Business Daily (Nairobi)

In a matter of days, the National Oil Corporation of Kenya (Nock) will put to use the 30 per cent monthly oil supplies quota even as the industry questions the rationale behind the new regulations.

Concerns are being raised on whether the State oil marketer has the capacity to perform the task considering that it controls only four per cent of the market, how the development will affect competition, and what it will do to the overall growth of oil business in Kenya.

Through a legal notice, the minister for Energy last month allocated Nock a 30 per cent petroleum procurement quota, in what analysts link to incessant attempts to control pump prices.

While the announcement has triggered strong reactions from the industry, the parastatal has indicated it was going full throttle to implement the directive from August 1.

On July 2, Nock expressed readiness to start supplying a third of Kenya's crude as well as refined products.

Nock managing director Mwendia Nyaga has asked that his firm be allocated adequate storage space in the State-owned fuel and distribution systems.

"We intend to commence utilisation of our allocation of 30 per cent petroleum import quota effective 1st August 2010 for refined products. We will soon advise you on the commencement dates for crude oil," said Mr Nyaga in a letter to oil marketers, the Kenya Pipeline Company (KPC), refinery managers, and supplies co-ordinator.

The market of 40 players is under the influence of four firms where the French oil giant Total is the leader, controlling a third of the market. KenolKobil controls 18.7 per cent, Kenya Shell ( 17.8) per cent, Oilibya has 11.7 per cent and Gapco (6.1 per cent) up to June 2010. Nock comes fifth in the ranking with four per cent.

By giving a statutory quota to the national oil company to import 30 per cent of all petroleum into Kenya, industry players that directly compete with Nock say this was meant to render them uncompetitive.

Disquiet is building among a section of senior officials at the ministry as well as the industry regulator Energy Regulatory Commission (ERC) who, it has emerged, were divided at the time of the drafting the Energy (Importation of Petroleum Products Quota Allocation) Regulations, 2010, published on June 18 by minister Kiraitu Murungi.

Industry sources say some commissioners were against "attempts to favour" Nock, nearly 16 years after the State corporation lost the mandate when the sector was deregulated.

Liberalisation also saw the State firm lose its mandate to import 30 per cent of the country's crude requirements, and since Nock has been marketing directly to the final consumer.

However, Section 102 of the Energy Act No 12 of 2006, provides the minister for Energy with latitude to regulate petroleum importation, refining, and exportation.

Section 116 of the Act states that while discharging its functions and exercising its powers under the Act, the ERC shall ensure that no individual is given undue preference or subjected to undue disadvantage.

Legal Notice No. 197 of December 2, 2003 requires all licensed importers to process 1.6 million tonnes of crude at the Kenyan refinery to meet 50 per cent of the country's needs for petrol among other refined fuels.

While the legality of the move may not be in doubt, petroleum experts are asking what value the action is adding to the industry.

Although a similar arrangement existed in the 1980s/90s, questions linger on whether Kenya has enough storage capacity for operational and strategic stocks.

The Kenya Pipeline Company storage depots in Nairobi, Nakuru, Kisumu and Eldoret are overstretched.

Experts and industry players question Nock's ability to meet the new quota even as modalities are still under way to harmonise the centralised supply system dubbed Open Tender System ( OTS) with the 'parallel' supply system.

Constraints in the limited petroleum infrastructure are likely to persist with expected increase in the number of fuel and crude tankers with separate consignments for industry cargo as well as Nock's say industry players.

With the State oil firm as a bulk supplier and a competitor in the same market, the regulations is seen giving it undue advantage over rivals, contrary to the Energy Act.

"We are concerned that vessel scheduling for the single berth at Mombasa will be further constrained. Whereas we have only two crude and three finished product vessels under the OTS, this arrangement will require an additional two to three vessels per month.

The move has sparked disquiet in the industry where observers and players are questioning the rationale of the action coming at a time the State firm is expanding and also working on oil exploration projects.

The new regulations are a breeding ground for unfair trade practices, they say.

"The argument that Nock's 30 per cent procurement quota will prevent market price fluctuations is actually flawed if one analyses the process of petroleum supply chain. The only way the government can influence local prices is through tax manipulation or subsidies, which in Kenya of today is not an option," said George Wachira of Petroleum Focus Consultants.

"If the government wants to make a margin out of the new procurement process so as to capitalise itself, then this is a different argument from the one already advanced. If this is the hidden justification, then the issue becomes that of unfair market competition, because Nock is already competing with the same marketers it is meant to procure for," adds Mr Wachira.

Our mandate

The Treasury has said that no subsidies or tax manipulations will be used.

Pump prices rise dictated by various factors, including global crude swings, which always hold sway.

However, Nock has parried the challenges, saying it is able to perform the new task, pass the benefits to the consumer, and gun for more competitive contracts.

"We believe that this confirmed 30 per cent monthly allocation will help us achieve our mandate of stabilising the petroleum market, as it will help us in negotiating for more competitive contracts including term contracts on a government-to-government basis," said Mr Nyaga.

"The challenge we have experienced in negotiating such contracts is that the suppliers want us to confirm a guaranteed regular lifting, which, so far, we have been unable to owing to the requirements of the OTS," he said.

Because of "vested interests [and] limited retail network, Nock was likely to clog the system without adequate retail network," a source who requested anonymity claimed.

The Ministry of Energy already supervises the open tender system that allows the country to get petroleum products at the lowest cost.

Under the OTS, a registered Kenyan oil firm that quotes the lowest premium and freight costs is licensed to import assorted products to distribute to marketers on pro rata basis.

Each industry cargo is allocated a code at the beginning of the year.

A senior ministry official also questioned Nock's ability and competitiveness.

"Nock needs to first demonstrate its competitiveness and consistency in the OTS. It is a passive player that has participated once in November 2009 to import diesel," he said.

Other grey areas, say observers, include whether the oil firm will now be excluded from the centralised supply system because the new regulations "raise several areas of conflict with the OTS."

"What will be the basis of calculating the 30 per cent quota? Will the quota be based on each tender or will this be based on supply to the industry in place of OTS," said Mr Jimmy Mugerwa, the country chairman of Shell and whose company hosts the secretariat for the supply co-ordinator.

Avoid shortages

"What assurance can the public have that Nock's imports will be priced competitively? What will be the basis for the pricing and the premiums? Will this be linked to the best OTS price?" posed the Kenya Shell boss in the brief seen by the Business Daily.

The industry is also seeking guarantees that Nock will consistently finance, deliver, and supply to avoid shortages.

"The procurement by Nock must be above board and not serve vested interests," said a senior official at the ERC.

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