Confidence crisis high as Shell plans exit

By John Njiraini

The local oil industry has yet again been hit by a confidence crisis after oil major Royal Dutch Shell Plc finally admitted it was exiting the country.

In a press statement, the firm said it planned to quit the downstream business in 21 African countries, including Kenya, and concentrate on exploration and production businesses.

"This decision is part of our drive to refocus our global downstream footprint into fewer, larger markets," said Xavier le Mintier, Executive Vice President, Shell Oil Products Africa from South Africa.

But beneath the communication, observers contend the move is a vindication of deep-rooted problems in the local oil industry.

They cite the lack of a strong regulatory framework to govern the industry, lack of adequate infrastructure to help movement of products and lack of a level playing field in the use of state-owned facilities as some of the challenges facing the industry.

Brutal operations

According to Patrick Obath, the chairman of the Kenya Private Sector Alliance (Kepsa) and former Kenya Shell Managing Director, the local downstream business is ‘very brutal’ due to lack of clear structures.

"The downstream oil business in Kenya is brutal because it lacks an even playing field and a strong regulatory framework," he said.

In effect this has made it impossible for multinationals, which must adhere to stringent internal rules, to make good returns thus opting to quit and concentrate on the more lucrative upstream business.

National Oil Corporation of Kenya (Nock) Managing Director Mwendia Nyaga said the industry is too fragmented, creating room for malpractices and unfair competition.

He said the industry required tight regulations, like in the banking sector where multinationals are thriving.

The chaotic manner in which the sector operates, coupled with an unprecedented increase in the number of independent petroleum dealers, has made it impossible for multinationals to realise impressive margins to sustain their local operations.

Statistics by industry lobby group Petroleum Institute of East Africa (Piea) indicate that by 2007, the number of independent owned service stations stood at 418 while the number of branded firms owned stations stood at 634.

With Shell joining Esso, Agip, Mobil, British Petroleum (BP) and Caltex in exiting Kenya, now the focus turns to the battle of acquiring its assets, something that would ultimately alter the current set up significantly.

According to Piea, the company last year commanded a 17.2 per cent market share behind Total with 23.6 per cent and KenolKobil with 21.9 per cent.

Though according to Mintier no agreement has been reached with any potential buyers, the new kid on the block, Oil Libya, that is endowed with a Sh375 billion ($5 billion) financial muscle to invest and could snap up the assets.

"Oil Libya has $5 billion for investing. If they acquire the assets their market share in Kenya would increase significantly," said Nyaga.

Currently Oil Libya controls 9.9 per cent market share, something that could propel its command of the local market to 27.1 per cent if it manages to purchase the Shell Kenya assets.

Other key assets

These include 121 retail service stations, LPG facility, a storage terminal in Shimanzi, Lubes blending plant, a depot in Nairobi’s industrial and aviation facilities in Mombasa and Nairobi.

Nyaga said that although Nock, with a 8.4 market share, would be interested in acquiring some of the assets in Kenya, the fact that Shell plans to dispose it operation in the 21 countries as a package makes it difficult for it to buy some of them.

"Kenya Shell has very good sites that we might be interested in and if I get a few stations I will be happy," he said, adding that this will enforce Nock’s position as the industry price stabiliser.

He added that for one company to control close to 30 per cent share of the market could be detrimental to consumers. "Someone can do things that are not desirable to consumers," he said.

The fact that by acquiring the local operation Oil Libya could ultimately assume absolute control of the local industry could prompt the Government to invoke a caveat like it did when BP exited the country in 2007.

Back then the Government forced BP to sell some of its assets to Nock to avoid a monopolistic situations if Kenya Shell had acquired all the assets.