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Confusion mars plans to reimburse oil marketers' margins

BUSINESS
By Macharia Kamau | April 16th 2021
An attendant at a filling station. [File, Standard]

Confusion mars the government’s plan to compensate oil marketing companies more than Sh1 billion that was cut from their margins after the monthly pricing remained unchanged this week.

The oil firms and the Ministry of Petroleum were yesterday locked in day-long meetings as they evaluated mechanisms on how to make good the government’s promise to reimburse the margins taken from the marketers.

The money is expected to be drawn from the Petroleum Development Levy Fund, financed by motorists who have been paying Sh5.40 per litre of petrol and diesel.

There are, however, no mechanisms to draw from the fund such as regulations, presenting a headache to the ministry with fears that drawing from the fund might contravene the public finance management law.

A senior official with an oil marketing company queried why the government cut the margins of the oil firms instead of removing the petroleum levy.

He argued that it made sense to suspend the levy considering that it is supposed to play a price stabilising role.

“Why did the government remove the oil marketers’ margin without touching the levy?” the official posed.

“They could have suspended the levy and once the pump prices come down, which will happen since crude oil prices are coming down, they could reinstate the levy.”

The government Wednesday slashed the margins for oil marketing companies in its bid to retain pump prices at the same levels as of March as it yielded to pressure from Kenyans, who protested the high fuel costs that have seen the cost of living go up.

The marketing firms had their margins cut by Sh4.44 per litre of petrol to Sh7.95 from Sh12.39.

Margins for kerosene and diesel were also slashed but at lower levels.

The total amount that the marketers lost when the margins for the three products were reduced adds up to Sh1.02 billion.

This had been on the promise that the Petroleum ministry would reimburse them the money, tapping from the Petroleum Development Levy Fund.

Motorists pay Sh5.40 per litre of diesel and petrol they consume, a fee that went up from 40 cents last year and was expected to play a stabilisation role when pump prices are high but to date lacks an enabling framework to enable the ministry to draw the cash.

Even as the major oil companies duel with the government on how they will be reimbursed, smaller firms – also referred to as independents – are feeling the pinch of the slashed margins differently.

The companies, typically having only a few stations and in many cases, one station or a pump, usually acquire stocks from oil majors to keep their stations running.

For them, the price reviews announced Wednesday also saw Epra fail to publish the maximum wholesale prices.

This has meant that the oil majors can adjust their wholesale prices to the extent that they can recover what was taken from them by Epra.

Kenya Independent Petroleum Dealers Association Chairman Joseph Karanja said that while in March the wholesale price had been capped at Sh113 per litre of petrol, beginning yesterday morning some of the oil companies were selling it at Sh117 per litre.

 

SUPPLIER MARGINS

In Wednesday’s announcement, Epra simply put a cap on the ‘supplier margins’ at Sh7.95 per litre. In previous price reviews, it stated the maximum amount that a wholesaler could make as well as the caps for the retailer.

“The consumer may be glad that the price did not go up. But for us, it is a challenge,” Mr Karanja said.

“The control for wholesale prices has been vacated. This meant that the fuel I was to buy at a wholesale price of Sh113 earlier this week has gone up to Sh117 per litre.”

When the cap was removed, wholesalers adjusted their prices upwards, he said. “We are now told that the government is going to compensate for the margin that was cut.”

Karanja said the majors importing fuel may have been hoarding in anticipation of increased prices following pronouncements by the Petroleum ministry that pump prices would go up due to the cost of crude oil having increased in March.

Patrick Obath, an oil industry expert, said the formula Epra uses to determine monthly prices had over the last decade resulted in instability in the industry and has given confidence to investors who have put up facilities in the country.

He, however, said the reduction of margins for oil marketers could be unsettling, more so considering there was no warning.

“When they are being considered for reduction to cushion prices, it is not the right thing to do, it reduces investor confidence,” Mr Obath said.

He said a simple and efficient way to implement a stabilisation component would be when oil companies are importing fuel.

“The easiest place to put any subsidy is at the point where there is the least administrative cost. At the oil market level, it will be expensive because you have to put a big administrative unit and when you introduce new quasi-government bodies, there is a likelihood that corruption will set in,” Obath said.

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