The Kenya Pipeline Company (KPC) has cautioned about the growth of Tanzania as an alternative importation route for petroleum products.
The company says higher costs associated with importing oil through the Northern Corridor could push Uganda and other landlocked countries to the Port of Dar-es-Salaam on the Central Corridor despite the Kenyan route being more efficient and competitive.
“The current supply logistics have made the cost of landing petroleum products in Kampala through the Northern Corridor Transit Route (NCTR) higher than the Central Corridor Transit Route (CCTR) road option by two per cent due to a reduction on freights and premium in the port of Dar-es-Salaam,” said KPC management in a risk analysis presented to the company’s board in May.
This has been complicated by recent plans by Uganda to sidestep Kenyan oil firms in importation of petroleum products as it seeks to lower the cost of fuel.
KPC said the governments of Uganda and Tanzania have been enhancing infrastructure of the Central Corridor to handle higher volumes.
“Business lost to that transit corridor would be difficult to recover if the supply route becomes efficient and remains competitive, which through market intelligence, Tanzania is focused on achieving,” said the brief.
Should Uganda manage to import a sizeable chunk of its fuel needs through Tanzania, KPC noted, it could lead to massive losses not only for the company but also for numerous businesses that are aligned to the Kenya petroleum pipeline and storage infrastructure.
“KPC’s revenue is on average Sh2.6 billion per month. The transit volumes account for 51 per cent of this revenue (due to exchange rate gains),” said the management.
“A loss in the transit business will result in loss of revenue and further impact ability to meet operational costs and financial obligations.”
The brief cautioned that the Kenya Ports Authority, the Kenya Revenue Authority and other service providers in the value chain will also lose revenue.
The firm added that loss of volumes that usually go to Uganda and other landlocked countries in the region would see Kenyans paying a higher pipeline tariff, which depends on volumes moved.
A 10 per cent reduction in transit volumes, according to KPC, could result in a five per cent increase in the tariff. The money that oil marketers pay to use the pipeline is passed on to consumers.
This means KPC could lose as much as Sh3 billion per year if the transit business reduced by 10 per cent.
In its appeal to the Presidency, KPC said it is imperative for Kenya to offer trade incentives for the Uganda market.
“These may include a dedicated pipeline and storage capacity allocation for the Uganda market and facilitating direct participation of the Uganda oil marketers in sourcing for petroleum products through the Northern Corridor Transit Route,” said the note.
Uganda’s parliament earlier this month passed a law to allow the Uganda National Oil Corporation to import fuel directly from suppliers, bypassing Kenya’s distribution chain.President Yoweri Museveni had complained that inefficiencies in Kenya’s import chain, largely because of brokerage during procurement, led to higher prices and supply disruptions.
“Transportation of transit petroleum products contributes to the ecosystem along the Northern Corridor, which would be adversely impacted by reduction in business from neighbouring countries,” said KPC.
Meanwhile, major oil marketing companies, through their lobby the Petroleum Institute of East Africa (PIEA), have said the government-to-government fuel importation deal has resolved some of the major issues that the industry had been going through.
Kenya got into a deal with Saudi Aramco, Emirates National Oil Company (Enoc) and Abu Dhabi National Oil Company (Adnoc) to supply fuel on credit as it sought to ease demand on the dollar and slow down the weakening of the shilling.
Reduced dollar demand
The arrangement was also aimed at addressing the security of supply of petroleum products after the oil marketing companies failed to get enough dollars to buy fuel.
Before the implementation of the G-to-G deal, oil firms used to pay importers in dollars to access their petroleum cargoes.
They currently pay in local currency, with the firms that have been nominated to handle the fuel locally by the international oil companies converting this money to dollars but over a six-month period, which the government says has reduced demand on the dollar.
The industry needed $500 million every month to import fuel.
“The government intervention has reduced demand of the US dollar which regularised security of supply of petroleum products as OMCs now access petroleum products in a timely manner using local currency,” said PIEA General Manager Wanjiku Manyara yesterday.
“It has also created an enabling business environment for oil marketing companies to guarantee security of supply of petroleum products to consumers in Kenya and the region, which is their core business as opposed to constantly addressing the challenges of the US dollar accessibility.”
Manyara said the government had since September last year started settling the Sh60 billion petroleum pump price stabilisation debt owed to oil marketers.
Opposition chief Raila Odinga has rubbished the deal, terming the arrangement a scam. Raila argued that the agreement had neither lowered the cost of fuel nor made the shilling stronger against the dollar.