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Kenyan consumers will have to wait for the retail cost of petroleum products to gown down despite the decline in the price of crude oil on international markets.
Kenyan consumers will have to wait for the retail cost of petroleum products to gown down despite the decline in the price of crude oil on international markets.

Industry players say it might take at least a month for the effects of a nearly 12 per cent drop in the price Kenya pays for crude oil to be felt at the retail level in Kenya as the fuel now on sale was purchased in June when prices were at an all-time high.

Metro Petroleum managers say the crude oil purchased in June arrived in July, and marketers got the refined fuel in August from the Mombasa-based Kenya Petroleum Refineries Ltd.

“The crude oil that Kenya buys this month will be consumed later this year,” said Metro’s managing director Bill Rotich. He said firms in Kenya rely on a monthly average cost by the Abu Dhabi National Oil Corporation (ADNOC) of the United Arabs Emirates in placing international orders, and retail prices could fall if the global downward trend is sustained.

Kenya pays retroactively for crude oil based on a price fixed by ADNOC at the beginning of the month on a calculated basis of the previous month’s average cost in the daily market.

According to marketers, the price for benchmark Murban crude has declined from an all-time high of US$134 per barrel on July 12, 2008, to $118.40 on Friday, but cost build-up factors have to be monitored before retail prices reductions are effected.

Cost build-up factors include the international crude oil price, shilling-dollar exchange rate, insurance premiums, cost of finance, freight and refining, taxation, inland transport cost and profit margins.

Petrol in Nairobi’s central business district costs Sh109.50 a litre and diesel Sh104.50. Prices outside the CBD vary according to location. The government collects Sh30 tax on every litre of petrol litre of petrol and Sh20 on diesel.

With a peak of $147 a barrel before receding, crude oil price dynamics not only translate into decreased consumption for marketers in Kenya but also reduced profit margins per unit of sales.

On August 28, after going above $120 a barrel, West Texas Intermediate crude for October delivery was down $2.60 to $115.55 on the New York Mercantile Exchange while Brent crude dropped $2.22 to $114 on ICE futures exchange in London.

According to Hydrocarbons Management Consultants, the escalating cost of crude oil and refined products internationally has seen producing countries make unprecedented profits.

“Producing countries are benefiting from high crude oil and fuel prices. Bankers also gain from handling large volumes of cash,” said Robert Shisoka who is the Lead Consultant of Hydrocarbons.

The high cost of petroleum products is painful for fuel consumers and has failed to translate to record profits for oil marketers, but a sustained decline in the international cost of crude oil holds sway.

“Whether it goes down drastically or not, we can only effect pump price reductions after carrying out analysis of key factors that are monitored,” said Shell’s external affairs manager, Ngaari Mwaura.

“In a high price regime and deregulated market, the marketers are not able to pass all costs to the consumer due to competition. This has led to the margins being really squeezed,” he said.

The profit margins for marketers in Kenya vary according the fuel type, company operating costs and the time of product acquisition, while financing costs have increased due to upfront payment of taxes.

This increase in working capital has pushed borrowing upwards. Freight charges have also followed suit on high fuel expenses and an increase in marine insurance.

“The oil industry has been hit by extremely high prevailing marine premiums and sea freight,” said Kenol / Kobil group managing director Jacob Segman.

The pumping capacity of the Kenya Pipeline Company has been stretched due to rising fuel demand in Kenya, Uganda, Rwanda, Burundi, Democratic Republic of Congo and South Sudan.

The pumping constraints have led to shortages in western Kenya as well as increased marketers’ costs as they resort to transporting oil products by road from Mombasa and Nairobi.

A decline in profits led to multinationals like Beyond Petroleum and Mobil to exit the Kenyan market. Chevron (trading as Caltex) has put its business up for sale.

Although Kenya is set to resume monthly importation of 500,000 barrels of crude oil from Sudan following an agreement signed by the two countries, the problem of high fuel costs is not yet solved. The crude will be handled by National Oil Corporation of Kenya (NOCK) and Sudan National Petroleum Corporation (SNPC) under technical details being worked out.

Mr Shisoka said the imports have to be preceded by delivery of samples of Sudan crude to Mombasa to establish the ability of KPRL to process the raw materials.

“The Sudanese crude oil is waxy in character. The paraffinic nature of the crude makes it a good feedstock for lubricating oils, making it vital for tests to be done by KPRL in advance,” he said.

KPRL was designed to process Murban and Zakum crude oils from the Middle East. The move by Shell, BP and Chevron to sell their 50 per cent stake in the refinery to Essar of India to pave the way for refinery upgrade has not been approved by Treasury.

The government owns the other 50 per cent stake in KPRL. The refinery upgrade will enable the Mombasa-based plant to process many types of crude and produce high-value products like petrol and diesel.

Energy minister Kiraitu Murungi said in February that the government was considering buying petroleum products fromVenezuela to stop multinationals from exploiting Kenyan consumers.

But industry sources said importing refined products from Venezuela is difficult because the cost of freight would be too high as there are no tankers that ply routes between the two countries.

Although Kenya last year signed an agreement to lift 30,000 barrels per day of crude oil from Nigeria for a period of three years at concessionary terms, this will not trickle down to local consumers.