Oil marketers make handsome profits from LPG as consumers hurt

Oil marketing companies are making a killing through sale of cooking gas in an environment devoid of price controls.

The firms’ pursuit for profits has been the major barrier of entry for many consumers in Kenya that would wish to ditch kerosene and charcoal for the cleaner cooking fuel.

The companies dealing in the essential commodity that Kenyans are increasingly relying on to fire their kitchens take about a half of the retail price they charge for cooking gas as profits, according to a new report.

Of about Sh2,000 that consumers pay to refill a 13kg gas cylinder, about Sh1,031 caters for the acquisition of products, taxes and delivering it to retail outlets.

This leaves about Sh968, or just about half of what it costs you to refill the gas, as gross profit for the marketers. Even with costs such as running a retail outlet, the marketers are still making a handsome profit from the sale of cooking gas.

While the prices are arrived at using data collected in mid-2017, it reflects the circumstances on the ground today, with the price of a 13kg cylinder of gas going for about Sh2,200. There has not been a major LPG infrastructure development that would alter this reality, with the storage facilities remaining thin while transport is by road.

The report, Cost of Services in the Supply of Petroleum Products (COSSOP), notes that the Energy and Petroleum Regulatory Authority should keenly watch the industry and even publish indicative retail prices that would guide consumers when purchasing LPG.

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The COSSOP study was commissioned by energy sector regulator last year and undertaken by Kurrent Technologies, a local energy consultancy firm. The regulator is using some of the findings in the report to review the fuel capping formula that has since 2010 been used to set maximum prices for super petrol, diesel and kerosene.

“There is (lack of) reliable data and other information to permit the regulator to immediately embark on LPG price monitoring and publication of indicative LPG retail prices. This is necessary to bring transparency to LPG pricing while ensuring fairness in consumer prices. This will be a prelude to full LPGretail price regulation when effective imports and OTS systems are in place,” reads the report.

Regulating prices of cooking gas is a debate that has been going on since the Government started capping prices of other petroleum products in 2010.

Oil marketers as well as other firms selling LPG have been against it, arguing that it offers them an avenue to offset what was lost in income when the price of fuel was capped.

The counter argument, however, is that high prices have stagnated growth of the use of LPG in the country, which is a cleaner fuel compared to kerosene, charcoal and wood fuel that are used for cooking and lighting by urban poor and rural households.

A major hurdle that has been cited by the Government in its refraining from regulating prices even when it is clear that LPGfirms have been exploiting Kenyans has been lack of state owned facilities to allow large scale importation of cooking gas.

Such a facility, as is the case with petroleum products, would be a common user facility available to all LPG dealers at minimal cost. Large discharge facilities would also enable importation of gas through an Open Tender System, which would be akin to the one used in importing petroleum products.

Under the OTS, one firm bids to import a large shipment on behalf of the other players where they can enjoy economies of scale in shipping by use of large vessels.

At the moment, more than three quarters of the gas imported to Kenya is offloaded and stored in a terminal owned by Africa Gas and Oil Ltd (AGOL). Ministry of Petroleum officials have in the past said price controls are unlikely as they cannot dictate the terms of use for the privately owned terminal.

Kenya imports gas through the Government owned Shimanzi Oil Terminal which accounts for 15.4 per cent of all imports, the privately owned AGOL terminal (76.2 per cent) and through the Namanga border (8.4 per cent).

“Imports through AGOL have the lowest CIF costs followed by Shimanzi terminal, with Namanga imports registering the highest landed costs,” says the COSSOP report.

The report recommended that before the Government can start regulating cooking gas prices, it should implement “a system that gives an open and competitive access to LPG supplies to all marketers, preferably sourced through open tender system. This creates a critical mass of imports and ensures least cost supply while opening up the supply chain to all licensed LPGmarketers.”

“There is also need to have adequate import facilities to allow optimisation of LPG imports economics especially in respect to freight rates. Such facilities should have open access common-user provisions,” adds the report.

The Kenya Pipeline Company has been planning to build an LPG terminal at the Kenya Petroleum Refineries Limited’s facility in Chamgamwe, which the pipeline company has leased, as part of its growth plans. This will be a common user facility.

Disterius Nyandika, the acting general manager strategy at KPC, said such a facility would increase the cooking gas handling capacity as well as enable dealers import large shipments of gas. When this is in place, it is expected to help ease price of gas in the market.

“Among the reasons that affect LPG uptake in the country is cost. Once you have the common user facility and cut down the costs, the penetration will be very high. Ten years ago, the demand was 77,000 metric tonnes and today we are talking about 157,000 metric tonnes. It is the route that everyone is taking with houses adopting with clean energy. So this is in line with our vision and from a strategy perspective we will be able to make a return on investment,” said Nyandika last week.

The COSSOP report noted that Kenya Pipeline should speed up its plans to have a common user facility in place and in case the plans face delays, the Ministry of Petroleum can consider a partnership with the privately-owned AGOL terminal, though such a partnership would have its shortcomings.

“The ongoing surge in demand should prompt KPC to prioritise a common user import storage facility in Mombasa to permit early implementation of open tender system for LPG imports. In the event that the completion of AGOL additional storage comes significantly earlier than Kenya Refinery/Kenya Pipeline additional storage, consideration can be made for the pipeline firm leasing part of the storage capacity as a common user LPG import facility to enable early utilisation of open tender system,” said the report.

“The introduction of open tender will facilitate LPG price regulation. However, in the meantime, the energy sector regulator can and should monitor the LPG market by publishing indicative LPG prices.”

Charging lower rates

Energy and Petroleum Regulatory Authority Director General Pavel Oimeke said they were still studying the report before taking any action.

He, however, noted while major oil marketers have been selling cooking gas at a premium, there has emerged independent dealers that are checking them by charging lower rates for a refill.

“The cost of cooking gas sold by key brands is fairly high but the independent brands are relatively lower. You can refill a 6kg cylinder for between Sh500 and Sh600 but the same is selling for Sh1,000 among the major oil marketers. You can see an element of the market forces ensuring that prices remain within reach,” he said.

Oimeke added that other than Kenya Pipeline, the Kenya Ports Authority also plans to put up an LPG handling terminal that would also act as a common user facility.

“Once this is up and running, we will have to look at how we can create a framework to deal with a common user facility. We still have about two to three years before we have a common user facility then we can import through open tender system. After that we can look at pricing for LPG,” he said.

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