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Kenyan oil marketers are on the spot over what critics term as “greedy and hasty price increase tendencies” that has renewed the push for price controls.
Kenyan oil marketers are on the spot over what critics term as “greedy and hasty price increase tendencies” that has renewed the push for price controls. Oil companies have in the past been accused of being ruthless profiteers – taking advantage of a slight increase in crude oil to pump up prices – but what has come into focus is that fact that, with the exit of multinationals, it is now the indigenous firms that are leading the pack in fuel price increases.

It appears the remaining multinationals like Total and Oilibya appear to have taken a backseat in pace-setting. Last week, KenolKobil increased fuel prices by Sh2.50, followed by National Oil Corporation, as the multinationals chose to wait and see. The Parliamentary Committee on Energy summoned the Energy Regulatory Authority (ERC) to explain why petroleum rules meant to curb rogue dealers have not been implemented a year after industry-wide consultations were concluded.

The private sector has ridden on a tight rope with the cost of electricity fluctuating month-on-month particularly with over-reliance on expensive emergency power. In 2008, when the industry was characterised with unexplained rocket-high oil prices, the Ministry of Energy through ERC vowed to put a cap through an agreed formula.

Last week, said it had forwarded the regulations to the Ministry of Energy early last year. Director of Petroleum Peter Nduru, while testifying to Parliament’s Energy Committee, said the minister has failed to gazette the regulations.

Committee Chairman James Rege said the Committee is set to meet Energy minister Kiraitu Murungi (pictured, right) this week to “explain why he has been sitting on regulations.” “We cannot allow private interests to override public issues. There is need to implement the rules,” Mr Rege said.

“The price formula was hijacked at a higher level than the Ministry of Energy, after intervention by Bretton Wood. I understand the Economic and Social Council advised against it,” Mr George Wachira of Petroleum Focus Ltd says. Mr Wachira, a former chief executive of the Petroleum Institute of East Africa (PIEA), says a price formula is essential in Kenya, saying it works well in South Africa and both consumers and marketers in the country feel protected.

He says the formula adjusts prices objectively every month as cost inputs move up and down. “The formula is entrusted to an outside independent audit firm to ensure absence of political or vested interest interferences. It is an efficient, fair, transparent formula with predictable results. It should be implemented,” Mr Wachira told Smart Company.

Kenol-Kobil Group Chairman and chief executive Mr Jacob Segman said: “Our view is that re-introduction of price controls in this market (used to be in the 1970-80s and the early 90s), is retrogressive and against the spirit of free economy philosophy.”

Mr Robert Paterson, a petroleum consultant says if the Minister gives ERC power to limit pump prices, it they could end up forcing the industry to stop importing fuel. Just last week, a number of oil marketers adjusted their prices upwards between Sh2.50 and Sh4 per litre blaming it on high international crude oil prices. KenolKobil, said the industry has had to contend with high prices of crude oil and freight.

Motorists are now paying as high as Sh97 per litre of premium petrol after the price adjustments from between Sh90 and Sh94 per litre. This has sparked fears of another round of inflationary pressures that could slow down economic recovery and hurt both households and businesses.

“Oil prices increases this month were as a result of global price increases in the month of April,” said Mr Person. “The same global prices have gone down this week (last week) which means that prices in Kenya in June will go down correspondingly, if the oil marketers exercise good market ethics.”

Last month, dealers had raised the alarm over a fuel inspection levy imposed on them, and passed it to consumers. But despite suspending the charge, marketers did not fully pass the relief to their clients. Locally, the currency has over the past weeks weakened against other international currencies, leading to gradual forex loss.

Mr Stephen Mutoro, chief executive officer of the Kenya Alliance of Resident Associations (KARA), says the decision of the regulator must, by law, supersede the interests of a minister. Experts say a well implemented, and a cleverly-crafted regulatory regime for oil companies can make a major impact in this economy.

Ms Wanjiku Manyara, the chief executive of Petroleum Institute of East Africa, says the deregulated market in Kenya has worked effectively in spite of the infrastructural challenges. She says that the Energy Act 2006 has no price controls but it empowers the minister to introduce price controls on recommendations of the ERC.

Petroleum imports into Kenya are managed through the Ministry of Energy under Open Tender System. The lowest tender supplies all the other marketers and this ensures that the country gets the least cost of imports. Ms Manyara says there are various variables that determine prices including operating expenses, taxes, and return on investment and each marketer individually determines its prices depending on their individual pricing policies.

Mr Segman of KenolKobil says if the formula is to be forced on them, the regulatory authorities must consider reasonable margins for the marketers. “It is ironical that we would be thinking of price controls even as the market becomes more and more unattractive to some players, as evidenced by the exit of a number of players from this market,” Mr Segman said.

A fuel price formula would spell death knell for the independents, analysts say.  “This is because it would force all industry players to price at the maximum and the only reason the independents exist is that they price below the majors. If they are priced the same, most people will go to the majors,” Mr Paterson, a former oil firm CEO, adds.  

He says the majors control about 70 per cent of the industry but without the independents they would have a virtual monopoly. Hass Petroleum Kenya Ltd chief executive Issa Mohamed says the industry does not need price controls. “Let market forces guide players, it is good that way, The market dynamics do not allow the industry to go back to that,” he said.

He says the government should encourage competition, license more players and increase funding to National Oil Corporation of Kenya to play a more prominent role is stabilising fuel prices. “I’m well aware of the reason why there is such quest for a price control; it is due to the notion that oil marketing companies are having super profits. It is a wrong notion; just check the results of the only two public oil firms verses other public companies from different industries like, banking and telecommunications,” countered Mr Segman.

Mr Aly Khan Satchu, a Nairobi Stock Exchange data vendor says, “Philosophically I believe that when prices are set by the regulator, we are embarked on a very slippery slope. It leads to regulatory arbitrage, gaming of the system and the history of its success difficult to discern.”

He says the regulator needs to ensure there is no price collusion and cartel-like behaviour and leave the business that has to set its prices. For the only two listed oil marketers Kenol-Kobil and Total, their share prices exhibit a high correlation with the oil price and the reason for this, Mr Satchu says, is that they are always carrying product inventory.

“In a situation where the commodity price falls dramatically, they are exposed to a supernormal loss. That’s why both Total and Kenol reported very poor first halves,” Mr Satchu says. He says Kenolkobil is trading at a two-year high and he believes investors are responding to their sub-Saharan Africa footprint and the potential for good profits to be extracted from this expansion. Full-year results confirmed much promise and the planned 10-1 share split iced the cake.

Total has been a share stuck in a Sh25-45 range for over five years. Total, which bought out Chebron operations in Kenya (Caltex), has not been able to break out of this box but the recent bulking up might move things forward on the share price in the medium term.

“I do believe that given the tax structure on oil, underlying price increases and decreases are actually more muted than you might have otherwise expected,” he adds. State-run National Oil Corporation of Kenya, mandated to stabilise pump prices, has largely been forced to follow the dictates of the market controlled by private players. The limited presence of the firm at the retail level denied it the muscle to take on multinationals that had a stranglehold on the retail market.

The firm has been acquiring more retail outlets lately, now at 60 and projects to grow to 75 by June. Through a government-backed initiative, NOCK managed to acquire retail outlets from Shell when it was merging its business with BP. Just recently it snapped 14 of the Caltex fuel stations on sale, underlining the strong craving local firms have for the fuel market.

Mr Mutoro says National Oil has over-concentrated its energies on discovering oil – which is a long term goal and forgotten its immediate task of assisting to stabilise the market pricing being a government entity. “The Corporation is effectively influencing pricing of petroleum products in the Kenyan market particularly in areas where it has got presence through availing of quality fairly priced products,” said NOCK managing director Mwendia Nyaga recently. “This is among the reasons why in our Strategic Plan, building a significant retail presence is key for the corporation to effectively play the role of market stabilisation.”

Price-stabilisation myth

To ensure stabilisation of supply of petroleum products in Kenya, National Oil is legally mandated (Kenya Gazette Legal Notice No. 43 dated 10th April 2008) to procure the country’s national strategic reserve equivalent to 90 days of local demand. The Corporation is currently developing the concept paper that will guide the establishment of these reserves.

Mr Paterson, who was the former Mobil boss, says National Oil doesn’t have the money to buy all of the fuel (each import can cost $90 million) and it would lose a huge amount of money in the process which would also hit the government as well. Many countries, he says, have at one point formed national oil companies but most of them have now been privatised because it doesn’t work.

“While no one likes to believe it, the downstream oil industry never has made windfall profits (the upstream at $150 per barrel sure did but not the downstream),” he says. He says for a National Oil company to lower prices means that they have to be prepared to take a loss and potentially force the industry into a loss making position.

“Therefore, when Kenol/Kobil announces they are raising prices because of crude escalation NOCK joins in,” he says. “ And they do so because if they don’t they will lose money and I am sure the MD has making money as part of the performance contract with the Government.”