Kenya plans to force Big Oil to sell off petrol stations

Jul 31, 2006 02:00 AM

The Kenya government is seriously contemplating introducing rules to curb what it sees as the "cartel-like behaviour" of the oil majors. An inter-ministerial task force that has been investigating the operations of oil companies has, in a confidential report, come up with proposals that -- if adopted -- could drastically overhaul the practice of oil marketing in Kenya, which has remained unchanged for decades.
Appointed by Public Service head Francis Muthaura in August last year, the task force's mandate was to carry out detailed investigations into cartel-like behaviour by major oil companies in Kenya and to recommend how Big Oil could be reined in.

Perhaps the most draconian of the suggestions put forward by the task force is to push Big Oil out of the retail business altogether by forcing the majors to sell the petrol stations they own and restricting them to the wholesale business. The task force has argued that separating the wholesale business from the retail segment and making sure that Big Oil does not own petrol stations, will make it easier for the government to track down whoever is responsible for arbitrary adjustments in consumer prices of petroleum products.
What is contemplated would be the most ambitious assault on the domination and control of the oil industry by Big Oil since oil companies started marketing oil in the country in the 1930s.

The oil marketing industry in Kenya is a vertically integrated affair in which oil majors hold sway, and consumer prices are often increased uniformly across the board, with the marketing companies operating more or less like an unofficial cartel.
The stranglehold that Big Oil has on the industry derives from its being involved in all aspects of the business from procurement of the raw material (crude oil) to its refining, since it has a major say in the Kenya Petroleum Refineries (KPRL) through shareholding and owning filling and service stations.

Oil comes into Kenya in two ways: importation of crude or importation of fully refined products. Imported crude is received and processed at the KPRL under an arrangement where all oil companies pay a similar fee. Thereafter, the refined products are either pumped into the storage facilities owned by the Kenya Pipeline Company or to the depots owned by the oil marketers in Mombassa.
In the case of imports of fully refined products, all products must be stored in the government-owned Kipevu Oil Storage Facility (KOSF). The oil depots owned by Big Oil in Mombassa are now effectively closed except for receiving lubricants, blending components, LPG, aviation gas and small amounts of packed products.

The industry has a rigid structure that not only inhibits innovation by individual marketers but encourages collusion, especially when it comes to effecting price increases. All oil marketers, including new entrants, must participate in importation of a minimum of 1.6 mm tons of crude oil commonly known as the "base load."
Then there is the requirement that all crude coming into the country must be procured through an open tender system known as "OTS," administered by the Ministry of Energy. Under this system, only one company is allowed to import crude for the rest of the marketers.

According to the task force, this system has turned out to be counterproductive as it does not motivate individual marketers to lower consumer prices and so sell more.
"They are guaranteed sales at higher prices given that the supply is fixed in the short run under the OTS," says the report. The government has also been advised to remove all barriers to entry into the market by smaller players, including the requirement that everybody contribute to the Kenya Pipeline Company's "line fill." Another recommendation by the task force is abolition of the requirement that all new entrants contribute to the "base load" at KPRL.

On the role of the state-owned National Oil Corporation (Nock), it has been recommended that it be strengthened to play the role of market stabiliser. Specifically, the committee has proposed that the government grant Nock a soft long-term loan to enable it to expand its retail presence by purchasing petrol stations owned by the majors, especially those who may be forced to divest from the retail business segment.
Pump prices of petroleum products in Kenya have been rising at an alarming rate over the past two years, exerting pressure on other prices in the economy. In January 2004, premium and regular motor spirit was purchased on average at Ksh 59.80 (83 US cents) per litre. Earlier, average pump prices had reached Ksh 82 ($ 1.14) per litre.

Consumers and the government have complained about the manner in which the oil companies have been increasing prices. Observers have always questioned the practice by oil marketing companies of effecting price increases at the same time and by the same margins across the whole industry.
Indeed, one of the conclusions of the task force is that the petroleum industry remains an oligopoly even after the entry of several new players into the market in recent years.

One of its findings is that the major oil companies -- Total, Shell BP, Caltex, Mobil and Kenol Kobil -- controlled 85.3 % of the market share as at September last year.
"Since the structure of this market is oligopolistic, it makes it easy for market players to collude and form cartels, the report adds. It says that it is inexplicable that despite the fact that the Nairobi area is the largest consumer of petroleum products, prices in the region are higher than prices in other regions. The normal situation, the report argues, should be higher prices in the rural areas than in urban areas to reflect lower sales volumes, higher unit costs and higher distribution charges.

The reports concludes that the situation points to a deliberate strategy by Big Oil to maximise their margins in places with heavy consumption such as Nairobi. Another finding of the task force is that the entry of small players has proven beneficial to consumers in the provinces of Western, Nyanza and RiftValley. In these regions, where the new entrants form the bulk of the marketing outlets, prices were on average 22-33 % lower than in Nairobi.
It has also been proposed that the government establish an oil price surveillance system to monitor price increases on a regular basis. The task force found that there is no comprehensive price monitoring going on except for that carried out in Mombassa, Kisumu, Eldoret and Nakuru by the Kenya Pipeline Company.

Source: The East African
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