The untold story of fuel shortage

Drivers line up at a petrol station along Valley Road on May 3, 2011.

What you need to know:

  • Fear of reduced profits by oil marketing firms and State’s rush to reduce taxes without proper planning blamed for biting fuel shortage that nearly crippled life in Nairobi and other major towns across the country
  • Under the Open Tender System, small players, even those without petroleum retail outlets are allowed to import oil on behalf of other players, and they have ways of holding the products to manipulate prices

Fear of reduced profitability by oil marketing companies and the government’s rush to announce tax cuts on fuel without proper implementation plans are the main causes of the biting fuel shortage that hit Nairobi and other major towns last week.

Investigations by the Sunday Nation found that oil companies deliberately delayed to evacuate diesel and kerosene from the supply chain to take advantage of recent reductions of duties and taxes on the two commodities.

That time lag between the time the duty waivers were announced and the time the decisions were gazetted was one of the most important causes of the shortages.

As a result of the oil marketers’ action, the Kenya Pipeline Company’s storage tanks were literally clogged with diesel, leaving little space for petrol.

The decision by the government to reduce exercise duty on diesel and kerosene was aimed at cushioning Kenyans against the impact of rising fuel prices.

The April 18, 2011 announcement by Finance minister Uhuru Kenyatta was arrived at after hue and cry by consumers.

Excise duty on kerosene and diesel was waived by 30 per cent and 20 per cent, respectively, the maximum that Treasury is allowed by law.

Consequently, the new prices were gazetted on April 21 in legal notice No. 38 with an effective date of May 3, 2011.

But three days preceding this date a number of petrol stations in Nairobi started experiencing stock-outs of super petrol.

The initial explanation was a logistical one; that the company that imported the product on behalf of the industry was waiting for payments from other players before releasing the product.

All this time, KPC maintained it was wet with product, an industry language to mean it had enough stocks of super petrol.

Players in the industry that we spoke to attributed fuel problems to the increasing role of traders and speculators that have come to dominate the oil supply chain in Kenya despite having no investment in retail outlets.

The crisis graphically illustrated how the balance of power in the troubled industry long shifted from the big oil majors to well-connected briefcase traders that have been minting millions by exploiting loopholes in the supply chain.

The small companies have been the big winners under the so-called Open Tender System (OTS) run by the industry under the oversight of the Ministry of Energy.

Under this system, all oil imported into the country, including consignments headed for neighbouring Uganda and Rwanda, must come by one ship, imported by one player and shared by the rest — according to market share.

The OTS tender is floated every month by the ministry. Why did Kenya adopt the OTS system?

The OTS system was introduced to allow locals to share in the product imported by one big player. The other advantage was that by allowing only one player to import for everybody, the country gained through bulk purchase discounts.

International prices are quoted under a benchmark known as PLAT. Often, traders will refer to PLAT Arab Gulf or PLAT Mediterranean.

Since the prices are standard and known to everybody, bidders in the OTS tender, only compete on the premium over the PLAT prices. The company which quotes the most competitive price over the PLAT prices for the specific month wins the OTS tender.

Until recently, the trick well-connected traders have been using has been to cheat on the bill of lading (a document signed by a transporter of goods or their representative and issued to the shipper of goods that is used to prove the receipt of goods for shipment to a specified designation and person).

Hundreds of millions of shillings are made especially during periods when international prices are constantly rising.

The trick works like this: the importer delays their cargo for as long as possible so that by the time its being discharged it, the prices will have gone up by huge margins, allowing the importer to make hundreds of millions.

Another trick well connected speculators have used to make huge margins is what is known in the trading jargon as ship-to- ship transfers: when a ship is about to arrive in Mombasa, its diverted it to a location between Zanzibar and Pemba and the cargo is off loaded to another ship.

The owner can then pretend that the day the ship-to-ship transfer was the day of the bill of lading — allowing him to sell the OTS product to other players at much higher prices. Cheating on the date of lading had been commonplace.

The unfortunate thing is that the high prices, which well-connected traders earn are passed on to the consumer.

Last year, cheating on the bill of lading had become so rampant that the Ministry of Energy intervened by introducing a system known as the monthly average. This means that if you win the February OTS tender, you have to sell to the rest at international monthly average price for February.

Last month, a major controversy erupted when companies refused to buy a consignment that had been imported on the industry’s behalf by state-owned National Oil Corporation of Kenya, claiming that NOCK had sought to change the price from the monthly average price of February to the average for March.

The delay in delivery of the consignment by NOCK was blamed on the award of a contract for supply of diesel to a little known firm, Prisco Petroleum Network, which failed to deliver on time.

Oil companies literally boycotted the cargo over the change in price, thus clogging both the pipeline to Nairobi and Kenya Pipeline Company storage tanks.

Fortunately, for the State controlled marketer, prices ratcheted upwards rapidly in a matter of days.  The oil marketers who had threatened to boycott the product were now scrambling for it.

At the end of the day,  it is the consumer who had to bear the burden of paying March PLAT prices instead of the much lower February PLAT prices.

It is the intrigues around the OTS system that have seen the big oil marketers stay away from participating in this critical part of the industry.

Which is why when the trends are examined, it is the smaller players who have been winning the OTS tenders.

If you are a big multinational player and part of an internationally listed conglomerate — which means you must play by the rules — you cannot compete with the new kids on the block, as they have mastered the game of exploiting loopholes in the OTS system.

Dominate access

The new kids don’t just dominate the OTS system alone; they also dominate access to facilities owned by KPC.

Every month, the ullage committee, which is responsible for allocating space comes up with a list with details of the space allocated to importers at the Kipevu Oil Storage facility, the Mombasa-Nairobi pipeline and other storage facilities owned by Kenya Pipeline Company Ltd.

Out of the 53 licensed importers who were allocated ullage space in the month of April — less than 10 own petroleum stations. If you combine the total of the space allocated to these new players, it is more than what has been allocated to a major player such as Kenol Kobil with 30 per cent share.

The weaknesses of a system skewed to favour traders at the expense of big players with marketing outlets came out clearly during last week’s crisis.

In the middle of the crisis, KPC was sitting on 19 million litres of petrol in its tanks in Nairobi’s Industrial Area even as motorist were suffering, having to wait in long queues.

It was to emerge later that of the 19 million litres of petrol in KPC tanks — the largest proportion belonged to trading companies with no marketing outlets.

This explains last week’s riddle of a country with too much petrol in storage yet not a drop in the petrol stations.