Petrol station operators win big in new fuel formula review

Shell petrol station on Nakuru-Eldoret Highway. [Harun Wathari, Standard]

Operators of petrol stations will be the biggest beneficiaries when a new method of determining the retail prices of fuel comes into use next month.

Under the new pricing guide, margins for players operating retail outlets in the industry will more than double. The new price capping formula seeks to address what is said to have been a pricing injustice perpetrated on the retail end of the industry for the last decade.

While the review of the formula might result in an overall increase in prices, the doubling of the retailers’ margin will be as a result of the wholesalers getting a major cut on their margins, at about 50 per cent, which will be transferred to the retailers.

In the current price capping formula, the retail margin is set at Sh3.89 per litre of fuel. In the proposed review of the formula, this is expected to go up to Sh8.19 per litre.

The retail margin will, however, be split into two components – the retail operating margin (Sh4.14 per litre) and the retail investment margin (Sh4.05). Wholesalers, on the other hand, will see their margins reduce to Sh3.05 as per the proposal from Sh7 per cent litre in the current formula.

While this might not mean much for major oil marketing companies that have operations at wholesale and retail levels, it will be a major boost for small and independent oil dealers.

These dealers have for years argued that the fuel capping guide has been tilted in favour of the big companies, translating to thin margins for them. In a report commissioned by The Energy and Petroleum Regulatory Authority (EPRA), which set in motion the process of reviewing the pricing formula, the retailers had to do with smaller margins to the advantage of the wholesalers.

This was despite having to make heavy investments in their outlets as well as in marketing their products,

The report further recommends an annual review of the retail margins to cushion players from surges in the cost of living, with the reviews enabling businesses to pass on the cost of inflation to consumers.

“An activity-based analysis of the wholesale and retail segments points to a possibility of over-recovery of margins in the wholesale segment at the expense of the retail segment where the bulk of marketing investments are domiciled,” said the Cost of Services in the Supply of Petroleum Products report.

“The retail margin should have an annual review to reflect the Consumer Price Index changes.” Kurrent Technologies, the company that conducted the study, noted that major changes had taken place since the price capping formula came into effect in 2009.

It said some aspects of the formula might not be a true reflection of the situation in the market today, hence necessitating a change in the formula. “Since the launch of petroleum price regulation in 2010, the shape of the petroleum subsector has changed, with new supply chain infrastructure in place while others have been retired. The previously heavily vertically integrated supply chain has new licensed players and investors participating in one or more of the supply chain segments," said the firm.

"In some areas, duplication of role and costs may have crept in. This makes it necessary to review the entire petroleum product pricing system,” reads the report, adding that the recommendations made would be “efficient and fair to all investors and consumers.”

The report recommends splitting up of the retail margin into two bits – operating and investment margins – an unbundling that would make it easy to “understand and quantify the cost drivers and opportunities for efficiencies and economies of scale.

While making presentations on the proposed changes during stakeholder engagement forums concluded a week ago, the Energy and Petroleum Regulatory Authority (EPRA) the formula currently in use does not capture the high operational costs that go into the retail bit of the business.

Thus, the regulator said, there was a need to split the retail margin and ensure that both operations and investments are taken care of.

“We have been engaging stakeholders and one of the things that came out is that we have to split the retail margin into a retail investment margin and operating margin. There are people who do not construct a petrol station they are just dealers, who should be paid a retail operating margin while the person who invested on that infrastructure should get a retail investment margin,” said EPRA.

“Retail has high operating costs because the owner of a petrol station has to maintain high standards to avoid contamination of products.” Kenya Pipeline Company (KPC) has also requested a review of the pipeline tariff to differentiate domestic and foreign pricing.

It wants the tariff for domestic market hiked but a reduction for products going to neighbouring countries.

The pipeline company had proposed that the local tariff increase to Sh5.90 per cubic metre per kilometre from the current Sh5.22.

The increase informed by KPC’s need to continue investing in petroleum products transport and storage infrastructure in the country.

The regional tariff would go down to Sh5.8 ($0.058) from Sh6.8 ($0.068) currently, as KPC tries to incentivise companies importing petroleum products to Uganda and Rwanda to use the Kenyan route, which has in the past lost some traffic to Tanzania.

The regulator said it is considering increasing the KPC tariff to ensure they have not given KPC too much but what is sustainable while making sure consumers pay for prudent costs.”