President Ruto seeks fresh fuel deal with UAE as Kenya's Sh420bn debt falls due

fuel, petrol

A pump attendant fills up a motorcycle at a petrol station on July 1. The Petroleum Outlets Association of Kenya says its members have been closing shop since the new tax measures came into effect on July 1.

Photo credit: Francis Nderitu | Nation Media Group

What you need to know:

  • Kenya is expected to pay about $500 million (Sh70 billion) at the end of September, being the first instalment of the amount owed to state-owned UAE companies.
  • Companies that export fuel to neighbouring landlocked countries have in recent weeks preferred to buy the product in Tanzania and transport it through Uganda, denying Kenya the much-needed earnings.

Treasury and Ministry of Energy officials have set in motion plans to re-negotiate with the United Arab Emirates (UAE) and Saudi Arabia the government-to-government agreement signed in March for the supply of petroleum products on credit, less than two months to payment of the first instalment of $3 billion accumulated over the past six months.

The government has deployed a delegation from the Energy and Petroleum Regulatory Authority (Epra), National Treasury and Energy Ministry that has for the past week been in the UAE negotiating for easing of some clauses in the government-to-government agreement.

Kenya is expected to pay about $500 million (Sh70 billion) at the end of September, being the first instalment of the amount owed to state-owned UAE companies that have supplied petroleum products on credit for the last six months.

Different market

The government-to-government agreement was expected to strengthen the shilling by easing monthly scramble for dollars by oil marketers, but the Kenyan currency has continued to weaken instead, exchanging at an average of 140 units to the greenback compared to about 130 units when the deal was signed in March.

“I want to assure those in Kenya who were facing challenges of access to dollars that we have taken steps to ensure dollar availability in the next couple of weeks is going to be very different because our fuel companies will now be paying for fuel in Kenya shillings,” President William Ruto said in March.

He later added that the shilling to dollar exchange rate could go to as low as Sh120 in weeks.

“I am giving you free advice. Those of you hoarding dollars might suffer losses. You better do what you must do because this market will be different in a couple of weeks,” he said.

Energy Cabinet Secretary, Davis Chirchir, told lawmakers at the time that the agreement would ease pressure on the local foreign exchange reserves.

However, some parliamentary Energy Committee members pointed out that the fuel could end becoming more expensive and delayed payments amounted to kicking the can down the road.

Reliable industry sources have now told the Sunday Nation that the government wants to re-negotiate some fixed terms in the agreement that have since proved expensive, owing to a drop in prices of petroleum products.

Epra Director-General, Daniel Kiptoo, said it is too early to reveal the outcome of the ongoing negotiations, adding that it is “work in progress”.

“I’m still in the Middle East. Let us respond when we return on Monday,” Mr Kiptoo told the Sunday Nation.

The fixed terms in the agreement, which were supposed to cushion Kenya from fuel price volatility, have seen the country take a hit as a fall in prices of petroleum products globally failed to reflect at the pump.

Companies that export fuel to neighbouring landlocked countries have in recent weeks preferred to buy the product in Tanzania and transport it through Uganda, denying Kenya the much-needed earnings.

“Even with the longer route through Uganda, you make a higher margin. The government-to-government agreement is hurting us,” said an oil marketing firm executive who requested anonymity for fear of reprisals.

About 40 per cent of oil imported into Kenya is exported to Uganda, Rwanda Burundi and the Democratic Republic of Congo, employing thousands of traders and trasporters in the supply chain.

In the old open market bidding system, Epra ordinarily set local fuel prices based on the average product costs internationally plus a freight and premium margin allowed to importers.

The deal, however, saw state-owned Saudi Aramco, Emirates National Oil Corporation (Enoc) and the Abu Dhabi National Oil Corporation Global Trading Company (Adnoc) sign a nine-month agreement for the supply of petroleum to Kenya.

Prices climb

The firms fixed the commercial terms of engagement. They were 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 every month.

This has denied Kenya the flexibility to negotiate for cheaper fuel, while the shilling has also failed to strengthen against the dollar as hoped.

The fact that supply volumes have remained fixed even as local demand for fuel drops has resulted in a market glut, triggering unease among confirming banks which fear that they could lose money if imported fuel is not sold out.

KCB, NCBA, Absa Kenya, Stanbic and Co-operative were picked as the local lenders alongside the Africa Export-Import Bank (Afreximbank) to issue Letters of Credit (LCs) to the Gulf-based suppliers.

By issuing the LCs, the banks commit to pay suppliers for the imported products in the instance that the local offtakers – Gulf Energy, Oryx Energies and Galana Oil – fail to pay for the fuel.

Sources say the banks have developed cold feet after demand for fuel dropped sharply, forcing the government to shop for Middle East banks to issue the LCs.

The Epra boss did not respond to our query on whether the delegation in the UAE had signed up new confirming banks.

Mr Kiptoo did not also respond to questions by the Sunday Nation on whether the government had succeeded in negotiating for a delay in the commencement of the repayments for the fuel supplies.

Kenya will be expected to pay the Gulf suppliers $500 million (Sh70 billion) every month after commencement of the first instalment in September.

Dealers say demand for fuel has dropped as prices have risen consistently.

Petroleum Outlets Association of Kenya (POAK) Chief Executive and National Coordinator, John Njogu, says demand has halved since Value Added Tax on fuel products was doubled to 16 per cent from July 1.

“Our members are doing anywhere between 30 to 50 per cent of previous sales volumes since the new tax came into effect. People are simply not using their vehicles,” Mr Njogu told the Sunday Nation.

Plight of retailers

He added that the drop in demand only makes worse the plight of retailers, who have been incurring higher working capital costs every time fuel prices rise.

The operators are negotiating with Epra for a review of their Sh4.14 margin that is provided for under the regulatory framework.

The last review of their margin was effected in 2018, when petrol was selling for about Sh90 a litre while diesel was Sh80.

Prices have since climbed to about Sh192 and Sh176 per litre of petrol and diesel respectively, raising the dealers’ working capital requirements without commensurate cushion on their margin.

The dealers now say they want compensation for increased finance costs, electricity, transport charges, rent and staff overheads.

“Our members are closing shop.  If Epra does not respond to our concerns, we will cease to operate,” Mr Njogu said.

Additional reporting by Julians Amboko