Insiders blame fuel crisis on cartels

By Standard on Sunday correspondent

A combination of greed, deliberately in-built duplications and outdated policies led to the five-day fuel shortage, which was last witnessed during the Triton scandal at the Kenya Pipeline Company in 2009.

By last evening, there were indications that normal supplies of fuel had been restored in all pump stations as the embarrassing long queues of motorists scrambling for the commodity had ceased.

But beneath the public anger, apparent ineptitude and unwillingness to take responsibility by Government functionaries, lies a well-oiled cartel of individuals profiting from the misery of Kenyans.

Through well-placed connections, the cartels are able to orchestrate a scenario like that witnessed this week while smiling all the way to the bank.

Just like in the rest of the world, the country’s oil industry is usually a prime target for manipulation by shady businessmen wishing to make quick billions.

The players in the industry include the Energy ministry, Kenya Pipeline Company (KPC), Kenya Petroleum Refineries Limited (KPRL) and National Oil Corporation of Kenya (Nock).

Others are Energy Regulatory Commission (ERC), Kenya Revenue Authority (KRA) and the 57 licensed oil-marketing companies, the latter having transport and storage agreements as well as ullage (space) in the pipeline system.

KPC, KPRL, ERC and NOCK are parastatals under the Energy ministry, which therefore controls the functional, policy and regulatory framework in the corporations.

While KPC is mandated to transport and store fuel products, KPRL is mandated to refine crude oil for the marketers.

Nock has an exploratory as well as a marketing and strategic reserve function. The mandate of the corporation has evolved over time, but industry experts say its functions and performance have remained wanting.

ERC licenses and regulates all traders at all levels of the oil trade, besides the recently assumed amorphous role of price controlling. On the other hand, KRA collects taxes accruing from petroleum imports.

Before a company imports fuel, it is licensed by ERC who only issue the licence after the trader has successfully negotiated a transport and storage agreement with KPC and a crude oil refinery agreement with KPRL.

This is to ensure the trader is allocated space in the pipeline and is allocated a crude oil supply quota for the benefit of the refinery.

Sources say the oil companies are uncomfortable with being forced to supply crude oil to a refinery "whose efficiency and ownership is questionable at the expense of their own efficiency and profit".

As of last count the country had 57 registered oil-marketing companies with satisfactory capacity to import product.

All of them are required to sign collateral financing agreements with KPC and trade financiers when importing product.

But in October last year, the Energy ministry revised product importation rules and effectively prohibited companies from buying products outside the monthly Open Tender Supply system (OTS).

Through this, the ministry floats a monthly tender (usually three months in advance) and the winning bidder supplies fuel products to all the other companies.

Any supply outside the tender is restricted to authority from the ministry and is riddled with corruption.

Experts argue that this scenario is untenable because it is unfair for companies such KenolKobil or Total, with 23 per cent of the market share, to rely on supplies from small companies with undetermined percentage of the market share.

The Energy ministry policies have also come under sharp focus as "encouraging both command and free market economies while deliberately creating gaps within the systems for purposes of rent seeking".

"Preferential treatment of companies like Nock who have exhibited inability to execute their limited mandate in the supply chain is wrong," said a key industry player.

Industry experts say the Government should revert to the previous system where only a certain percentage of the country’s fuel requirement is subjected to the open tender system .

Companies should then be allowed to competitively source their own product without favours, as protection provided to the refinery is unwarranted in an economy like Kenya’s.

"They should either shape up or ship out. Furthermore, any new idea in the supply chain should be tested at a smaller level like all experiments before plunging the country into logistical chaos of proportions witnessed this week," added the source.

ERC’s functions were mainly transferred directly from the Ministry of Energy upon creation under the Energy Act 2008.

Beyond licensing, their attempts at price controls have been confusing and comic at most. As a regulatory authority with diverse powers, they are yet to stamp their authority the energy sector as a whole.

Analysts say the entire legal and regulatory framework of the petroleum sector needs to be re-written and moved from the direct control of the Ministry of Energy to ERC.