Tricks that oil firms use to dodge fuel-pricing formula

Trucks on a queue at the loading area of the Kenya Pipeline Company, Eldoret Depot. [Kevin Tunoi, Standard]
Oil marketing companies are blatantly violating the law by disregarding the new price-capping formula in a move meant a move to protect their margins.

This is happening at the expense of businesses that operate retail outlets under different brand names, mostly those of major market players.

The oil marketers who operate as wholesalers, and feed their network of branded retail stations operated by dealers, have in some instances refused to pass the higher retail margin benefits to the petrol station operators.

The firms have found ways to impose charges on the petroleum products they supply to their branded outlets.

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The Energy and Petroleum Regulatory Authority (EPRA) started implementing the new formula in October 2019, which gave retailers a higher margin while slashing what the wholesalers have been earning by about 50 per cent.

Retailers’ margins

Under the new regime, retailers’ margins more than doubled to Sh8.19 per litre from Sh3.89 per litre, as the regulator tried to correct oversights included in the regulations whose implementation started in 2010.

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The retail margin has been split into retail investment margin (Sh4.05) and retail operations margin (Sh4.14). The wholesale margin, however, nose-dived to Sh4.20 per litre from Sh7.

While some of the large oil marketers own the stations through leasing, and are hence entitled retail investment margins, they are not passing on the entire Sh4.14 of the retail operations margin.

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Instead, they have imposed charges such as rent or product transit insurance, with the effect of substantially reducing margins.

The charges vary between Sh1.50 and Sh2 per litre, which would push the wholesaler’s margin to Sh6, closer to the Sh7 that was there before the review of the formula.

It also means that some of the firms that operate the retail outlets have to contend with margins lower than what they earned prior to the implementation of the new price-capping formula.

“The formula has factored all these things that oil companies are charging the dealers. They have refused to follow the regulations,” said one dealer who asked not to be named for fear of reprisal.

The amount that goes to oil marketers at wholesale and retail levels also increased to Sh12.39 per litre of petrol and Sh12.36 per litre of diesel and kerosene following the review.

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This is compared to the previous margin of Sh10.89 per litre across the different fuel products.

A report published last year noted that wholesalers were getting more than their fair share of the margin to the detriment of the retailers.

According to the report commissioned by EPRA, the initial formula that was implemented 10 years ago had not captured the high operational costs that go into the retail aspect of the business.

“An activity-based analysis of the wholesale and retail segments point to a possibility of over-recovery of margins in the wholesale segment at the expense of the retail segment, where the bulk of marketing investments are domiciled,” noted the Cost of Services in the Supply of Petroleum Products report.

The report noted that some aspects of the formula might not be a true reflection of the situation in the market, hence necessitating a change in the formula.

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“Since the launch of petroleum price regulation in 2010, the shape of the petroleum sub-sector has changed, with new supply chain infrastructure in place while others have been retired. The previously heavily vertically integrated supply chain has new licensed players and investors participating in one or more of the supply chain segments,” said the report.

“In some areas, duplication of roles and costs may have crept in. This makes it necessary to review the entire petroleum product pricing system.”

Efficient and fair

The report added that the recommendations would be “efficient and fair to all investors and consumers”.

It recommends splitting up of the retail margin into two bits – operating and investment margins – an unbundling that would make it easy to “understand and quantify the cost drivers and opportunities for efficiencies and economies of scale”.

EPRA had previously noted that the 2010 formula had not factored in the high operational costs in the retail business.

“We engaged stakeholders and one of the things that came out is that we have to split the retail margin into a retail investment margin and operating margin. Some people do not construct a petrol station, they are just dealers who should be paid a retail operating margin, while the person who invested in that infrastructure should get a retail investment margin,” said EPRA.

“Retail has high operating costs because the owner of a petrol station has to maintain high standards to avoid contamination of products.”

Other than the new margins to the oil marketing firms and their dealers, fuel prices have also factored in new taxes, pushing up the cost of operations in transport and manufacturing sectors that are reliant on petroleum.

The levies that have been hiked are Import Declaration Fee to 3.5 per cent from two per cent, and the Railway Development Levy to two per cent from 1.5 per cent.

The hike in the two levies is among the new tax measures that the Treasury introduced in this financial year’s budget to increase tax revenues.  

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