State extends fuel import deal with Middle East oil firms

President William Ruto leads members of the Cabinet in a prayer during a Cabinet meeting at State House, Nairobi on the 17/12/2024. [PCS]

The government has extended the controversial oil import deal it had signed with three Middle Eastern oil companies.

The agreement, which allows Kenya to import refined petroleum products on a six-month credit period, was set to end at the end of this year but the Cabinet approved its extension yesterday.

In the government-to-government fuel import deal, the government entered into an agreement with three Gulf firms for the supply of petroleum products on credit as it sought to relieve pressure on demand for the US dollar.

Through the agreement, the three Middle Eastern oil companies — Saudi Aramco, the Emirates National Oil Company and the Abu Dhabi National Oil Company (Adnoc) — would supply Kenya with fuel with a six-month credit period.

The system replaced the Open Tender System where the oil marketer with the most competitive bid imports products on behalf of the industry.

In a statement, the government said the deal with the Gulf firms had stabilised the shilling that had sunk to historical lows against the US dollar and further claimed that it has played a part in lowering the cost of products. 

“The Cabinet has approved the extension of the Government-to-Government (G-to-G) arrangement for the import of refined petroleum products. This arrangement has eased the monthly demand for US dollars for petroleum imports, stabilising the shilling-dollar exchange rate at Sh129 from a high of Sh166 and reducing pump prices from Sh217 per litre of petrol to Sh177,” said the Cabinet in a dispatch. Reports indicate that the G-to-G system tied Kenyans to expensive fuel products and could not benefit when oil prices dropped. This has seen Kenyans pay the highest for fuel prices, higher than even their landlocked neighbours, Uganda and Rwanda.

“The arrangement secures the supply of refined petroleum by allowing payments in Kenya shillings, previously estimated at $500 million (Sh65 billion) a month,” said the Cabinet.

Under the deal, the gulf firms selected local oil marketing companies to handle the fuel locally on their behalf. Local oil marketing companies pay the selected companies in shillings and then the selected companies have a six month window to convert the local currency into US dollars and pay the Gulf IOCs.

The deal was initially supposed to run for a nine month period to the end of 2023 but was extended to run till December 2024, with the Cabinet now extending it further.

In implementing the system, the government said it reduced demand on the dollar to the tune of $500 million every month, which is what the oil marketing companies previously needed to buy the fuel to the importing oil marketer.

The importers were previously competitively selected through the Open Tender System (OTS)). The system, which was run by the industry but supervised by the Ministry, has since been suspended as the state implements the Government-to -Government deal.

The cabinet also wants petroleum industry players to import cooking gas, heavy fuel oil and bitumen in a similar manner.

“The Cabinet meeting also approved the procurement of Liquefied Petroleum Gas (LPG), Heavy Fuel Oil, and bitumen through a centrally coordinated bulk procurement system,” said the despatch.

The Petroleum Ministry has for years been looking at centralising the importation of LPG by having a system similar to the OTS for diesel, super petrol and kerosene. It has however held back on implementing this citing lack of storage facilities. The Kenya Pipeline Company (KPC) is planning to construction a 30,000 tonne storage facility in Mombasa.

There has in recent past been a clamour for the importation of heavy fuel oil (HFO) in a similar fashion. Fuel oil is used by thermal power producer to generate electricity.

The acquisition of this fuel has however been subject of controversy with past audits showing that the companies may have been overcharging power consumers and asking for more than they may have incurred.

The money that thermal IPPs spend on fuel is usually passed to consumers and is captured in the power bill as the Fuel Cost Charge (FCC). The charge has been blamed as among the factors that have sustained high power prices in the country.

The latest investigation to cast doubt on the procurement of HFO has been an inquiry by Parliament’s Departmental Committee on Energy, which recommended that Kenya Power undertake a forensic audit on the procurement and system losses arising from the use of HFO.

The MPs also want Kenya Power, working with the Energy and Petroleum Regulatory Authority (Epra), to renegotiate the components of Power Purchase Agreements that are specific to fuel for thermal lPPs that use heavy fuel oil to generate electricity.

In 2021, the John Ngumi-chaired task force on review of PPAs had raised alarm after review of the costs incurred by different thermal IPPs when buying HFO. It noted a huge variance in how much the different thermal power producers were paid for the same commodity, purchased under near-similar conditions.

For instance, over 2019, the task force found out that one IPP would buy a tonne of HFO at $526 (Sh68,380 at current exchange rates) on average while another would buy the same at $1,037 (Sh134, 810).

A forensic auditor by the Auditor General that was triggered by the recommendations of the taskforce found that electricity consumers have over the years been overbilled owing to malpractices in the procurement of HFO.

The audit, covering the period between 2018 and 2021, unearthed instances where IPPs overlooked fuel suppliers with low bids and instead award contracts to those with higher bids, sometimes more than double what had been the lowest bid.