Skewed tendering system earns fuel importers bumper pay day

On March 18, oil prices tumbled by a quarter in the worst plunge in history linked to a fierce ego contest among an international cartel of producers.

Huge inventories of expensive fuel already in the market in the midst of an economic downturn meant the stocks would influence the subsequent pricing beyond the usual one-month window.

Trucks are not on the roads, the passenger service on the Standard Gauge Railway has been suspended and major factories have been shut. 

As the crude oil prices plummeted globally, a Bahamas-registered vessel SKS DongGang was discharging the costlier fuel at the Kipevu Oil Terminal in Mombasa.

The costly consignment acquired in February is still influencing fuel pump prices because the imported volumes were huge in a period of faltering demand for the commodity.

Galana Oil Kenya Ltd had won the tender to procure the fuel on behalf of the Kenyan marketers, including its sister company Delta Petroleum.

Backed by deep-pocketed Kenyan shareholders through a layer of companies, including Miral Holdings registered in the British Virgin Islands, the importer has delivered at least three other tankers of cheaper diesel consignments - more than all other marketers combined.

But it was the March delivery procured a month before that is hurting Kenyan consumers who have no option but to continue paying the elevated prices for no fault of theirs.

Galana Oil had inadvertently, through this shipment, set the stage for huge profits for itself as it would go on to win more delivery tenders, including the one for May, with the price pegged on the SKS DongGang consignment.

After the delivery, the firm has also imported another mega diesel consignment, which was discharged last week from crude oil tanker BW Shinano.

BW Shinano had set out from Yanbu Port in Saudi Arabia on March 3, just before the oil markets were spooked by the coronavirus pandemic, suggesting next month’s fuel pump prices in Kenya might still not capture the global pricing slump.

Galana Oil, which has maintained a firm grip on diesel importation, is expecting its next consignment at the Mombasa port next week aboard another massive vessel - Seaways Shenandoah - from Malaysia, according to shipping schedules.

All efforts to reach out to Galana Oil for comment through phone calls, text messages and emails proved futile as they had not got back to us by the time of going to press.

This is despite Antony Munyasia, the chief executive, having promised to do so.

Reduced economic activity amid the partial lockdown informed by the Covid-19 outbreak in Kenya has meant lower demand for diesel because of supply chain disruptions in various sectors.  

Orders placed by the respective marketers have declined since March as a result of the slowdown in business activities.

But the millions of litres of the fuel already imported while the prices were still high have to be offloaded, somehow, with zero downside exposure to the importers who have since brought in fresh stocks, but at a fraction of the earlier pricing. 

Interviews with various stakeholders in the energy sector indicate that the latest diesel imports got to Kipevu at below Sh27 per litre compared to Sh40 in February.

As the volatility in pricing on the global market played out, importers had figured out how to capitalise on the crisis that saw prices sink to an 18-year low, effectively denying Kenyans the spoils.

Helped in part by a flawed pricing formula that is lopsided to always cushion the trader at the expense of the consumer, oil importers are having a field day.

Should prices fall to zero, hypothetically, monthly pump prices would to a huge extent still be hinged on the landed cost of stocks imported over the previous month.

That was the argument extended last week when petrol became cheaper than diesel for the first time in recent history.

Perhaps, some would argue, it is a high time the country reviewed the pricing formula to be more consumer-centric given that the pricing lag only works as insurance for traders’ downside risk. “...the costs and volumes to be used in the computation of the petroleum pump price for a particular month are the costs and volumes of petroleum cargoes imported through the Open Tender System (OTS) and discharged at the port of Mombasa from the 10th of the previous month to the 9th of the pricing month,” said the Energy and Petroleum Regulatory Authority (EPRA), the market regulator.

In essence, any pricing shifts, especially dips, which occur in the international markets, can only be felt at home after at least two months as the pump prices are adjusted once, on the 14th of every month.

In 2002, a litre of diesel was retailing at just about Sh30, a third of the current pump prices, other developments over the period such as changes on taxation schedules aside.

In today’s exchange rate to the US dollar, which would factor in depreciation of the Kenyan currency, a litre of the fuel would go for about Sh58.

To put this time frame into context, the late President Daniel Moi was still in office, the then battered Thika Highway consisted of two lanes separated by maize plantations, while the dancing sensation Azziad Nasenya was no more than a toddler.

Events surrounding the April pricing of diesel, the fuel that besides powering the economy has some bearing on the budgets of every single household, remains confounding.

Ordinarily, the average price of crude oil in the prior month is used in computing applicable pump prices as the fairest means to cushion the consumer and hand the trader a justifiable return.

For March 2020, when the supremacy contest between Russia and Saudi Arabia was peaking, the global average for crude was in the region of $32 (Sh3,300) per barrel, according to official statistics.

In the previous month, the quoted average was $55 (Sh5,560) per barrel, a 40 per cent plunge - the biggest movement in recorded history.

For importers of the commodity who, like everybody else, did not see the crisis unfold, it presented a potential knockout from the business.

Stiff taxation schedule

In any case, some had stockpiles of expensive fuel that would last them for months betting that prices could only rise.

Had their projections been right, as they often are, it would result in billions of shillings in neat profits for them.

But they were awfully wrong in their forecast. This, however, did not translate to losses because, in any event, it would be passed on to the consumer. 

Most of the commodity sold in Kenya is imported by a winning trader in the monthly bidding process overseen by the Ministry of Petroleum as a means of ensuring competitiveness and guarantee fairness. 

EPRA, whose main mandate is to protect consumers, was able to accommodate the importers’ interests and only indicates that the reprieve could only be felt in the coming months.

In its April pricing guide, retail pump prices dropped by Sh4.09 per litre for diesel, Sh18 for super petrol and Sh18.18 for kerosene. 

A stiff taxation schedule and a predetermined profit margin for the marketers translate to over Sh62 in fixed costs for a litre of any of the three petroleum products. Since consumers have to bear the fixed costs, any possible relief on the variable portion of the pricing would be their only saving grace.

Hindpal Jabbal, a former chairman of the Energy Regulatory Commission – a precursor to EPRA, said the variable cost portion for Kenyans in minimal, yet it’s dependent on many factors. 

Among them is the prevailing price of crude oil, refining expenses and freight, which are collectively captured in the landed cost. 

He noted the tariff formula is heavily pegged on the previous imports of the finished product, adding that should there be no importation in a particular month, then the prior set prices would continue to apply. 

“If the importation is zero this month, then last month’s set prices will prevail,” Jabbal said. 

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