The Kenya Petroleum Refineries Limited is gunning for an increase in crude oil processing charges beginning November, setting the stage for a new wave of price escalation at the pump station in five weeks.

The application to the Energy Regulatory Commission (ERC) indicates that the refinery plans to increase its processing fee from $2.30 (Sh188) per barrel to $3.50 (Sh280) a barrel to cover rising operation costs and to raise the money to upgrade its operations in the next five years, according to people familiar with the matter.

That margin of price adjustment is expected to push up prices of petroleum products across the board, including kerosene, cooking gas and petrol by more than two shillings per litre, adding impetus to inflationary pressure that has averaged at 25 per cent over the past one year.

Energy and food prices have been the main drivers of inflation in Kenya over the past two years - a situation that has only escalated in recent months with the persistence of drought that has pushed up the prices of staple foods and forced the country to rely more on expensive thermal power to meet its energy needs.

Currently, the refinery charges oil marketers a processing fee of Sh1.20 per litre of crude oil but that price does not account for close to 25 per cent of crude that is lost during processing. Oil marketers said inclusion of the 25 per cent loss into the final price means pump prices could jump by more than two shillings per litre.

Petroleum dealers reckon that they are operating on very thin profit margins that do not allow them to absorb additional costs, signalling that it is the consumer who will ultimately pay the price.

ERC on Monday confirmed receipt of the application but could not confirm whether it has been accepted or rejected.

"KPRL has written to us requesting for a review of the processing tariff. The Energy Act 2006, allows any party to request for a review by the ERC and we are currently looking into the request," said Mr Peter Nduru, ERC's director for petroleum.

KPRL says an adjustment of the fees is necessary to enable it cover its operational expenses and build the financial muscle it needs to repair aged segments of its plant that have in part contributed to the perennial petrol and gas shortages in recent months.

In the long term, the refinery is set for a complete overhaul at a cost of Sh32 billion that will enable it to produce more of white or processed fuel and boost its efficiency.

The refinery earns about Sh188 million from the one million barrels of fuel it processes every month. That means its total monthly take from the oil marketers will grow to Sh280 million with the increase in processing fee.

In recent weeks, hopes that the global economy is on the path of recovery has triggered a rallying of commodity prices including oil a trend that any increment in processing price could only escalate.

Crude Oil price, which tumbled from a record high of $147 per barrel in July last year to a low of $30 a barrel in December, has rallied in recent months to stand at $71 yesterday, prompting local oil marketers to increase pump prices.

The price of unleaded petrol currently stands at an average of Sh84 per litre in Nairobi and marketers say it could edge upwards in coming weeks with the continued rise in crude prices.

This means that consumers will continue to dig deeper into their pockets to meet their fuel needs sparking a new wave of inflationary pressure across all sectors of the economy.

Kenya's increased dependence on thermal electricity with the persistence of drought in recent months means that unless the expected El Nino rains come next month, the cost of electricity will rise as independent producers pass on the additional cost of fuel oil and diesel to the consumer.

Fuel cost charge charges -- a varying item on the power bills that is linked to the amount of power on the national grid that is generated from thermal sources -- has increased from Sh4.36 last month to the current Sh7.43 per unit of power.

Thermal energyThe Central Bank has warned that the cost of living could rise further in the remaining part of the year on increasing energy prices and food prices.

"Inflation is likely to rise as a result of the rising fuel costs as diesel is used to generate thermal energy," said CBK on their latest update on the economy. Current pump price of Sh84 per litre of petrol, leaves KPRL with Sh1.20 per litre of fuel processed.

From the processing fee, KPRL pays wages, power, water, maintenance and tax, leaving it on a thin profit territory.

"The best way to think of it is from the shareholders perspective. We have not paid a dividend for quite some time," Mr Harvey told the Business Daily.

KPRL's quest for price adjustment comes at time when the amount of money it is owed by marketers has topped Sh400 million. The oil processor is also seeking the regulator's intervention to compel oil marketers to promptly pay the fees in order to improve its financial position.

"We have received complaints that the processing agreements between marketers KPRL are not being honoured. It is part of thinking that the transportation, storage and refining business which is a monopoly should be regulated to salvage the situation," said Mr Nduru.

The refinery's operations are based on a legal notice instructing the oil companies to process 1.6 million tonnes of crude oil at the plant every yearIndustry data shows that petroleum dealers are currently enjoying retail margins of between Sh2.30 per litre to Sh2.50 per litre for super and regular petrol and Sh2.15 per litre for every litre of diesel or illuminating kerosene.

Reduced trading margins have seen top marketers Total Kenya and KenolKobil record losses for the first half of the year.

Total says it bore the brunt of the structural inefficiencies in the refinery and pipeline system.

"We have concerns about the lagged impact of oil price movements, high competitive dynamics and the structural inefficiencies of the oil sector," says Felix Majekodunmi, the managing director.

KenolKobil recorded a Sh611 million pre-tax loss for the first half of the year compared to Sh757.5 million pre-tax profit it registered over the same period last year. Group managing director, Jacob Segman, attributed losses from the Kenyan operation to distribution constraints, volatility of oil prices, along with a volatile forex as presenting challenges to the group.

Since 1973 when the facility was set up, the Mombasa refinery has not seen any serious investment to allow the refinery to process more valuable products, making the overall production cost higher.

At its first board meeting on August 29, the new KPRL's board, comprising Essar and the Kenyan treasury, approved implementation of projects including the modernization project and a power generation project for 24 megawatts of its own electricity.

Mr Raj Varma, the KPRL CEO, said his priority will be on repairs of the equipment that manufactures cooking gas and petrol.

Known as the plat former unit, whose operations fully rely on electric power provided by the national grid, frequent interruptions and the ongoing power rationing programme have led to perennial shortages of the two commodities.

Industry analysts say Essar, the new co owners at KPRL, since July 30, along with the Kenyan government should demonstrate that they will actually inject capital to resuscitate the technical and economic life of the 36-year old facility.

An upgraded refinery with a cracking unit will increase the yield of white oils --from fuel oils by as much as 15 per cent of crude and produce diesel with lower than 0.05 per cent sulphur. It is expected that this will reduce overall unit cost of the 3.7 million tonnes/ year of all products consumed in the country.

"Without upgrade the consumer and economy will only benefit by 100 per cent imports of finished products, that is refinery closure. Timing of investment is of essence , for without it the refinery should wind up," added an analyst.

Analysts say increasing processing fee amounts to increasing subsidy for KPRL with the consumer bearing the burden.

"Processing fee is about $2.4(Sh200) per barrel (159 litres of crude. Together with the cost of crude, along with other costs but minus government taxes that are fixed, the cost comes to $75 (Sh6 000) per barrel," said Mr George Wachira, an energy consultant in Nairobi.

Marketers have also warned that the licensing of a new fuel inspector contracted by the national standards body is bound to push fuel prices up. Marketers warn that any extra costs incurred by oil importers will be passed on to consumers.

Geo Chem Middle East -the testing and inspection agent for the Kenya Bureau of Standards will henceforth charge up to 35 cents for every litre of fuel inspected.