Why fuel subsidy is pushing small oil marketers to the edge

Firms are facing delays in compensation by the State even after foregoing their margins. [Courtesy]

Oil marketing companies have over the last three months been made to shoulder a huge burden in the government’s plan that has kept fuel prices stable for close to a year. 

The firms have also had to wait longer before they are reimbursed the money they forego at the pump so as to keep fuel prices stable.

In addition to grappling with having their margins slashed, the oil firms also have to shoulder what the Energy and Petroleum Regulatory Authority (Epra) refers to as the stabilisation deficit in the its monthly price capping guide.

This means that the oil marketers, in addition to foregoing their margins, have to cater for extra costs that include paying other players along the supply chain, which has in some instances meant using their own resources.

They are however compensated by the National Treasury, using money collected through the Petroleum Development Levy but the delays are now becoming a cause of concern for the industry.

Over the February-March 2022 pricing cycle, the price of diesel was subsidised by as much as Sh23.29 per litre.

The marketers have to shoulder the weight of the entire subsidy, which is nearly double their margin which stands at Sh12.36 per litre.

This may mean paying other players along the supply chain, who are unaffected by the stabilisation process, using their own cash. This includes including the government taxes and levies.

Attendant refuelling a vehicle at a gas station. [Courtesy]

Other players unaffected by the stabilisation programme are the product importers and firms that store and distribute fuel including the Kenya Pipeline Company as well as the truckers who move fuel from depots to petrol stations.

The coordinator Kenya Civil Society Platform on Oil and Gas (KCSPOG) Charles Wanguhu said the modality of implementing the subsidy programme has been unfavourable to small oil marketing companies.

“Delays in the release of the subsidy strains the smaller market players and may push them out, leading to less competitive pricing in the market,” he said.

"Government stepped in to cushion consumers and not as a guarantor of profits and currently government taxes are the biggest impediment to lower prices."

The fuel subsidy over the current pricing cycle has stabilised super petrol to the tune of Sh14.53 per litre - Sh2.14 more than the margin for oil marketers, which stands at Sh12.39 per litre.

Kerosene has been subsidised by Sh15.88 per litre - Sh3.52 higher than the maximum allowed margin at Sh12.36 per litre.

Among the oil marketing firms that are feeling the pinch of the margins been taken away at the pump and Treasury taking time to pay include the National Oil Corporation of Kenya (Nock).

The State-owned oil marketing company last week told the National Assembly’s Committee on Energy that it has been unable to buy adequate petroleum products for its outlets as the funds it would be using to buy stocks are being held by the government.

The company revenues stood at Sh402 million over the six months to December 2021, against a target of Sh993 million.

“The low revenues are due to working capital constraints, which saw us unable to buy enough products for our retail outlets. Working capital constraints has led to decreased margins and reduced sales,” said Nock Chief Executive Leparan Ole Morintat, explaining that money it would have used for working capital is tied up at Treasury, with the firm owed more than Sh250 million.

“This has been made worse by the government's stabilisation programme, where working capital is held up at Treasury because of delayed payments of the subsidy by the government to oil marketing companies.”

Tankers on a queue at the Kenya Pipeline Company in Eldoret, 2021. [Peter Ochieng, Standard]

Reports indicate that oil marketing companies have not been fully paid for the margins that were slashed for the December-January pricing cycle. This could mean that they have also not received funds for the January-February cycle which ended last week. 

The Petroleum Ministry said it pays about Sh8 billion per month to various oil marketers, to compensate them for slashing their margins at the pump to keep fuel prices stable.

An oil industry source said there are individual companies owed as much as Sh2 billion.

Garissa Town MP Aden Duale, in a letter to the National Assembly Speaker Justin Muturi noted the difficulties some oil marketers are experiencing as the Treasury fails to pay the money regularly.

He requested the speaker to fast track the Petroleum Products (Taxes and Levies) Amendment Bill 2021, that was supposed to play a part in reducing the cost of fuel in the country.

“I make this request cognisant of the disquiet among the oil marketers because of delays by the National Treasury to pay them their statutory subsidy which is likely to cause another abrupt increase in fuel prices,” he said.