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How State gifted oil firms millions in deal to freeze fuel price hikes

FINANCIAL STANDARD
By Macharia Kamau | May 4th 2021

On April 15, a day after the government intervened to retain fuel pump prices at the previous month’s levels, representatives of disgruntled oil marketing companies met with senior Petroleum and Energy Ministry officials and the industry regulator. 

The meeting, attended by 30 officials, including chief executives of the major oil marketing firms, had been convened to look into how the marketers would be compensated for the loss of their margins over the April-May pricing cycle.

Despite expectations of fuel pump price hikes, on the back of rising oil prices in the international market, the Energy and Petroleum Regulatory Authority (Epra), industry regulator, had the previous day retained prices at the same levels as in the March-April pricing cycle.

The move came to the detriment of the oil companies whose margins were cut. The companies took a Sh4.44 hit on every litre of petrol sold, Sh3.47 on kerosene and Sh2.28 on diesel. 

Collectively, the oil firms were estimated to take a Sh1.34 billion hit during the month. It was, however, on the understanding that they would be compensated for the losses.

At the meeting, the marketers and the ministry officials agreed on the modalities of compensation.

But it was a double win for the oil companies. In addition to being fully compensated for their slashed margins, they would get another Sh0.50 for every litre of petrol that they brought into the country for consumption between April 15 and May 14. At the meeting, this was referred to as an “administration fee.”

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Kenyans are expected to consume 433 million litres of diesel, super petrol and kerosene this month. The marketers are expected to walk away with an easy Sh216.5 million.

According to a source who attended the meeting, the oil marketers had pushed for more money, noting that cutting their margins coupled with the compensation process had come at a bigger cost for them. The Ministry, the source said, appeared to be in agreement.

Graphics: The Standard

“The meeting noted that the receipt and disbursement of monies by the respective cargo importers would incur additional administration costs, bank processing fees, among other costs,” read the minutes of the meeting.

“After technical analysis, the administration cost was set at Sh0.50 per litre, which members ratified.”

The money will be factored in the pump prices for the May–June pricing cycle, which will be announced on May 14.

The meeting agreed that this was a prudently incurred cost that should be considered when determining retail prices, putting it in the same category as other costs such as fuel transportation and storage.

It also directed a review of the rules that govern the Open Tender System (OTS) – the Ministry’s supervised system of contracting industry players to import fuel on behalf of the sector – to capture such scenarios and costs in future.

“The administration fee incurred by cargo buyers during this process is considered a prudent cost and shall be included in the import cost build of the OTS cargoes to be considered in the May-June 2021 pricing cycle,” read the minutes. “The OTS agreement to be amended to accommodate such situation in the future.”

For the compensation, the amount of fuel imported by the oil companies will be verified by the supply coordinator (Supplycor) – an entity constituted by the oil marketing companies to coordinate activities along the fuel supply chain.

The coordinator will then share the verified cargo volume the list of buyers and their respective volumes with Epra, the industry regulator, which will then confirm the data and in certain instances, as is the case with kerosene, verify with the Kenya Revenue Authority.

It is after the verification that they will be compensated at a rate equivalent to the margin reduction per litre per product.

“The Ministry of Petroleum will liaise with the National Treasury for the disbursement of the compensation funds,” read the minutes of the April 15 meeting.

“Upon release of the compensation funds, the Ministry of Petroleum will advise the oil marketing companies through the Supplycor and remit the same to the respective cargo importer for inward disbursement to all cargo buyers.” After the release of the money to the oil marketers, the administration process then commences.

This is what will cost you an additional 50 cents at the pump beginning mid-May when Epra announces new retail petroleum prices.

According to the minutes of the April 15 meeting, the Petroleum Ministry will forward the funds from Treasury to the importers, who will then be required to pay the cargo buyers (oil marketers buying for resale at both wholesale and retail levels) within five working days.

They will, however, recover the 50 cents before giving the marketers their money.

“The cargo importer shall net off Sh0.50 per litre (inclusive of VAT) as administration fee for the disbursement, documentation and processing activity,”  read the minutes. 

“Cargo buyers shall raise debit noted to the importer net of the administration fee and this shall form the basis for transfer of funds.”

The ministry is, however, mum on where Treasury will get the funds.  

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