Reality check as Kenya to pay Sh72.5bn oil bill

Fuel vessel

A Fuel Vessel MV Norddolphin of 250m Long which is loaded with 85000 tonnes of Petrol from UAE offloading the precious commodity at the new Kipevu Oil Terminal in Mombasa in this photo taken on April 13, 2023.

Photo credit: Kevin Odit | Nation Media Group

KCB Group is next month expected to wire to Gulf petroleum conglomerates the first dollar payment for fuel imported on credit over the past six months, presenting an acid test for the shilling as the six-month debt period ends.

It has emerged that Gulf countries turned down a request from a delegation President William Ruto sent to negotiate flexible terms when Kenya begins making payment.

In early July, sources said, the government sent officials drawn from the Energy and Petroleum Regulatory Authority (Epra), National Treasury and Energy Ministry to the United Arab Emirates to negotiate for the easing of some clauses in the government-to-government agreement.

Sources familiar with details of the trip to the Middle East, however, say the trip did not strike a deal on flexible premiums.

The Kenyan delegation, however,  succeeded in convincing the Gulf oil conglomerates to vary import volumes, based on market demand but the petroleum majors remained adamant on the premium, which is a margin added on the cost of the product. This effectively denied Kenya flexibility to negotiate for cheaper fuel based on market fluctuations.

“They were told to come back and await a response on the issue of the premium but there has been no response to date,” our source said.

Under pressure from the International Monetary Fund, which sees the deal as another debt exposure to the government, Treasury Cabinet Secretary Njuguna Ndung’u on August 20 indicated that the state could step back from the agreement upon its expiry and revert to open market purchases.

In April, Kenya signed a government-to-government deal that saw oil import from Gulf states on credit to ease a dollar crunch that had set the shilling on a free fall.

The repayment grace period has now lapsed, with the shilling still on a decline. KCB, the bank tasked with sourcing for dollars to pay for the oil, says it has the amount required to make the first payment to Saudi Aramco, Emirates National Oil Corporation (Enoc) and the Abu Dhabi National Oil Corporation Global Trading (Adnoc) – the companies that supplied Kenya with oil on debt.

The real test, however, is expected in subsequent months when KCB is supposed to source for an estimated $500 million (about Sh72.5 billion) every 30 days, without further weakening the shilling. Local oil marketers have been paying for supplies in shillings, and KCB’s brief has been to receive the cash and convert it to dollars.

“I know which our obligations and KCB will meet its obligations. We are ready,” KCB Group Chief Executive Paul Russo said in an interview with the Sunday Nation.

In the four months to April prior to the start of the supply deal, the shilling depreciated at an average rate of two per cent per month, but this dropped to 1.6 per cent in the four months since the start of the importation cycle. The shilling closed at 145 units to the dollar on Friday,  but the Treasury and the Central Bank of Kenya hold that the situation would have been worse if the fuel importation deal did not exist.

“The noise over the shortage has reduced. There has been less pain at least when I speak to a broader base of customers,” Mr Russo said.

While oil industry players familiar with the deal concur that KCB has stockpiled enough dollars for the first payment set for September 25, saving the shilling from an unchecked spiral, there are concerns on the effect that sourcing for dollars for subsequent months will have on the local currency.

Analysts fear the start of the payments could undo gains made, notably easing access to the dollar besides slowing the rate of depreciation of the shilling.

Kenya signed the agreement with the UAE and Saudi Arabia for supply of the fuel on a 180-day credit period.

The three oil conglomerates contracted to supply fuel on credit picked Oryx Energies, Galana Oil and Gulf Energy as the local marketers to offtake the petroleum every month and supply to the rest of the market. 

The nine-month agreement that runs to December provided for fixed commercial terms of engagement.

Kenya was to ship in 250,000 to 350,000 tonnes of petrol and 330,000 to 380,000 tonnes of diesel every month.

Another 80,000 tonnes of jet fuel was to be imported per month.

As supply volumes remained fixed even as local demand for fuel has been dropping, a market glut of the product has caused unease, to an extent that confirming banks feared they could lose money if imported fuel is not sold out.

Energy Cabinet Secretary Davies Chirchir in an interview, however,  said the start of payments would not erode market stability gains made.

“We have been buying dollars since the arrival of the first cargo and are set for next month’s payment. We will not have a sudden surge in dollar demand,” the minister said.

The state set up a committee with membership drawn from the CBK, Ministry of Energy, oil industry and the energy regular to guide the sourcing of dollars from the local market.

The committee sets weekly targets for the amount of dollars to be bought and at a rate which is capped at 10 cents above the inter-bank rate.

“The team has successfully done its work, allowing us to go to the market and silently get dollars without any distortions,” added Mr Chirchir.

Oil firms have emerged as the biggest winners in this agreement, with other importers holding that they are easily getting dollars to meet their needs.

“We were facing the twin problem of dollar availability and its pricing. But we have seen slight improvements in availability since the deal started. However this has been dealt a blow by the high pricing,”  said Kenya Association of Manufactures  Chief Executive Officer Antony Mwangi.

Vivo Energy, Rubis and TotalEnergies Marketing – the three biggest oil dealers around – had last year flagged difficulties in accessing dollars to make monthly payments for fuel as a growing concern in their Kenyan operations.

Vivo Energy said it entered into material foreign exchange (US dollar) borrowings and swaps last year, highlighting the adverse impact of the dollar shortage.

But while the deal has eased the hurdles importers faced in accessing the greenback since last year, the shilling has remained on the drop, albeit at a slower rate.

“What government to government did to this economy cannot be quantified. If we did not have it we would be in a worse position today,” a top CBK official told the Sunday Nation.

An escrow account set up to keep money raised from sale of the fuel deal had $600 million and another Sh60 billion at the start of last month.

Kenya opened an interest-bearing escrow account into which the proceeds from the sale of fuel under this deal are deposited in an effort to cushion itself from foreign exchange risk.

Under the agreement, Kenya is required to source dollars for 60 per cent of every fuel cargo imported, given that the remaining 40 per cent for the transit market is paid for in the US currency.

Mr Chirchir, however, added that improvements are needed to better the deal that “has given the economy a huge reprieve in accessing dollars”.

“We have slowed down depreciation of the shilling even if we did not stop it. We also re-established interbank rate. The deal has worked even though there are areas it can be improved,” Mr Chirchir said.

Additional reporting by Patrick Alushula