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Why the cost of gas is going up

By Macharia Kamau | Jan 24th 2022 | 5 min read
By Macharia Kamau | January 24th 2022

Sharp increase attributed to the recent imposition of value-added tax and the rising global price of petroleum products. [Kipsang Joseph, Standard]

Kenyans are reeling from the high cost of cooking gas following a sharp rise in the price of essential fuel. The sharp increase has been attributed to the recent imposition of value-added tax as well as the rise in the global price of petroleum products.

A spot check by The Standard in some of the major petrol stations in Nairobi shows that the cost of refilling a 13-kilogramme cylinder of liquefied petroleum gas (LPG) has shot up to Sh3,000.

Many of the retail outlets run by major oil marketing companies are selling the fuel at about Sh2,990. This compared to Sh2,600 in November 2021, according to data by the Kenya National Bureau of Statistics (KNBS) and Sh2,000 in November 2020 before the government imposed VAT on gas.

Daniel Kiptoo Director-General Energy and Petroleum Regulatory Authority explained that a mix of factors particularly higher global petroleum prices and taxation are to blame for the recent spike.

“LPG is petroleum-based, so when the price of crude goes up, the price of LPG will go up. Prices of butane and propane (used in the production of LPG) have gone up by more than 30 per cent. Other than being driven by global prices, there is also no price regulation for LPG locally,” he said.

“The recent surge is due to both product cost in the global markets as well as VAT. VAT is compounded… if the cost of the gas per tonne goes up, VAT will also go up. When VAT was introduced in 2020 the price of crude was low but when the price ballooned, the tax became significant.”

The energy industry regulator said it has advised the Petroleum Ministry and Treasury to consider doing away with VAT on LPG.

“We have made a case for the removal of VAT on solar PV and LPG to both the Ministry of Petroleum and the National Treasury and it is also under consideration by the Parliamentary Committee on Finance,” said Mr Kiptoo.

While the government considers the advisory from Epra, not only will consumers continue hurting but there is also the risk of households that had ditched ‘dirty’ fuels such as charcoal and kerosene reverting to using them.

Over the years, there has been a buy-in of LPG in Kenya, which is seen in the increase in the amount of gas consumed in the country.

Data by KNBS shows that demand for cooking gas has more than tripled over the past 10 years to 326,200 tonnes in 2020 up from 93,600 tonnes consumed in 2012.

The uptake of the fuel has been on account of health and environmental campaigns that have led to, among other actions, the State adopting such measures as banning logging in government forests. Consumers Federation of Kenya Secretary-General Stephen Mutoro said the recent surge in prices could reverse the gains made to adopt the cleaner LPG.

He says consumers have largely been left without options as the cost of ‘dirty’ fuels such as kerosene and charcoal increases.

“The increase in the cost of cooking gas has been astronomical. It is too much on the consumers,” said Mr Mutoro. “Many households are also thinking about alternatives to the gas, meaning we are eroding the gains we have made in increasing the uptake of cooking gas. The cost of charcoal is also too high so at the moment it is really not an alternative.”

He noted that taxes levied on petroleum products, LPG included, are largely to blame for pushing the costs to a point beyond reach by many households. Mutoro added that while there are factors that are beyond Kenya’s control, there are components of the retail that the government can work on to reduce the cost.

“One of the biggest components in the retail price of gas is tax and levies. There is little we can do about the international cost of gas but if there is a commitment by the government to lower the cost of gas for obvious reasons of health and proper economy, then we need to have deliberate actions that require lowering taxes and levies on LPG,” he said.

Mutoro claimed that some players are frustrating the demand and supply factors through their dominance. “There is also the issue of competition and accountability in the industry. If you have one player dominating the entire chain from importing to processing and retailing, you will find those challenges of distortions in the market,” he said.

“The sector suffers serious conspiracy. Free market forces are being interfered with. Even if crude has gone up, it doesn’t match the increases in local retail prices. Something urgent needs to be done ad it should go beyond the ministry of petroleum… both Cabinet and Parliament should look into as health, environment and energy issue.”

Kiptoo said it is however not all doom and gloom - noting that there are plans in place that could see Epra regulate prices of LPG. The new Kipevu Oil Terminal (KOT 2) which is expected to be operational by April has facilities that will enable more ships bringing in LPG to discharge.

Currently, vessels importing cooking gas have to use the African Gas and Oil Company terminal, which is privately owned, hence limiting how much government can intervene in terms of pricing. The Kenya Pipeline Company is also in plans to put up a storage facility at the Kenya Pipeline Refineries Ltd (KPRL).

The facility is expected to have an initial capacity of 25,000 tonnes.

“The second KOT is almost being completed, it has an LPG line and this will ease importation LPG. What is lacking at the moment is a common user facility. The government is looking to construct a cooking gas storage facility at KPRL. With a government-owned common user storage facility, the government can be able to introduce price controls,” said Kiptoo.

“At the moment we are stabilising petroleum prices but since we do not set maximum prices for LPG, it is left to the market forces.”

While the industry regulator says its hands are tied and cannot cap prices of cooking gas or put in stabilisation measures as is the case with fuel, a project mooted by the government a few years ago might have done that. The Mwananchi Gas Project, dubbed Gas Yetu was expected to increase the uptake of LPG as well as ensure Kenyans could refill the cylinders affordably.

The State-funded project was expected to equip poor households with LPG kits at affordable rates. The kits - six-kilogramme cooking gas cylinders, grill and burden and regular refilling of cylinders were to retail at cheaper rates.

It was rolled on a pilot basis in Kajiado and Machakos counties but was called off before the countrywide rollout commenced.

The project was halted after claims of unsafe cylinders. The government has been slow in restarting the project.

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