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The proposed price control for petroleum products is drawing diverse views from industry players. They are torn between the need to protect consumers and letting supply and demand forces determine costs.
The proposed price control for petroleum products is drawing diverse views from industry players. They are torn between the need to protect consumers and letting supply and demand forces determine costs.

There are issues of taxation, covering overheads, fuel availability and problems affecting supply chain.

According to the Energy Regulatory Commission, pump price regulation will lead to quicker benefits for consumers when the international oil market is on downward trend.

“Marketers are likely to be assured of a margin on their products and they will not be in a position to make windfall profits,” said the regulatory commission director-general, Kaburu Mwirichia.

The Motorists Association of Kenya terms regulation as timely but the Kenya Independent Petroleum Dealers Association wants supply constraints such as pipeline pumping capacity to be considered.

Changes in the shilling-dollar exchange rate, taxation, insurance and sea freight rates, cost of crude oil, refining, finance, transport inland and profit margins lead to adjustment of fuel prices upward or downward.

Mr Mwirichia said the maximum retail price of fuel in shillings per litre at a filling station shall be determined within a radius of 40km from the nearest oil products distribution depot.

Loading facilities

Distribution depots are petroleum receipt, storage and truck loading facilities owned by companies in Nairobi and Mombasa and by Kenya Pipeline Company in Nakuru, Kisumu and Eldoret.

The independents’ chairman Keith Ngaruchi said reduction of taxes has to be considered as price control will cause fuel shortages and make investors pull out because of losses.

“Pipeline’s pumping capacity inland needs to be enhanced, and the Mombasa port dredged for ships ferrying big consignments of crude oil and refined fuel to dock, besides taxes being reduced,” he said.

Dredging of the port, which was planned but not done, will enable Kenya hire big tankers cheaply. The government collects a Sh29.35 tax per litre of super, kerosene Sh7.66, and diesel Sh19.75.

While the government owns 50 per cent of Kenya Petroleum Refineries Ltd, it has not been upgraded to make the plant more competitive and able to process various types of crude oil.

“The refinery only processes Mrban and Zakum crude oil, as the plant has not been modernised for over 20 years, making it uncompetitive compared to other facilities in the Middle East,” Mr Ngaruchi said.

Prices are to be determined on weighted average cost per litre at the refinery and Kipevu Oil Storage Facility, fuel imported through an open tender system and products obtained from crude oil the previous month with unit cost, taxes, levies and exchange rate.

According the Hydrocarbons Management Consultancy, it takes a lead time of about 60 days from ordering crude oil, refining in Mombasa, transporting inland to reach consumers at retail outlets.

“The lead time was not captured in the formula, and price controls can easily lead to marketers refusing import oil if they disagree with government,” Robert Shisoka of Hydrocarbons said.
He added that if the price fixed by the government cannot cover overheads, multinationals could pull out of the market, and retailers would offer poor services.

At the centre of the debate is negotiated storage and handling charges levied by different distribution facilities, and loss of petrol through evaporation while being transported by road tankers.

Other issues are inventory tracking of oil products moved by pipeline and road, which need to be separated by marketers. It is cheaper to transport fuel by pipeline than road.

Avoid losses

Mr Shisoka said regulator needs to take into account the fact that the inventory cost has to be tracked to avoid losses.

The rules allowing combined gross margin of 10 per cent for marketing and dealers in business require the regulator to determine crude oil processing fees charged by the refinery and the storage charges.

The proposal fixes the delivery rate within a radius of 40km of oil products at Sh42 plus value added tax and Sh12 per litre for 1,000 litres of fuel is charge outside town.

The Minister for Energy may review the formula for calculating maximum retail price of oil products and pipeline tariff for transporting fuel to Nairobi is Sh1.530 per litre plus VAT.

The pipeline tariff for transporting fuel to Nakuru is Sh2.105 per litre plus VAT, Kisumu is Sh2.703 and Eldoret is Sh2.706.