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Regulator dents oil firms’ hopes of Sh3.5b payout

BUSINESS
By Patrick Alushula | April 26th 2016

The Government will not pay oil marketing companies (OMCs) for losses incurred because of the country’s inefficient refinery.

The companies had demanded a total Sh7.1 billion in compensation for what is technically known as yield shift losses, which refers to the variation between the actual crude processing yields and the expected yields. They have so far received Sh3.6 billion.

But in a notice in the latest issue of the Kenya Gazette, the Energy Regulatory Commission (ERC) said OMCs should stick to the terms and conditions they entered into with the now closed Kenya Pipeline Refinery Limited (KPRL).

“The arrangement between OMCs and KPRL was of contractual nature between the parties to the processing agreement and the commercial dispute ... the yield shift losses cannot be recovered as pass-through costs,” said ERC.

Forensic audit

In a letter sent to the Ministry of Energy and Petroleum in January, the marketers said KPRL should not have been allowed to handle compensation without involving the ERC

The move by the ministry to commission a forensic audit to establish the liabilities of the refinery at the time of closure had given marketers hope they could get improved compensation.

“The independent forensic audit undertaken by Deloitte Consulting Limited determined that oil marketing companies suffered a yield shift loss of Sh7.1 billion, but Sh3.5 billion was yet to be passed,” the oil marketers’ letter to the ministry read in part.

The marketers had asked to be allowed to recover the money over a five-year period by charging up to Sh0.10 per litre on retail consumer prices.

The same gazette notice also dealt a blow to Total Kenya and Hashi Energy. The two were hoping to be paid more than Sh200 million in a review of the escalation and de-escalation factors in the tenders they won in April and May last year.

According to Supplycor Kenya, the two OMCs, suffered the loss as a result of an error that occurred in the drafting of the petroleum pricing clause in the open tendering system (OTS) was signed in April.

However, ERC said the tenders in question would not be considered since it would be a violation of the OTS.

“The commission has determined that these tenders were not to be administered under the escalation formula provided under Clause 11.3 of OTS whose commencement date was April 1, 2015,” said ERC.

In June 2015, ERC boss Joseph Nga’ng’a had said applying the escalation factor on the bids would have seen the Government lose at least Sh45.9 million on each of the seven tenders.

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