Hogging the billions: Government directive on oil, bitumen leaves dealers smarting

Directive seen as a measure to strengthen Nock’s presence the competitive local oil market

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Michael Duncan
The existing rivalry between the government-owned National Oil Corporation of Kenya (Nock) and private oil marketing companies is set to intensify with the government’s award of exclusive supply rights to Nock.
In a letter dated April 30, 2015, chief of staff and head of the public service Joseph Kinyua directed all ministries and government agencies to purchase their fuel lubricants and bitumen from Nock.
It further stated that where such institutions already have existing supply contracts with private oil marketing firms, the contracts should be allowed to run to their full terms after which they will revert to Nock.
“During the meeting of principal secretaries held on February 11, 2015, the Chief Executive Office, National Oil Corporation of Kenya, presented the mandate and future plans of the corporation and a proposal for the corporation to be the supplier of fuel lubricants and bitumen to ministries and government agencies. It was noted and agreed that the initiative will lead to cost-savings, access to guaranteed clean fuel and fraud prevention through use of fuel cards,” reads the letter.
The directive is seen as a measure to strengthen Nock’s presence in the competitive local oil industry where the corporation seems to be struggling to maintain its market share.
It has, however, been dismissed by private players in the sector, some who have termed it “unfortunate and unlawful”, signalling the possibility of court battles as other privately-owned oil marketing companies try to protect their market for fuel and lubricants.
According to data from the Petroleum Institute of East Africa, Nock ranks eighth with a market share of just 3.3 per cent, inclusive of exports.
Total is the market leader, commanding a market share of 17.5 per cent ahead of Vivo Energy, KenolKobil, Gulf Energy and Hashi, among other private companies that are strongly opposed to the government’s directive.
It is not the first time that attempts by the government to protect Nock’s market share have received opposition from private oil sellers.
In April last year, oil marketers protested a decision by then cabinet secretary for Energy Davis Chirchir to increase fuel allocation to Nock for fear that if the directive was implemented, it could lead to a supply crisis.
Chirchir in a letter to the Kenya Pipeline Company directed that Nock be allocated 7,500 tonnes for super petrol. He also ordered Kenya Pipeline to increase Nock’s allocation for diesel and jet A-1 to at least 20 per cent of the industry’s total product allocation through the pipeline.
“As you are aware, this ministry has been looking into ways of empowering National Oil to ensure that it is a market leader in supply, marketing and distribution of petroleum products. However, National Oil continues to struggle to access petroleum products to the extent that they buy in-tank from other companies within the Kenya Pipeline system. This is therefore to ask you to allocate National Oil at least 20 per cent of the total local haulage for diesel and jet A-1 to enable them meet their role as a stabiliser of petroleum product prices,” said Chirchir in the letter.
He defended his directive saying that ensuring that Nock has sufficient fuel stocks could lead to an “automatic” drop in fuel prices as this would allow the corporation to price its products lower and consequently force other marketers to follow suit.
Those opposed to the directive argued that Nock lacked the capacity to influence a drop in fuel prices given is small network of service stations compared to the market leaders.
There were also fears that overloading Nock’s fuel stocks could actually trigger rogue trading in petroleum products such as in-tank selling to other oil companies as the corporation tries to get rid of excess product, which could eventually impact negatively on motorists – the end buyers.
“Please note that the country’s oil supply is fully reliant on the Kenya Pipeline Corporation system since Kenya Petroleum Refineries stopped refining. Any deviation from the current allocation formula in favour of National oil will easily lead the country into a supply crisis,” said David Ohana, chair of the Oil Industry Supply Co-ordination Committee in a letter to the cabinet secretary dated April 14, 2014.
The current allocation formula for petroleum products procured under the open tender system, a central oil products purchase system operated by the ministry of Energy and Petroleum is based on the volume of sales for each oil marketer.
Slashing product allocation for other oil marketing companies in favour of Nock could mean that those with large outlet networks suffer lean stocks which could precipitate fuel supply crisis countrywide.
The directive by the chief of staff and head of public service comes at a time when the government has announced plans to construct 10,000 kilometres of tarmac roads in various parts of the country.
With the surprise move, Nock is set to benefit from sales of bitumen which is among the components used in building roads.
The directive has been interpreted by industry analysts as a way by the government to ensure that resources are locked within the public sector as with its implementation, contractors will be forced to source their supplies for bitumen and bitumen products from Nock.
The lubricants and bitumen business is a promising given that it is not directly controlled by the Energy Regulatory Commission (ERC) as is the case with fuel where it sets the maximum retail prices every month. For this reason, most oil marketing companies are eyeing the lubricants and bitumen business to bridge the gap in their earnings from sales of fuel brought about by the monthly price control that has been in operation since December 2010.
KenolKobil and BP South Africa recently announced plans to construct a lubricants blending plant in Mombasa to tap into the fortunes of the lucrative business. The plant will cost an estimated $15 million (Sh1.6 Billion) and will focus on Kenya and the East Africa region where the market for lubricants is seen to be growing.
In July, Gulf Petrochem Group, a UAE company, acquired Essar Petroleum East Africa and changed its name to ASPAM Energy (Kenya) Limited in a deal approved by ERC.
The acquisition, according to Gulf Petrochen Group’s officials is meant to enable the UAE company strengthen its footprint in the East Africa region where it intends to pursue fuel, bitumen and base oil trading.
“With the global market for bitumen expected to reach $95 billion (Sh9.8 trillion) by 2020 according to a new study by Grand View Research, our group has recognised the potential for business growth within the African continent,” said Sudhir Goyel, Gulf Petrochem managing director.^

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