How Nock missed out on bumper fuel deal

Working pumping fuel at a station. Kenya is set to import diesel, super petrol and jet fuel on credit. [iStockphoto]

The National Oil Corporation (Nock) missed an opportunity that could have helped in turning around its fortunes.

The State-owned oil marketer's fortunes have over time dwindled to a point that it rarely features in discussions on the country's petroleum sector industry players.

Nock was skipped in the government-to-government deal that Kenya got into with other National Oil Companies from the Gulf States for the importation of petroleum products on credit.

The deal, which will see three companies supply Kenya petroleum products for nine months with an extended six-month credit period, is expected to cure some of the dollar-related problems the country has been experiencing.

The Energy Ministry explained that the three firms - Saudi Aramco, Emirates National Oil Company (Enoc) and Abu Dhabi National Oil Company (Adnoc) - will nominate local companies that will handle business on their behalf in Kenya.

These include the sale of the fuel to local oil marketing companies (OMCs), collecting payments that will be made in local currency, over time converting them to US dollars and finally remitting them to the oil producers after the expiry of the six-month credit period.

The National Assembly Committee on Energy wondered why Nock did not have any role to play, despite the government initiating the deal.

The MPs noted that in as much as the Gulf companies insisted on nominating the local OMCs that they would work with, the government should also have pushed for a fraction of the products to be handled by Nock.

"We would have assumed that you (government) would have asked the winning bidder to clear some of the products through Nock even as they nominate the local OMCs who will handle the business on their behalf in Kenya," said committee chairman Vincent Musau.

"Why was it not important to make this consideration in this arrangement? How is it that they (the international oil companies) did not see Nock as an off-taker? Why did the government not give any conditions to the suppliers to involve Nock? We should have demanded that for us to give them the business, they should consider Nock... this could have placed Nock strategically so that it gets some revenues. If you rescue Nock, it will no longer be a strain to the Exchequer."

Another MP Julius Mawathe also queried why the government did not appear keen on enhancing Nock's capacity to enable it to deal with shocks associated with petroleum products, which usually result in shortages or sustained high retail prices.

Energy CS Davis Chirchir. [Kipsang Joseph, Standard]

It is also seen in the alleged mistreatment of small oil firms, which without the capacity to import, have to rely on the major firms to supply them with products.

"The best way to ensure the security of fuel supply in the country is through Nock. Every other country has a national oil company, and they use them to ensure that they have the security of supply," said Mr Mawathe.

Too huge

Energy and Petroleum Cabinet Secretary Davis Chirchir noted that on the one end, the transaction was too huge for Nock as it is already grappling with other challenges.

On the other hand, he said, the ministry had tried to pitch for Nock but the oil companies that agreed to supply Kenya with petroleum products on credit said they preferred selecting companies that they would work with.

"Initially, when we were still negotiating with these countries, we did propose Nock as the off-taker, but they said that they did not want to work with Nock, so we left them to nominate the companies they would work with," he said.

The CS, however, noted that the transaction was big and even if the Ministry's pitch for Nock had been successful, a lot would be needed to prop up Nock's capacity to handle just a fraction of the petroleum products. "We are dealing with a transaction of $500 million (Sh65 billion) every month. We went for a government-to-government deal because we want to slow down dollar demand and build a dollar reserve equivalent to Sh425 billion," he said, in trying to demonstrate the magnitude of the deal.

"When we talk about Nock being involved in this, the company is struggling to repay a loan of Sh8 billion, and they are almost not trading. We are seeking to withhold $3 billion (Sh420 billion)."

The CS added that the government is considering working with oil-producing countries to establish giant storage facilities in the country.

The storage tanks would then be operated by a national oil company from an oil-producing country that would fill them up with petroleum products for supply to Kenya and the region.

Fuel tankers at the Kenya Pipeline Company depot in Eldoret, Uasin Gishu County. [Peter Ochieng, Standard]

"We need Nock for the security of supply... but to hold three months stock at $500 million (Sh65 billion) per month - or about $1.5 billion (Sh195 billion) - is quite expensive," said Mr Chirchir. "What other countries do is that they get an international oil company to build a bunker in their country so that when there is a problem, at least the product is in the country."

"What we are doing is to see whether we can have one of the oil-producing countries have a bunkering facility - big storage - for supply to the whole region. The point is that we do not have to pay for the product because it is held by the supplier for supplying the region, but if there is a problem, the product is in the country."

Strategic functions

Mr Chirchir added that the country is already strategically positioned for the supply of petroleum products to the region.

He, however, said the country needs a strong Nock for several strategic functions, including holding the government's stake in the Turkana oil blocks that are expected to start oil production soon.

In the agreements the State signed with oil exploration and production companies, the government has the option of exercising back-in rights in the project, which means owning a proportion of the project before commercial production starts.

"We need to build our own Nock as apart from doing what it does, it has a role to play in the back-rights where a 20 per cent stake in the project will be novated back to the government. Nock will hold that 20 per cent," he said.

"This is why we need to strengthen Nock ahead of taking this assignment and also other opportunities." The joint venture companies are currently searching for a strategic partner - a firm that will carry the project to the commercial phase. The firms have also presented the field development plan to the Energy Ministry.

This is even as Mr Musau, the chair Energy Committee, claimed that the State-owned oil marketer is under threat from cartels. "Cartels have frustrated efforts to build a formidable national oil. We are afraid that there is an intentional strategy to finish Nock so that they can buy it at a throwaway price," he said.

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