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How oil marketers toyed with consumers as State watched

FINANCIAL STANDARD
By Macharia Kamau | Apr 19th 2022 | 6 min read
By Macharia Kamau | April 19th 2022
FINANCIAL STANDARD
Long queues were witnessed in Migori town as the biting fuel shortage continued in Western Kenya last week [Courtesy]

Over the last two weeks, Kenyans saw an ugly side of the key players in the country’s petroleum industry.

Even back when traders would hoard products in anticipation of price increases, never were Kenyans made to walk around with jerrycans in search of fuel or queue at petrol stations as has been the case in the last few weeks.

The events have raised questions as to whether the Petroleum Ministry and regulator — the Energy and Petroleum Regulatory Authority (Epra) — are toothless while demonstrating how easy it is to create a black market due to the critical nature of fuel, with enterprising Kenyans retailing petroleum products from the boots of their cars.

The crisis also exposed the National Oil Corporation of Kenya (Nock) for failing to play its role in stabilising petroleum supply and pricing in the country.

All the while, the oil marketing companies (OMCs) appear to have scored a major victory, benefiting from an increase in retail prices, which will see them offload products meant for the March-April pricing cycle over the current cycle at much higher prices.

The events of the last few weeks have made Kenyans question the usefulness of the fuel subsidy, with some even calling for its scrapping.

While it is inevitable that the subsidy will go at some point, it would leave Kenyans exposed to even higher fuel pump prices.

OMCs, on the other hand, would not have the trouble of dealing with the government in claiming compensation.

“This has exposed the soft underbelly of the regulator and, in turn, left the consumer on their own… the regulator needs to stamp its feet and punish some of the companies,” said the Consumers Federation of Kenya (Cofek) Secretary-General, Mr Stephen Mutoro.

At the height of the fuel crisis last week, desperate motorists bought a litre of petrol at highs of Sh200 in some instances.

Mr Mutoro noted that due to the critical nature of petroleum, a black market emerged, claiming that in some instances, the hand of major oil marketers was evident.

“It appears the OMCs that were able to get fuel at the depots have been offloading it to the black market. You find fuel at a few small retail outlets at a higher rate, but then at the petrol stations franchised by the major OMCs, they have to stick to Epra prices,” he said.

Aside from the deportation of Rubis Kenya Chief Executive Jean-Christian Bergeron, which the company has disputed, saying he is in Paris for consultation on the situation in Kenya, the Directorate of Criminal Investigations (DCI) has also questioned some of the oil firms’ chief executives.

These are among the most visible actions by the government in trying to get the industry back to order.

But Acting Petroleum Cabinet Secretary Monica Juma said a lot more had happened behind the scenes.

“The idea that this is the first action is actually wrong. It is not true that nothing has happened. This is the tail end,” said Ms Juma, adding that the other CEOs are also under investigation and would be punished accordingly.

“Punishment will be determined within the framework of the law… It depends on what we find and the scale of the offence.”

The crisis has cast a spotlight on Nock, the State-owned oil marketer formed four decades ago and mandated to keep private sector players in check on both prices and supply of petroleum products.

The shocks would have been marginal had Nock lived up to its mandate.

The company, however, has been making losses, weighed down heavily by commercial loans and high cost of operations.

The government has also in the past failed to invest in Nock, seeing it lose the previous mandate to import 30 per cent of local diesel requirements due to inadequate capacity as well as loss of its market share over the years to 1.8 per cent currently from nearly 10 per cent a decade ago.

Acknowledging the failure of the government to have an entity that can play a strategic role in securing petroleum supplies, CS Juma said the incidents of the last few weeks highlighted the importance of having a strong entity to fill the gap.

“This confirms the importance of having a strategic institution that can secure and cushion this country. This is the rationale why we must focus on Nock as the institution that will provide us with that comfort,” she said, adding that the State planned on pumping money into the loss-making entity to enable it to gain a foothold in the competitive market.

“There will be refocused attention on Nock… whatever needs to happen to ensure that it acts in the light of its mandate shall be done,” said Ms Juma.

“As a medium-term intervention, the ministry has commenced the process of ensuring that National Oil assumes its responsibility of taking up the 30 per cent import quota of petroleum products that was designed to assure continued security of supply.”

The Petroleum Ministry has recently made proposals that if passed as they are would see Nock import nearly a third of all petroleum products consumed in the country.

The Draft Petroleum (Importation) ( Quota Allocation) Regulations, 2022 allocates Nock a 30 per cent petroleum products quota for diesel, super petrol, kerosene and cooking gas.

Independent oil dealers

“The Petroleum Products Quota Allocation shall be imported by Nock,” said the Petroleum Ministry in the gazette notice dated February 16. The draft regulations also require Nock to give priority to independent oil dealers, mostly small and medium-sized oil marketers, who do not have affiliation with oil majors.

They have in the past said the major brands usually torment them, giving them products at unreasonably high wholesale prices, leaving them with little margins at the retail point.

“Priority to purchase petroleum products from the quota holder shall be given to retail stations operated or franchised by the quota holder and operators of independent petroleum retail stations,” said the Petroleum Ministry.

The outright refusal by major OMCs to sell to the independents was one of the factors that spawned the countrywide fuel shortage. Additionally, the oil majors have in numerous instances reportedly sold fuel to the small marketers at prices above the price caps.

Kenya Independent Petroleum Distributors Association (Kipeda) Chairman Joseph Karanja last week told Financial Standard that by selling to small players at higher prices, oil majors have ensured the independents make little profit when reselling at retail level.

Due to this, small marketers cannot compete with the majors in urban markets, which is largely why they have been relegated to small rural towns or informal areas in towns.

“Over the recent past, there have been instances where a major OMC sold super petrol to independents at Sh147 per litre. You do not expect the person who has bought it at Sh147, to sell it at Sh134.72. But then you have the price caps and the police enforcing on the retail side,” said Mr Karanja, adding that Kipeda has raised the matter with Epra, which has told them it’s working on it.

“When Epra does not cap the wholesale price, it causes unfairness and a disruption in the flow of the product,” he added.

Data by the Petroleum Ministry tabled in Parliament recently indicates that the independents control more than 60 per cent of the market. Out of the 4,270 petrol stations in the country, the independents operate 2,934 stations.

Perhaps aware of the cost that lack of fuel can do to industries, the Kenya Association of Manufacturers (KAM) is now pushing for the government to abandon the subsidy and also suspend some of the petroleum taxes.

KAM Chairman Mucai Kunyiha noted that the lack of petroleum products came at a great cost for both industry and consumers

“It is now painfully clear that the fuel supply system and in particular the subsidy programme, has broken down, perhaps irretrievably so,” he said.

“The lack of easily accessible fuel is a strain on our operations and a poor advertisement of Kenya’s ability to manage our national affairs. We are urging the government to abandon the subsidy system to enable stable supplies in the market, and to suspend some of the taxes on fuel as an alternative mechanism to shield the country from the high cost of fuel,” said Mr Mucai.

Currently, taxes account for 42 per cent of the subsidised retail price of super petrol and 39 per cent per litre of diesel.

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