02-09-07 Kenya's oil market is set for a major shift following the entry of three deep pocketed players with direct roots in the oil wells of the Middle East, and some of the world's biggest refineries. The new entrants, led by two Indian firms Reliance and Bharat Petroleum and Libya's Libya Oil Kenya, have acquired significant stakes in strategic segments of the oil business that energy sector analysts say will loosen the grip that multinationals have had on the market with consumers as the big winners.
Though currently controlling only a tiny fraction of the market, these firms have on the cards ambitious expansion plans that should give each a double digit share of the market in the next five years with competitive pricing as the key selling point. This pricing war is expected to finally crack the cartel-like behaviour that has persisted in the multinational-controlled market despite the entry of a large number of independents over the past five years.

Mr George Wachira, the chief executive at Petroleum Institute of East Africa (PIEA) -- the industry lobby -- reckons that the entry of new players alone is enough to tip the balance of power in the market even without the recently passed Energy Act that, among other things, reintroduced price controls.
"The Indians will definitely bring good contrast in the oil market," said Mr Wachira, suggesting that a remarkable shift in market share is on the cards especially among the top oil companies. Official statistics show that the structure of the market has remained unchanged over the past five years despite a steep rise in the number of players.

Kenol/Kobil is the market leader with a 23.78 % share of the oil market and Shell has a 21.04 % while Total and Chevron have 17.94 % and 15.26 %, according to PIEA. Libya Oil Kenya Limited -- formerly Tamoil -- which took over the Mobil business in Kenya, has 7.33 % with local firms controlling the remaining 14.6 % market share. With the market size growing only marginally, experts say that the battle for control of the oil market will be won or lost on the pricing front as the top players, including the new entrants, match each other on key fronts such as quality.
"It will boil down to keeping unit costs down as this will allow one to price competitively," says Richard Mwangi, an analyst at African Alliance.

In their operations elsewhere in the world, Reliance, Bharat and Libya Oil are known for their low operations costs given their direct relationship with exploration blocks and refineries, which they partly own, and huge cash kitty that is key for one to penetrate the local oil market. If this onslaught comes to pass, it will be a big sigh of relief in the Kenyan market where high prices, notably in the firs half of 2007, has seen sales drop 10 % compared to the same period a year earlier as consumers change their habits.
The drop in volumes comes at a time when the oil marketers are recording thinning margins as competitive pressure and fresh regulatory rules fronted by the Government, notably the upfront payment of taxes, take their toll on the business. Onto this list of profit crunchers will soon be added price undercutting as the new players fight for their share of the market.

Of the three firms, the Indian multinational giant Reliance is expected to do the most damage given its financial muscle and the fact that its one of the few oil marketers that controls the entire supply chain from oil exploration to refineries to distribution of oil products. Control of the supply chain makes the company a least cost marketer a position that would make it easy for it to eat into the markets of the industry top dogs in the local market.
The Indian firm had revenues of Sh 1, 119 bn in 2006 and posted a net profit of Sh 115.6 bn, and is listed among Fortune Global 500 list of the world's largest corporations. Reliance is also said to have its sights on the local refinery where it has expressed interested in acquiring a 50 % stake held by the oil marketers in the Kenya Petroleum Refinery.

Besides the refinery, the firm is also keen be a major player the monthly tenders for oil importation in a system dubbed Open Tender System (OTS) where one marketer imports crude oil on behalf of other players. The tender by the Government is issued to the lowest bidder, and with Reliance enviable position in the supply chain its easy to see that firm would have an edge over other marketers in the tender battle.
The firm made an entry into the East African market after acquiring a majority stake of the Gapco Group. Though a small player in the Kenyan market, where it controls 1.85 % of the local market, Gapco is a major player in Tanzania, Uganda and Sudan. In Tanzania it has an estimated 35 % of the market, which its got after acquiring Esso and Caltex, while in Uganda its has a 12 % market share again acquires through the buyout of Esso assets. A source close to the deal told that the Indian giant is keen on building a retail presence in the local market.

Separately, Bharat Petroleum, which is engaged in a LPG project with Kenya Pipeline Company in Athi River, is mulling the idea of going big in other segments of the oil market. The segments include aviation, lubricants, fuel oils and the gasoline markets. The Indian firm, in which the Indian government has a 66 % stake, has revenues in excess of Sh 1,482 bn and last year made a profit of Sh 32.1 bn, putting it in a good stead to mount a fight with the top marketers for a share of the lucrative local market.
Libya Oil, on the other hand, which has seen its market share drop from 10.8 % to 7.33 % in the six months to June, is planning to increase its footage in the retail business as part of a broader turnaround of its local outfit.

The Libyan firm, which made an entry into the local market last year after acquiring the assets of ExxonMobil, is betting on its wide product offering and lower pricing to claim market share.
"We plan to grow our market share to between 15 and 20 % in the next five years," said Kamel Jarnaz, the managing director of the local unit of Oil Libya. With the deep resources of the Libyan Government, which controls the firm through its investment arm, the local outfit has already put up a multi-million shilling war chest to build visibility in the increasingly competitive oil market.

The marketing strategy involving a re-branding of the company stations, which currently stand at 64, to reflect the new ownership under Oil Libya. But the industry top players are putting on a brave face.
"We are watching and ready to face any form of competition and Shell is not prepared to cede an inch of its share of the market," Patrick Obath, the managing director of Shell told.