Demurrage is a term that will rarely feature in local political debates.
Yet, it featured prominently in a parliamentary inquiry that had been looking at why the cost of fuel was rapidly going up last year and what could be done to slow down the increase in pump prices.
Demurrages are penalties imposed on owners of petroleum products by shipping lines due to delays in the offloading of goods after the ship docks at the port.
Because of these delays, Kenyan oil marketing companies paid Sh1.16 billion in the six months to June last year as demurrage costs. This is according to disclosures that the Energy and Petroleum Regulatory Authority (Epra) made to the National Assembly’s Committee on Finance and National Planning during its inquiry into record-high fuel prices.
In its report on the matter, the committee noted that demurrage costs were partially to blame for the high cost of fuel in the country.
A lack of infrastructure for discharging petroleum products had previously been blamed for delays at the Mombasa port, resulting in hefty penalties on oil importers.
The country had been depending on the Kipevu Oil Terminal (KOT), which could only allow one ship to discharge petroleum products into storage facilities on land at a time.
This has, however, significantly changed since the beginning of August this year when the second Kipevu Oil Terminal (KOT2) was commissioned.
The new offshore terminal, which is still close to the old terminal, allows three ships to simultaneously discharge petroleum products into the Kenya Petroleum Corporation (KPC) storage tanks.
The jetty has additional facilities for the discharge of cooking gas but is yet to start being used due to a lack of storage facilities for Liquefied Petroleum Gas (LPG).
The Kenya Ports Authority (KPA) responding to our query on the impact of the new terminal has said since the jetty became operational last month, ships no longer have to queue to discharge petroleum products.
During the commissioning of the new jetty, outgoing National Treasury Cabinet Secretary Ukur Yatani noted that the new terminal would address several issues that have far-reaching impacts on the sector both in the country and the region.
“This facility is timely as it will address the twin challenges of growing volumes of imported petroleum products while at the same time cutting demurrage costs, which have contributed significantly to the high cost of oil products in the region,” he said.
National Assembly’s Finance Committee had noted the completion of KOT2 would significantly reduce demurrage costs.
It is, however, not possible to compare the various charges importers incurred before and after the commissioning of the new facility as Epra only includes them in the cost of petroleum products when they land in Mombasa.
Referred to as the landed cost, it combines several costs incurred by oil importers such as the cost of buying refined fuel from an oil refinery, shipping and insurance costs.
The House watchdog committee had recommended separating demurrage costs from the other product acquisition costs.
“The fuel pricing formula be amended to make demurrage a standalone factor of calculation of the price of fuel as opposed to the current scenario where it is factored in the landed costs,” said the committee in its report, adding that with the commissioning of KOT2, transport and maritime authorities should limit the number of days a vessel can stay at the port to cut such costs as demurrage that are eventually passed on to the consumer.
“The number of days that a ship can stay at the port (should) be specified.”
According to the committee’s report, the reviewed demurrage payments between January and June 2021 showed that vessels were being paid for between one and 22 days. Demurrage charges are paid according to the size of the vessel.
This can vary from $25,000 (Sh3.01 million) per hour for medium-range vessels with a capacity of about 80,000 tonnes to $45,000 (Sh5.42 million) per hour for large ship tankers with a capacity of up 160,000 tonnes.
While KOT2 might have sorted out the delays that vessels experienced in the past to discharge petroleum products, there are growing concerns that storage tanks and the pipeline capacity might not be adequate for the onward transmission of the products to the rest of the country.
KPC recently said it plans to increase the capacity of its infrastructure to be able to evacuate products from the Coast at higher speeds.
This will be through building another pipeline between Mombasa and Nairobi as well as increasing the capacity of its depots in Western Kenya.
It is because of these and other planned investments that KPC is seeking an increase in the amount it charges oil marketing companies to use its network of pipelines.
The pipeline company, which recently applied to Epra for a higher tariff, said it needs to undertake “capital for enhancement for the Mombasa-Nairobi line where we plan to install a new line.”
KPC is seeking a 13 per cent increase on its transport and storage tariff to Sh5.22 per cubic metre per kilometre over the 2022/23 financial year from the current Sh4.61.
The tariff will increase to Sh5.53 per cubic metre per kilometre over 2023/24 financial but ease slightly during the 2024/25 financial year to Sh5.50 when the company expects to have completed building the pipeline.
The company also said the money from the higher tariff would enable it to increase its storage capacity at its depots in the Western Kenya region.
KPC noted that its depots have been “having operational challenges due to storage constraints, especially in Eldoret and Kisumu.”
If Epra okays the new tariff application, it will increase the retail cost of super petrol by 54 cents in Nairobi, 42 cents per litre in Nakuru and 29 cents per litre in Eldoret and Kisumu. Motorists in Nairobi currently pay Sh2.07 as the transport charge on the Mombasa-Nairobi pipeline.
While making a case for the new tariff at public consultation forums recently, KPC said it needs to make the new investments owing to the growing demand for petroleum products, which requires it to pump fuel at a faster rate and have larger storage facilities.
Additionally, there is also an increase in petroleum product flow rate from ships importing fuel to Kenya following the commissioning of KOT2.
Plans to build another pipeline come on the heels of the commissioning of the new Mombasa-Nairobi pipeline.
The Sh48 billion pipeline started operations in 2018. It currently pumps about a million litres of fuel per hour but can increase this to 1.8 million litres per hour. This would, however, require investing in additional booster pumps along the pipeline.
Following the commissioning of Line Five (the new Mombasa-Nairobi pipeline), KPC continued using the old line to complement the new one but retired it last year.
Players have in the past noted that the old pipeline had proven useful even after the commissioning of the new larger pipeline.
They argued that because of its more powerful pumps, it should have been allowed to continue playing a complementary role as KPC evaluates other options.