The Silent Cry: The slow death of the Independent Petroleum Industry in Kenya.
The independent Petroleum Industry in Kenya is slowly dying due to the adverse effects of the stagnated capping of petroleum prices in the country despite the global movement in petroleum pricing. While globally petroleum products are dictated by market forces and the government has no control over the producer prices that in turn affect the landed costs, the government has from mid last year (2021) consistently put up a price control policy on the petroleum products in Kenya.
Following the COVID-19 pandemic, the prices of energy products including crude oil dropped globally. This was due to a decrease in demand because of economy—wide pandemic-related closures as well as the price war that arose between Saudi Arabia and Russia. In the year 2020, Brent crude oil and WTI crude oil hit a year high of $ 70.25 and $ 63.27 and a historic year low of $ 9.12 and $ 11.26 per barrel recording an annual percentile change of -24.42% and -20.64% from the previous year respectively. As the world started recovering from the effects of the pandemic, the prices of crude oil started advancing again, first due to shortage of supply and then later due to a positive shock on the demand. Consequently, in 2021, the prices for Brent crude oil ad WTI Crude oil hit a year high of $ 85.76 and $ 84.65 and a year low of $ 50.37 and $ 47.62 per barrel recording an annual percentile change of 50.80% and 55.01% respectively from 2020.
As at 17th February, 2022, the prices for Brent crude oil and WTI crude oil have already hit a year high of $ 101.66 and $ 95.46 and the year low has only been at $78.25 and $ 76.08 per barrel respectively. The historical highs recorded this year is attributed to geopolitical tensions between Russia and Ukraine. Currently, as at 16th February, the price of WTI is $ 93.29 per barrel and for Brent Crude oil is at $ 101.66 per barrel. These prices are estimated to go even higher should Russia choose to invade Ukraine. The global pricing of petroleum products is dictated by market forces. The global movement in petroleum pricing in turn affects import prices which is directly linked to the landed costs at which OMCs import crude oil into the Kenyan market.
Despite the upward global movement of petroleum prices in the last two years and with crude oil prices hitting historic highs this year, the Government of Kenya still maintains a subsidy regime on the pricing of petroleum products. As per the maximum petroleum prices rolled out in Kenya by EPRA for the period of 15th February to 14th March, 2022, the retail prices of petroleum remain unchanged; super petrol being sold at Kshs. 129.72 per litre, diesel at Kshs. 110.60 per litre and Kerosene at Kshs. 103.54 per litre in Nairobi.
Kenya sources the larger percentage of its crude oil from the Murban Crude oil marketed by the Abu Dhabi National Oil Company (ADNOC). When ADNOC sets the monthly price for crude oil for a specific month, this becomes the basis of the free on board (FOB) loading port price for the market supply tenders issued under the open tender system (OTS). The winning company sells to other oil companies at the winning bid price plus industry agreed cost build-up parameters to land the product in Kenya. (ref: www.pwc.com). It is this cost, plus the taxes levied on petroleum and storage and distribution costs together with profit margins for oil dealers that comprise the pump prices.
Where the pain is
For the government to be able to keep the pump prices low, OMCs have to forgo their expected margins and in other cases fund expensive cargoes in the expectation they will in turn be compensated from the Petroleum Development Fund. The cost of maintaining the prices for petroleum products despite the upward movement of pricing globally are borne by OMCs and this is not a rosy affair as much as it may sound like it. Part of the money that make up the tax levied on petroleum products i.e Kshs. 5.40 for Super Petrol and Diesel (which was increased from 40 cents in July, 2020) serves as the Petroleum Development Levy that is paid into the Petroleum Development Fund pursuant to the Petroleum Development Fund Act, No. 4 of 1991.
The Petroleum Development Fund Act does not clearly provide that the fund is meant to be used as a stabilization fund so as to compensate oil marketing companies through a subsidy regime. However, the practice has been that the monies collected in the PDF are to be issued to compensate OMCs for the cuts they take. There are currently alarming levels of current accounts and fiscal deficits due to diversions that are being considered as a breach of law. (for example, in September, 2021, Kshs. 18.1 Billion was diverted to defray SGR costs.). The illegal diversion of PDF funds are as a result of lack of a clear regulation on how the monies should be used. This in turn translated to delayed compensation to OMCs. There are currently pending payments for November last year and the government has not paid a single cent for the December-January, January-February review. The delays have pushed the OMCs especially small independent firms to the edge who have to take bank loans to cover the payment for fuel and distribution costs. They are now staring into the abyss as most have exhausted Lines of Credit with their financiers, tied all their working capital in paying for their monthly imports while others have all together given up their ullage on the OTS.
Resellers
Independent petroleum players buy products from these same Oil Marketing Companies whether for resale or retail. Due to the delayed compensation from the Government of Kenya, the Oil marketing companies are unable to offer products at any reasonable rate to the resellers who play an extremely crucial role in micro-distribution of petroleum products so that even the remotest parts of the country can enjoy a dependable supply.
Either by accident or design, this has now started turning the petroleum business into an oligopoly dominated by Multinational Oil Companies (MNOCs) who now command a market share of over 50%. Though the MNOCs are doubtless suffering the same fate of withheld payouts, they occupy a unique resource position which in a competitive market is working for them like snapping up abandoned ullage capacity by smaller players.
The government of Kenya first imposed price controls on petroleum product in 1971. Deregulation of these prices occasionally, has always led to a huge public outrage. Hence the government has had to maintain a subsidy regime to manage the cost of living of consumers. Although a subsidy regime may be saving consumers, and somewhat protecting businesses from high cost of doing business, it is similarly killing the Petroleum Industry as there is simply no money to shoulder the high prices hence delayed compensation to OMCs. The government should therefore allow petroleum pricing to be controlled by market forces. A full deregulation of the downstream sector by removal of subsidies is the way to go. This will in turn give everyone a level playing field and encourage competition. Of course the discourse on reducing fuel prices should still be taken full circle through the Petroleum Prices (levies and taxes) amendment bill which is currently before the National Assembly.
Conclusion
The question we must now start asking ourselves is this, if the trend continues, what will happen to the hundreds of businesses run by the local independent players and the thousands if not hundred of thousands of people who depend on them? In an electioneering year, politics are known to take center stage, but it must be properly understood that our economy runs on petroleum and it should concern the entire country when those who labor in it are silently crying.
Authors: John Njogu (National Coordinator, POAK) & Beverlyne Mokaya (Lawyer & Researcher, POAK)