How Kenya's oil import deal has soured trade with Uganda

The move by Uganda to radically reorganise its petroleum importation process could have far-reaching impact on Kenya's petroleum sector, which is designed with the local and export markets in mind.

Through a combination of its ship discharge terminals in Mombasa and storage tanks across the country as well as the pipeline network, road transport and the recently launched Kisumu Oil Jetty, the Kenyan petroleum sector serves Uganda and the regional market as much as it serves the local market.

Uganda is Kenya's largest trading partner, accounting for 11.1 per cent of Kenya's total exports. Kenya exported goods valued at Sh873.14 billion of which Sh97.16 billion went to Uganda.

More than half of the value of products Kenya sold to Uganda are re-exports of petroleum products that oil marketing companies (OMCs) import through Kenya.

The pronouncements by Ugandan leadership over the recent days that the country is evaluating its fuel imports could thus be unsettling for the local sector from the oil marketing companies to senior government officials.

It could affect not just Kenya's petroleum re-exports to Uganda but also to neighbouring landlocked countries - South Sudan, Rwanda and parts of the Democratic Republic of Congo - all of which meet a majority of fuel requirements by fuel imported through Kenya.

Many of the oil marketing companies in Kenya also have operations in Uganda and could be hit hard by radical changes in how the country imports petroleum products.

It also puts on the spotlight Kenya's recent move to get into a fuel import deal with state-owned international oil companies from the Middle East.

The government-to-government deal, which enables Kenya to import fuel on credit from the Gulf oil companies as it sought to tame the weakening of the shilling, and its predecessor the Open Tender System are being viewed as being impediments to the region getting cost-effective petroleum products

Uganda's President Yoweri Museveni said his country had contracted bulk suppliers of petroleum products to provide country fuel at lower costs.

This is even as he slammed some players along the East African petroleum supply chain terming them parasites, who he noted take a significant chunk of the money that Uganda pays for fuel

"Without my knowledge, our wonderful People were buying this huge quantity of petroleum products from middlemen in Kenya. A whole country buying from middlemen in Kenya or anywhere else!! Amazing but true," said Museveni on Sunday on his social media handles.

"We have now contracted bulk and refinery suppliers able to give us the lower prices. I have discussed this with (William) Ruto, the President of Kenya and our delegation is now in Dar-es-Salaam, discussing with (President) Samia Suluhu."

He added that the planned refinery in western Uganda that will process the country's crude oil would benefit landlocked countries in the region to get competitively priced products.

"(President) Ruto is handling the Kenyan part. I salute his contribution. In a few years' time, our refinery will be up and running. I can assure the Inland East Africans of competitive petroleum products, free of distributions caused by middlemen. The whole of Uganda, North- Western Tanzania, Rwanda, Burundi, Western Kenya, South Sudan and Eastern DRC, will benefit," he said.

At the moment, Uganda imports 90 per cent of the fuel consumed in the country through Kenya. The importation is done by OMCs with Uganda National Oil Company (UNOC) currently being dormant in the fuel import space. The Ugandan OMCs access products through their affiliation to Kenyan OMCs.

Kenya may be beating Tanzania to getting fuel to Uganda due to its expansive bulk storage facilities and extensive pipeline network that transports fuel from Mombasa to Kisumu.

This however might not be for long as Uganda considers working with Tanzania in upping this capacity.

The president's comments came days after Uganda's Energy ministry said it is empowering the country's national oil company to be able to source and supply Uganda with fuel.

Many of the oil marketers with operations in Kenya also have operations in Uganda and usually factor their Ugandan operations' requirements when importing through Kenya's OTS.

"The government of Uganda has decided to enhance its involvement in ensuring the security of the supply of petroleum products into the country by mandating the Uganda National Oil Company Ltd (UNOC) to source and supply the petroleum products to the licensed oil marketing companies actively involved in the importation of the products for Uganda," said Uganda's Energy and Mining ministry.

Improve security

The ministry said it is amending its Petroleum Supply Act, with the amendments expected to enhance the role that UNOC plays in the importation of fuel, primarily to improve the security of the supply of fuel products in Uganda.

"Despite the price competitive nature of the OTS in Kenya and its relatively normal suppliers, it exposed Uganda to occasional vulnerabilities where the Ugandan OMCs were considered secondary whether there were supply disruptions," said the ministry.

"These vulnerabilities posed additional challenges, resulting in Uganda receiving relatively costly products ultimately impacting the retail pump prices."

Why Kenya has lost its most precious market, Uganda

The ministry added that UNOC had entered into a five-year contract with Vitol Bahrain EC, in which Vitol would provide expertise and working capital facility to ensure competitive pricing of petroleum products in the plan, Uganda appears to be sidestepping Kenya's massive pipeline and storage infrastructure in favour of Tanzania.

"To guarantee the security of supply, the partnership has ensured that there will be buffer stocks in Uganda and Tanzania to be called upon should there be supply disruptions to the country.

"The partner has also committed to finance construction of additional capacity in partnership with UNOC of 320 million litres," it said in a statement.

Reports indicate that Uganda was disappointed by Kenya not keeping it in the loop when it started the government-to-government importation deal for the initial nine-month period but also in the discussions that led to its extension to the end of next year.

The government-to-government agreement replaced the open tender system (OTS) of importing products. Observers note that OTS may have had many shortcomings.

It has in many instances been referred to as opaque and said to be controlled by a click of a few oil marketers in a cartel-like manner but the concerns by Uganda on the government-to-government deal has many wondering whether Kenya may have jumped from a bad system to a worse one.

The Ministry of Energy and Petroleum started importing fuel under the government to government system in March this year. At the time the Ministry explained that it was primarily aimed at slowing down the weakening of the shilling.

"This Government-to-Government agreement replaces the current process of Open Tender System (OTS) reported to incur a monthly cost of approximately Sh500 million," said Davis Chirchir Cabinet Secretary Ministry of Energy and Petroleum at the time.

"The newly agreed upon measures would enhance the country's forex reserves, leading to a reduction in currency speculation and the revitalisation of the inactive interbank market," said Mr. Chirchir.

Under the arrangement, the state-owned gulf oil companies - Saudi Aramco, Emirates National Oil Company (ENOC) and Abu Dhabi National Oil Company (ADNOC) - supply fuel to Kenya on credit.

They have been receiving their payments since September, following the lapsing of the six-month credit period. The three companies got their first pay in September, which was for the first cargo delivered in March. The feeling within the market is that the deal failed to deliver on easing pressure on the local currency. The shilling is now peeping at a low of Sh160 to the US dollar at the moment down from Sh127 in March when the new import system became operational.

But perhaps the biggest failing of the government-to-government deal is putting at jeopardy the trade relations between Kenya and Uganda, with Uganda now considering a total departure from its oil import method.

Under OTS, oil firms compete to import products on behalf of the industry with the firm with the lowest bid for premium and freight getting the job. The price of petroleum products is not subject to competitive bidding at OTS as this is based on the prices at the Standards and Poors (S&P) Platts benchmark.

OTS is coordinated by the Ministry of Energy and Petroleum.

Players said the system has worked and if anything, Kenya has hosted delegations from other oil importers in Sub-Saharan Africa seeking to understand OTS as they look to implement an efficient and cost-effective fuel import system.

"The government-to-government deal could as well be the end of the OTS. OTS is competitive. There are certain aspects that might be improved but the system has generally been good for both the industry and the consumers," an industry player has in the past told The Standard in an interview.

"The benefits of OTS have now been nullified and the ministry might consider increasingly using the government-to-government method going forward."

Critics have however alleged that OTS is not open as its name suggests and that it only favours a few players in the industry.

MPs last year undertook a probe on OTS after the Consumers Federation of Kenya filed a petition claiming that "OTS was opaque and shrouded in secrecy and susceptible to abuse by cartels".

The committee, while finding that the OTS was fairly open and had in some instances saved consumers money but also noted the failure by the players to make it transparent through public communication, which also gave way for collusion among the companies involved.

It ordered the ministry as the supervisor of OTS and EPRA as industry regulator to make public details of bids including participating bidders and their price quotations.

The committee also recommended that new regulations be put in place and that these should provide "that the ministry and EPRA shall maintain an online portal that is accessible to the public where they shall advertise and publish all information relating to bids and awards of the OTS including the date of the contracts, the bidders, when the tenders are floated, bids received, bid evaluation, cargo services, respective storage capacities and the beneficial owners of the winning bidders".

The new regulations that the Energy Committee had envisioned would also require the Ministry and EPRA to publish details of pricing and delivery schedules and the cargo prices per litre along with the prevailing prices for super petrol, diesel and kerosene.