gesture and also make sacrifices.<br />But whether they agree to play ball or not, the analysis of the oil industry shows Kenyans will have to wait for a longer time for fuel prices to come down because the Government will have no motivation to bring them down drastically.<br />Scrap all taxes<br />The Chairman of Parliamentary Committee on Energy Mr James Rege said his committee wants to recommend scrapping of all taxes on diesel and kerosene. “We are pushing for complete removal of taxes on kerosene and diesel so that at least the cost of living can be affordable to Kenyans,” explained Rege.<br />He said the committee is also pushing for full financing of National Oil Corporation of Kenya (NOCK), by Government, so that it can be able to regulate the prices of fuel at the pump level.<br />Currently, NOCK imports 30 per cent of oil while multi-national companies import the remaining 70 per cent. The Energy committee says the fund would cushion NOCK against the fluctuations of prices globally.<br />Government has also been asked to set up a reserve of petroleum to cushion Kenyans from fluctuations in the world oil prices. Executive Director of Africa Public Policy Institute Prof Inonda Mwanje challenged the Government to establish strategic reserves through Public-Private Partnerships. Mwanje said reserves, which can last the country three to six months can be used to cushion Kenyans from prohibitive prices.<br />He also called for scaling down of the size of Cabinet to reduce Government expenditure.<br />As a long-term measure, Mwanje called for setting up of a refinery around Isiolo, improving transportation infrastructure, a comprehensive review of Energy Regulation Commission mandate and an arrangement where Government directly negotiates import prices.<br />But it may be hard to establish strategic oil reserves as Energy PS Patrick Nyoike told Petroleum Institute of East Africa recently. “None of the parastatals like KPC and NOCK have the money and neither is the Treasury able to allocate funds for the storage,” he conceded.<br />Nyoike said the proposal might be considered in 2015 when KPC is expected to be in a better financial position, adding that the Government is willing to partner with private investors to finance the project.<br />