Muna Wahome
9 May 2006
analysis
Nairobi — Three weeks ago, a major haulage firm was directed to a transnational's outlet on Mombasa Road, Nairobi, after making frantic enquiries. On a good day, companies do not bother to ask around where they are to get diesel - as that can be everywhere. But things are quickly changing, for the worse.
So when the trucks made a beeline for the filling station, they ended up blocking Mombasa Road. As the firm is in the business of hauling fast-moving consumer goods (FMCG), it cannot take chances. That is the reason information that one outlet owned by the oil marketer they use had fuel provoked instant reaction and obviously anxious moments.
Contracts can be voided. And to make matters worse, companies with large fleets are finding one-off alternatives to their contracts quite hard to secure. Last year, Kenya Revenue Authority (KRA), through the yearly Finance Act, enforced a rule that oil importers have to pay for fuel before it is released for use. Marketers are asking the same of most customers.
As this translates into a huge advance cost, it simply means that companies cannot borrow money to buy oil, then sell it on credit. More so when the international prices have stuck around $70 a barrel. But prepaid taxes by KRA is just one of the problems bedevilling the fragile sector from Nairobi to Bujumbura, Burundi.
Players in the multi-billion industry have been eager to point fingers at each other, making pinpointing the problem about as hard as getting super petrol on a bad day in Nairobi. But investigations show that the main culprit is Kenya Pipeline Company (KPC), which pumps the oil from Mombasa. Poor reinvestment by the parastatal has meant growing demand was not matched by expanded capacity either at its Kipevu Oil Storage Facility (KOSF) or the pipeline itself.
Last week, the current management was comfortable to point fingers. "It is regrettably noted that the previous management was not focused on increasing capacity," they said in a statement. Perhaps what is most regrettable is the fact that the parastatal is charged with performing the function for not only Kenya, but also the Great Lakes region including Uganda, Rwanda, Burundi, DR Congo and Southern Sudan.
"In the fortnight ending April 28, 2006, fuel shortages emerged throughout the Great Lakes region from Kenya through to Uganda, Rwanda, Burundi, eastern Democratic Republic of Congo and Southern Sudan," UN agencies wrote. "It was reported that the stations in Juba were out of fuel. Certain UN agencies ran out of supplies, in part because of a management issue within these agencies."
In the last ten years, mostly what KPC have been doing is sit around and collect user fees. It is estimated that KPC can only meet 60 per cent of demand. That means the parastatal only pumps 400,000 cubic metres or 400 million litres a month.
"The growing demand of petroleum products in the region has put extreme pressure on the facility," they moaned last week after grudgingly admitting there was a problem. KPC lethargy could have remained unnoticed until the rains in the region failed. That meant Uganda with its curious power industry management - they were in trouble even when the rains were ruinously heavy - got deeper into the quagmire calling for thermal generation as dam levels hit rock bottom. Rwanda and neighbouring Tanzania followed suit.
Kenya Electricity Generating Company (KenGen) and power industry players are in the process of igniting the expensive thermal generators, which will consume billions of shillings worth of fuel. The expensive generators either use gas or diesel. This has in part caused a system overload both at KOSF and at KPC. A few weeks back, it was reported that tankers were queuing on the water hoping to discharge at KOSF.
The problem is not by any definition short term. Energy demand in the region was growing with Uganda, Kenya and Rwanda registering an average growth of 5 per cent. With peace returning to Burundi, DRC and Sudan, so did economic activity. KPC said it had grown capacity by only 25 per cent in half a decade.
Capacity takes a different dimension as far as KPC problems go. In the past few months, oil marketers have been fighting over its allocation at KOSF with some dominant downstream (retailers) players alleging companies with no local market share are putting oil in the facility for speculative purposes.
The war of words has fallen silent as the issue took legal dimensions but murmurs remain - even after the ministry of Energy and stakeholders agreed on the allocation criteria of the so-called ullage (space). Some industry observers trace the immediate crisis to failure by a subsidiary of an American transnational to bring a load of 29,045 tonnes on time; meaning it was competing for ullage long after it should have evacuated the cargo. Its ship docked 13 days late, throwing a carefully crafted industry plan to the dogs.
KPC has reported a number measures to bulk up its capacity and stretch the pipeline to Kampala. One of them is a blueprint to double capacity on the line from Mombasa to Nairobi by May 2007. Nairobi Eldoret is set for enhancement through laying a larger pipeline and a pumping station.
Yet few are expectant of any quick solutions to the problem of erratic oil flow. "For the foreseeable future, supplies will continue to be supplemented by imports through Port Sudan and, for Southern Sudan, through the increasingly fragile supply chain from Mombasa," the UN says.
But not even marketers of the commodity seem to blame new tax rules. Indeed, in public none appears to oppose the costly but effective upfront taxation. "The new rule eliminated dumping of oil in the country because before we could see differences in prices of up to Sh10 a litre which is not the case today," said Shell/BP CEO Patrick Obath. Other players concurred with him.
KRA customs services department commissioner Wambui Namu was categorical that problems have nothing to do with the taxman. She blamed ullage, pumping speed and capacity issues.
Since KRA threatened to cut off defaulting companies about two months back the compliance has been encouraging. "The oil companies have been quite compliant. Only one owes us money right now and no major payment is due until May 12," she said on phone. In the meantime she revealed the ministry of Energy, KRA and other players were in the process of facilitating Shimanzi depot in Mombasa to discharge oil to marketers.
Easing congestion
Separately, there are those at KRA who privately blame oil companies for overloading the system deliberately, refusing to evacuate and pay for cleared cargo: just to prove the on-line Simba 2005 system has failed. In fact, they accuse the companies of even clogging up the duty-free aviation fuel facility at Kenya Petroleum Refineries Ltd (KPRL).
Lately, the Government has allowed transportation of fuel by rail to ease congestion. The customs boss says road transportation from Mombasa is allowed if the goods have already paid taxes. Luckily cooking gas and fuel oil for industries is transported by road.
Oil prices have risen in part because of this shortage. Last week, super was trading at a high of Sh79 in Nairobi with many stations running out.
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