Kampala — DEMAND for heavy-fuel oil (HFO) and other oil products is expected to rise mainly due to the increased use of HFO in generation of electricity, increased economic activities and vehicles, a report has predicted.

The report: "Determinants of fuel supply costs in Uganda," conducted by the Electricity Regulatory Authority, states that the increase creates a need for a strategy to develop storage and transport facilities to accommodate the demand.

"The use of HFO for thermal generation will depend on the availability of new facilities for storage and transportation," it states.

"Transporters are confident they can meet the logistics of the growing demand. However, truck registration expenses, constraints and lack of tax incentives for investors in the sector continue to limit development of the sector."

The report said railway transport, which is a cheaper means of transporting oil products, was still highly inefficient.

"The East African Community (EAC) should re-examine privatisation of the railway system and address the inefficiency," the report suggested.

"Without functioning ferries, the Tanzanian route and the railway, the Kisumu route would not be an efficient supply route of oil products. It involves time loss as a result of delays in connecting the railway system with the ferry system for quick delivery."

The report notes that while the transporters and the fuel suppliers could previously enter into long-term contracts with fixed transport charges, which were re-negotiated after the diesel pump prices increased by 5%-6%, the recent sharp increases in prices of petroleum products have forced the transporters to renegotiate these contracts with an intention of making the transport charge a variable cost.

The same applies to freight charges. It emerged that fuel suppliers as well as transporters are concerned the Uganda electricity Transmission Company (UETCL) does not guarantee power generating companies like Aggreko minimum fuel supply.

Consequently, the fuel companies cannot guarantee minimum supply for the road tankers. This raises an investment risk and as a result, the companies are willing to recover their investment costs over a short period of time.

The study also established that the logistics costs vary according to type of transport and route. The ocean going/freight costs are estimated at $49-$60 per tonne as at May 2008.

The actual costs paid depend on the size of the shipment and the tenure of the contract. The logistics costs from Mombasa to Kampala excluding the company margin by road tankers amounts to $120 per cubic metre in the case of four-axle road taker and $137 per cubic metre in the case of three-axle road tanker.

The company margin/premium is in the range of $10-$20 cubic metre. The study recommends that consideration should be given to use of government storage tanks in Jinja as the industry develops its own storage capacity. "A review of the concesions in the railway system is needed urgently."