THE POLITICS OF OIL IN KENYA'S ECONOMY

DAILY NATION
NAIROBI
By JOSEPH BONYO
January 5 2009

Behind the scenes in the recent fuel shortage that almost spoiled the Christmas party for Kenyans were mild but candid signs of the slow disintegration of what has been a tight cartel of oil marketers comprising exclusively of multinationals.

In the past, the big oil firms have conspired to manipulate fuel prices and made nonsense of the state-owned National Oil Corporation’s intervention to cool prices.

But the recent fuel shortage, which sparked an immediate rally in pump prices even as crude dropped in the international market, caused a clear division, with Shell breaking away to slash its prices drastically.

With the fuel shortage threatening to stall transport, the government had to intervene. “We as government are getting involved in this affair because it is unfair, selfish and dishonest to Kenyans that some oil marketers are creating an artificial shortage. This is an attempt to hold the country at ransom,” said Prime Minister Raila Odinga.

But industry players have remained adamant, dismissing the claims of the an artificial shortage and instead directing the blame at the Kenya Pipeline Company (KPC) and Kenya Revenue Authority.

Interviews with a number of sources showed that the glue that held the likes of Total, Caltex, Keno/Kobil, Shell, Mobil (now Oilibya) among others is slowly giving in to individual interests as small oil dealers, known as independents, give them a run for their money.

Previously, in dealing with the media or the government, the industry religiously read from the same script. However, today each organisation has its own stand on various industry issues. Insiders claim that there is a bitter supremacy battle in the industry.

This ranges from the management styles of KPC to the growing shift in market share by players. Also fuelling the disintegration of the industry is the Big Brother syndrome, where some muscled marketers are seen to be keen on directing the game.

According to industry data obtained from the Petroleum Institute of East Africa (PIEA), Kenol as at the end of September led the pack with 24.41 per cent in market share. Closely following was Shell, with 20.57 per cent, Total with 19.65 per cent, Chevron (operating as Caltex) 11.25 per cent. The remaining players share the spoils holding between 0.001 and 10 per cent.

With about 76 per cent of the market under their grip, the four big players would have a natural tendency seeking to sway things their way. This leaves the remaining 20-plus players with only 24 per cent of the market, although some are exporters to neighbouring countries.

The smaller players, miffed by the domineering attitude, could be rising against their hegemony, according to our sources. But more interesting is the perceived bad blood between the top players as they try to outdo each other.

It has been reported that when the Energy Regulatory Commission published proposals for price controls in the industry, a meeting was called for the players. However, it did not survive its initial stages that were meant to counter the proposals.

In a manner likely to have exposed the ‘every man for himself’ culture that is fast creeping into the industry, other players are said to have abandoned the cause. Sources close to the organisers of the meeting told the Smart Company that Total was the first to pull the straw by failing to send a representative to the meeting.

For its part, Shell Kenya, pulled out the idea (other sources say its representative walked out of the meeting), insisting that participating in the forum would infringe on the anti-trust law.

With options few and far between, the remaining players chose to give the meeting the rather popular line of, “we shall study the proposals and give our stand through the industry lobby group, the Petroleum Institute of East Africa.”

However, Shell Kenya pulled a first one on its colleague’s just days after the aborted meeting by sending a statement to newsrooms that it had lowered its pump prices by Sh15, a major coup in an industry known to fidget with price cuts. Other players went into crisis meetings to try and save face.

Two players are said to have requested newsrooms for the statement from Shell to guide their way forward. What followed was a mass reduction of prices by marketers to the relief of motorists.

The ERC proposal is currently an issue that the marketers are fretting about and as time ticks towards its implementation sometime this month, a plan may be in the offing.

Our sources added that the recent shortage was a likely effect of a crafted go-slow by marketers. While this could not be exclusively be authenticated, claims by both KPC and Mr Odinga that some marketers were not collecting the available fuel from the depots added weight to that school of thought.

The marketers are said to be silently hoping for a meeting with the Ministry of Energy before the regulations come into effect this month. But going by recent statements made by Energy Minister Kiraitu Murungi at function in December, the die could be cast for price controls.

“We shall defiantly experience a lot of resistance from these oil marketers but the government will not budge. The price controls will come into effect by January,” said Mr Murungi.

The regulations are currently on a 40-day notice after issuance by the ERC. The notice invited the public, oil companies and other industry players to give their suggestions in respect to the retail pump prices of petroleum products in the country before a final proposal is taken to Parliament for debate and approval.

“It is apparent that players in the industry, both small and big, are terribly shaken by the idea of the price control as it would mean an invasion in their cosy financial territories,” an industry manager recently said in an article in the media.

Mr Murungi has also indicated that the government is investigating claims of a go-slow by a section of industry players to protest at the intended price controls.

Some oil marketers accuse KPC, which has been at pains to explain the cause of the shortage coming just weeks after the opening of a high-capacity pipeline, of allowing smaller firms to hold stocks or ullage in excess of their market share.

“This is not a secret, marketers like Shell, Kenol, and Total have been complaining that some ‘politically connected’ players routinely exceed their storage capacity,” said an industry player who asked not to be named for fear of retribution.

One such firm which the players took issue with was Triton, which has since been put under receivership due to cash-flow problems. The company won a tender to supply about 80,000 metric tonnes of oil but managed only 56,000 metric tonnes.

Out of this, it is also alleged it kept 26,000 metric tonnes for its use and went under before delivering to clients such as Engen Kenya, which now risks losing Sh23 million from the non delivery. KCB is also said to be at risk of losing Sh1.6 billion in the importation of the oil by Triton.

Questions have also arisen over how KPC handed over so much storage space at Kipevu Oil Storage Facility (KOSF) to Triton. KPC Managing Director George Okungu in an earlier interview refused to be drawn into the matter.

“It’s certain that the Triton was involved in some malpractice that KPC is not party to, investigations are under way and once the truth is established we will let you know,” said Mr Okungu.

Independent petroleum dealers are more forthright in accusing the multinationals of manipulating the recent fuel shortage. Through their umbrella body, Kenya Independent Petroleum Dealers Association (KIPEDA), they said big companies were hoarding the product to prop up prices and blackmail the government into dropping price control proposals.

“We are aware of the actions of multinationals not to distribute the products to us with a mind of creating an artificial shortage hence price increases,” said Keith Ngaruchi, the chairman of the association.

According to KIPEDA, multinationals are deliberately not selling them products and in case they do the wholesale prices are higher than those of the companies’ retail outlets.

COMMENTS:

Submitted by Newshawk
Posted January 06, 2009 06:18 PM

The maths of Kenya's economy does not add up. Can anyone explain how petroleum products processed in Mombasa and transported to Nairobi either via KPC or oiltankers can cost less the source point - Mombasa that is? Another thing, as long the government keeps taking close to 50% of the pump price we should forget about any help from Kiraitu and his ilk.

Submitted by Squeezed
Posted January 06, 2009 03:41 PM

Yes, there's most definitely something amiss with the oil industry in Kenya. Hard to believe that a couple of months ago it cost me $50.00 to fill up my tank...this morning, it cost less than $18.00!

Submitted by Kabird
Posted January 06, 2009 02:55 PM

The Kenyan government should control these oil cartels. It seems as if the government has lost touch to protect mwananchi? Kenyans should stand up and demand for fair pricing of this commodity. With the current pricing gas should be costing around ksh 35

Submitted by gombea@paynet.co.ke
Posted January 06, 2009 12:15 PM

The real reason oil prices do not change with world markets in Kenya is because there is a legal monopoly for the handful of oil companies that own the refinery. Liberalise the refining sector and watch competition work wonders. Just compare telecoms in Kenya now to when there was a state monopoly.

Submitted by angusnassir
Posted January 06, 2009 11:59 AM

30 per liter when the government pockets around 29 per liter in taxes? Not in this lifetime! I think the growing influence of the small dealers is a good thing. Free market can work, but we also need an oversight body

Submitted by dod kiama
Posted January 06, 2009 08:41 AM

It is a shame we are paying this high price for our oil. Everyone knows the price of oil has come down tremendously that the OPEC has been trying to concoct ways of propping it up. In some developed countries, petrol is selling at $1.50 a gallon (4 litres)

Submitted by emgoja
Posted January 06, 2009 05:21 AM

It is surprising that Kenya is still paying so much for gasoline. According to the law of purchasing power parity, Kenyan unleaded petrol should be going for only sh.30.00 rer liter instead of the sh.75.oo per liter. Petrol has gone down so much in the world market and hence it shouldn't cost that much.My suggestion is that Kenya should make cartels illegal for the sake of the public.

Submitted by naliweliwalo
Posted January 06, 2009 03:35 AM

Oil prices have dropped significantly, but oil/petrol prices in Kenya never fall. Thank you small dealers for refusing to accept the hoarding and artificial shortages created by the big companies!

Submitted by bogoro
Posted January 06, 2009 12:29 AM

Kibaki has really messed up with our country.He goes to Libya and China to soliticize without our knowledge.He can plan to anything because he is the President because he is everything YES WE CAN