Fear of reduced profitability by oil marketing companies and the government’s rush to announce tax cuts on fuel without proper implementation plans are the main causes of the biting fuel shortage that hit Nairobi and other major towns last week.
Investigations by the Sunday Nation found that oil companies deliberately delayed to evacuate diesel and kerosene from the supply chain to take advantage of recent reductions of duties and taxes on the two commodities.
That time lag between the time the duty waivers were announced and the time the decisions were gazetted was one of the most important causes of the shortages.
As a result of the oil marketers’ action, the Kenya Pipeline Company’s storage tanks were literally clogged with diesel, leaving little space for petrol.
The decision by the government to reduce exercise duty on diesel and kerosene was aimed at cushioning Kenyans against the impact of rising fuel prices.
The April 18, 2011 announcement by Finance minister Uhuru Kenyatta was arrived at after hue and cry by consumers.
Excise duty on kerosene and diesel was waived by 30 per cent and 20 per cent, respectively, the maximum that Treasury is allowed by law.
Consequently, the new prices were gazetted on April 21 in legal notice No. 38 with an effective date of May 3, 2011.
But three days preceding this date a number of petrol stations in Nairobi started experiencing stock-outs of super petrol.
The initial explanation was a logistical one; that the company that imported the product on behalf of the industry was waiting for payments from other players before releasing the product.
All this time, KPC maintained it was wet with product, an industry language to mean it had enough stocks of super petrol.
Players in the industry that we spoke to attributed fuel problems to the increasing role of traders and speculators that have come to dominate the oil supply chain in Kenya despite having no investment in retail outlets.
The crisis graphically illustrated how the balance of power in the troubled industry long shifted from the big oil majors to well-connected briefcase traders that have been minting millions by exploiting loopholes in the supply chain.
The small companies have been the big winners under the so-called Open Tender System (OTS) run by the industry under the oversight of the Ministry of Energy.
Under this system, all oil imported into the country, including consignments headed for neighbouring Uganda and Rwanda, must come by one ship, imported by one player and shared by the rest — according to market share.
The OTS tender is floated every month by the ministry. Why did Kenya adopt the OTS system?
The OTS system was introduced to allow locals to share in the product imported by one big player. The other advantage was that by allowing only one player to import for everybody, the country gained through bulk purchase discounts.
International prices are quoted under a benchmark known as PLAT. Often, traders will refer to PLAT Arab Gulf or PLAT Mediterranean.
Since the prices are standard and known to everybody, bidders in the OTS tender, only compete on the premium over the PLAT prices. The company which quotes the most competitive price over the PLAT prices for the specific month wins the OTS tender.
Until recently, the trick well-connected traders have been using has been to cheat on the bill of lading (a document signed by a transporter of goods or their representative and issued to the shipper of goods that is used to prove the receipt of goods for shipment to a specified designation and person).
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