A new government-backed report reveals that Kenyan households are spending an additional Sh881 to buy 13kg of cooking gas due to a lack of competition in importing the commodity.
A study report on the cost of service for the supply of Liquefied Petroleum Gas (LPG) by consultants hired by the Energy and Petroleum Regulatory Authority (Epra) has shown that the absence of competitive bidding for LPG shipments has seen Kenyans get a kilo of LPG at a wholesale price of Sh159.7, however the same price would cost Sh91.9 if the import window was opened for bidding to all players.
This means that households may pay Sh2,400 for 13kg of cooking gas which currently retails at Sh3,200.
Currently, LPG is imported into the country by a few players and without bidding, a system criticised by Kurrent Technologies Ltd and Channoil Consulting Ltd – the two companies hired by Epra to conduct the study.
The consultants suggest using an open tendering system (OTS).
Under the cross-border supply system, local companies bid to import oil monthly, with the lowest or winning bidder supplying oil to the industry for two months and paying for the shipment within days of delivery.
The OTS system was used to import fuel products such as petrol and diesel until March last year when Kenya temporarily switched to a government-to-government deal whereby Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company would supply the country with the products.
The leaked report indicated that the absence of tenders for the import of LPG resulted in the product reaching Mombasa at prices higher than the prevailing market prices.
This has led to reduced gas use and increased coal consumption, as more LPG traders increasingly avoid Mombasa and head to Dar es Salaam for cheaper cooking gas.
While a kilogram of LPG arrives in Mombasa at Sh87 under a competitive import process, the product currently fetched Sh135.3, according to the Kenya Petroleum Products Supply Cost of Service Report.
After landing in Mombasa, other shipping costs and gas handling push the wholesale price to Sh159.7 per kg, a price that would drop to Sh91.9 per kg if the import window was opened for all players to bid.
The draft report submitted to the Ethiopian Atomic Energy Commission indicates that while a ton of LPG reaches Mombasa at $1,002.4, the cost will be reduced to $685.4 under the cross-border transport programme, which requires upgrading the infrastructure at the Mombasa port.
“Our proposal is that the cost of delivery in Mombasa should be the price that is quoted as a premium to the Saudi contract price. So, in this case, the proposed price would have been CP (contract price) plus $101.4. (This reflects our expectations of what the price should be),” the report notes.
The high landing costs leave a tonne of LPG sold to wholesalers at $459.7 (59,379 shillings) more than it would have been sold under the cross-border transport system, costs that are ultimately passed on to households.
The consultants found that because of high prices in Mombasa, some Kenyan traders are resorting to sourcing LPG from Tanzania even as thousands of households turn to charcoal to avoid expensive cooking gas.
“Market data indicates that there are currently physical imports by land from neighbouring countries, especially Dar es Salaam. This should not be the case as Mombasa has much better infrastructure both for shipping and storage and Dar es Salaam is 400 kilometres further from Nairobi than Mombasa.
“There appear to be two explanations for this anomaly. The first is that the prices charged at the Mombasa terminal are too high and the second is that unlicensed operators are finding a way to smuggle gas across the border to avoid regulations. The first explanation seems the most plausible,” the report said.
The consultants advised Ebra to adopt an OTS system for importing LNG, which would open the market to competition and lower prices. The report indicates that under the OTS system, wholesale LNG prices would fall by between 30 and 114 percent.
“We expect that once the cross-border transit system is operational, the final gate price will be around CP (contract price) plus $140. This compares to current terminal prices in Mombasa of CP plus $200 for contracted customers and CP plus $300 for non-contracted customers,” the report notes.
“The cost of the current government project in Dar es Salaam with the infrastructure being much lower is $200 plus $200,” he adds.
The report noted that as a result of rising LPG prices in Kenya, more households have resorted to using charcoal for cooking, leading to a decline in demand for LPG since 2021, which poses a health risk and deviates from the country’s target of increasing LPG use to 15 kg per capita by 2030.
“Until 2021, it looked like Kenya was on track to achieve this. However, the escalation of the war in Ukraine in February 2022 disrupted LPG markets and increased prices. This was compounded by the fact that there was a lack of competition or regulation on imports, which led to prices rising above similar competitive markets,” the report notes.
Demand for LPG declined from 373,865 metric tons in 2021 to 360,594 metric tons last year as more households switched to coal, as the cost of cooking with coal is now cheaper than LPG.
“Therefore, it is important to keep the cost of cooking with LPG in key urban markets lower than that of cooking with charcoal. This can be achieved by keeping prices across the value chain as low as they would be in a competitive market but ensuring that they are offset by the investment required to improve value chain efficiency and continue market growth,” the report notes.