Expect more pain at the pump as oil firms push for bigger margins

Oil marketing companies and the Kenya Pipeline Company are pushing for higher margins as the energy industry regulator is set to review the petroleum pricing formula that has been in place for ten years.

The push is against consistent increases in the prices of petroleum products in the country, which has seen prices of super petrol go up from Sh100 per litre in Nairobi in February to Sh115 per litre currently.

An upward review, which is most likely, could mean more painfor the consumer and comes close to a year after the government introduced the eight per cent value-added tax on petroleum products.

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KPC charges Sh2.35 per litre of the petroleum products transported using the pipeline – super petrol, diesel and kerosene – but has applied for the review of this tariff amid protests that the State-owned entity that operates the network of refined petroleum products pipeline should be an enabler and focus less on profits. The company made Sh27.7 billion in revenues and a profit after tax of Sh8.56 billion for the year to December 2018.

The marketers have in the past argued that ten years is a long time for their margins to stay at the same level and it is also unlike their counterparts in the electricity sub-sector, who for instance are cushioned against sudden spikes in cost of materials by regular review of the inflation adjustment component of the power bill every six months.

The Energy and Petroleum Regulatory Authority (EPRA) can also revise the Fuel Cost and Foreign Exchange cost every month, reducing or hiking the two components depending on the cost of oil globally and the performance of the local currency against the dollar. This guarantees that the power sector players do not pay for higher costs occasioned by two factors but instead pass them to consumers.

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Through their lobby, the Petroleum Institute of East Africa (PIEA), the oil firms have argued that the petroleum pricing formula that caps the pump prices fails to recognise that marketers have to make investments in retail outlets.

All indications are that EPRA has yielded to their demands and might give both KPC and marketers bigger margins, a cost that will be borne by the consumer. It, however, said it would be considerate to give the industry sustainable margins while balancing the concerns of the consumers.

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"In July 2017, EPRA commissioned a Cost of Service Study in the Supply of Petroleum Products (COSSOP) in Kenya. The objective of the study was to review the existing supply chain system and processes to identify and quantify costs while seeking to improve efficiency," said EPRA in a public notice calling for public participation in the review process.

"Further in 2016, the Authority approved the KPC fuel tariff for a three-year tariff control period. Meanwhile, EPRA has received a tariff application from KPC for the tariff control period of 2019/20-2021/22, which precipitates a review of the same.

The review is necessitated by the need to increase the export product tariff competitiveness and to leverage the expanded pipeline capacity following the commissioning of Line V.”

While pointers are that the tariff review will result in an increase in the cost of fuel, EPRA said the result of the public engagement would determine the outcome but added that some components of the formula would go up while others would reduce, thus ‘evening out’.

EPRA Director-General Pavel Oimeke, however, noted there would be an increase in the KPC tariff, with the ‘modest’ increase aimed at “ensuring that we have not given them (KPC) too but give them what is sustainable while at the same time making sure that consumers pay for prudent costs."

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On the margins of the oil marketing companies, the regulator noted that it would be reducing the wholesale margin by morethan half from the current Sh7 to about Sh3 while doubling the retail margin.

Currently, the retail margin is fixed at Sh3.89 while the wholesale margin is Sh7.

EPRA acting Director of Petroleum Edward Kinyua noted that the crafting of the initial formula ten years ago had not captured the high operational costs that go into the retail bit of the business.

“We have been engaging stakeholders and one of the things that came out is that we have to split the retail margin into a retail investment margin and a retail operating margin. There are people who do not construct a petrol station they are just dealers who should be paid a retail operating margin while the person who invested on that infrastructure should get a retail investment margin,” he told the Senate Committee on Energy last week.

"The study has recommended that we reduce the wholesale margin to Sh3 from the current Sh7 so that the rest of the margin can go to retail. Retail has high operating costs because the owner of a petrol station has to maintain high standards to avoid contamination of products.”

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"We also intend to control the wholesale price, such that if you sell to retailers at prices that are higher than what is prescribed, the Authority can take action.”

Migori Senator and member of the Energy Committee Ochillo Ayacko noted that while considering increasing KPC’s tariff, the regulator should consider that the pipeline company is an enabler and should not be after profits. It was established on the basis of running commercially but the overall objective is to enable Kenyans to easily access petroleum products

He added that EPRA also needed to closely monitor how the margins are also distributed among the oil marketing companies, noting that a few multinational firms have a firm grip of Kenya’s petroleum industry. This is to the extent that despite the formula that sets the margins for retailers and wholesalers, contractual agreements that the oil majors have with the petrol station owners ensure a minimal return for the retail outlets.

Oligopolistic

He added that they have been posing a barrier of entry into the businesses, noting that government should encourage as many independent petrol stations as possible to make sure that it is competitive and local investors get a decent return on investments.

"The industry is oligopolistic and it is the big firms that fix these prices for the small players. The margin for the petrol station owners is Sh1 while the brand owners will take the balance of Sh8 or Sh9,” he said.

"They control the pipeline because they own the product line fill and determine the margins for petrol station owners… the small businesses running a petrol station in Huruma, Donholm or even Migori that run petrol stations get a shilling or two but the big companies pocket Sh9, which is built into the pricing formula. The margins in the formula especially where there are no controls between the wholesaler and retailer are theoretical and are not been enforced. What the petrol station owners make at the end of the day is nowhere near the margin in the pricing formula.”

“The marketers pose a barrier to competitive trade. There is a need to encourage as many independent operators as possible.”

Other factors that led to an increase specifically in the cost of kerosene is the anti-adulteration levy that EPRA set at Sh18 per cent. This increases the cost of kerosene to the same levels as that of diesel and according to the regulation, offering no incentive to the unscrupulous businesses that had been mixing kerosene with diesel to shore up diesel volumes and making a killing selling it.

The parliamentarians described it as a ‘sadistic, unfeeling and cold way of dealing with the lives of Kenyans’ who depend on the fuel to cook and light their homes.

"Why charge consumers the adulteration levy? People who use kerosene are the poor and ordinarily cannot afford to pay for gas or other alternatives. Wouldn’t you as the regulator look for better ways to fight adulteration and make sure that it is available without using imposing the Sh18 per litre on consumers?

Anti-adulteration levy

"On the issue taxation, we understand that the country needs tax revenues but we also need to protect poor people, we cannot be taking money from them,” said Ledama Ole Kina, Narok Senator and Energy Committee member.

Ephraim Maina, Nyeri Senator and Energy Committee chair noted that failure by the country’s leadership had bred cartels that would mix kerosene with diesel, with the efforts to fight them now resulting in punishing users of kerosene.

"We as a government were unable to control these cartels that were mixing kerosene and other fuel, we chose to go and penalise the poor, which is most unfair. The government should implement laws that are there against adulteration. You cannot punish one segment of society because the other one has gone haywire," he said.

Oimeke noted that since the imposition of the anti-adulteration levy, kerosene consumption had gone down to 15 million litres per month, from an earlier average of 42 million litres per month. A pointer, according to Oimeke, that the adulterators had been using close to 30 million litres of kerosene a month to adulterate diesel.

"This was a necessity for us to ensure the quality of fuels. Part of what our vehicles were running on kerosene, killing engines and destroying the environment,” he said.

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