Motorists have been overcharged by an estimated Sh16.4 billion or Sh2.70 per litre of fuel since Kenya opted for government-to-government oil supply contracts with three Gulf-based companies, boosting the profits of three local companies at the expense of consumers.
Kenya entered into the deal with Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company in March last year, switching from an open bidding system where local companies compete to import oil on a monthly basis.
Now, consultants appointed by the energy regulator have asked Kenya to terminate its oil supply agreement with three Gulf-based companies, arguing that it is expensive compared to fuel procured through open tender.
Leaked report I saw Daily business Data indicates that three local suppliers, including Galana Oil and Gulf Energy, failed to reap the benefits of the Gulf oil supply deal and received huge returns compared to average margins under the previous open bidding system.
The previous system was open to all retailers in Kenya, with the winner committing to supply the industry with goods for two months and paying for the goods in hard currency within five days of delivery.
“The open tendering system, through monthly competition and award of supply contracts, ensures price competition among suppliers which in turn ensures that supply premiums remain competitive. Therefore, the open tendering mechanism is preferred,” according to the report by UK-based Channel Consulting Ltd and Nairobi-based Current Technologies Ltd.
“For the OTS mechanism, the average supplier premium for January and February 2023 is Sh4.51 per litre. For the government-to-government mechanism, the average supplier premium for June and July 2024 is Sh7.21 per litre, or Sh2.70 per litre higher than the OTS mechanism for the sampled months,” the report adds.
The oil supply deal with three Gulf-based companies aims to manage demand for dollars and reduce the premium Kenya pays to its suppliers.
Official data shows that Kenya consumes an average of 380.1 million litres of diesel, premium petrol and kerosene per month.
This means consumers have lost out on Sh1.02 billion in benefits per month in the government-to-government oil deal, or Sh16.4 billion since the Gulf deal began in March last year.
The UAE’s Energy and Petroleum Regulatory Authority has selected consultants to conduct a cost-of-service study for fuel sourced from Abu Dhabi National Oil Company (ADNOC), Saudi Aramco and Dubai government-owned ENOC.
Fuel prices have a significant impact on inflation in Kenya, which relies heavily on diesel for transportation, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
The state had last year said the deal would help reduce the cost of transporting oil to Kenya and the premium it pays to suppliers.
This came with 175-day credit terms, allowing the country to accumulate the dollars needed for purchases over time, rather than needing about $600 million a month to pay for imports.
Critics of the government have accused the oil import agreement, in which the government acts as a guarantor, of contributing to higher retail gasoline prices.
Gulf Energy Kenya, Oryx Energy Limited and Galana Energy Limited were the carefully selected local operations management companies to distribute fuel products to other oil companies throughout the duration of the deal.
However, Saudi Aramco dropped Oryx as a local diesel importer in a G-to-G deal in December last year and chose Asharamy & One Petroleum instead.
Local oil marketing companies did not immediately respond to requests for comment. However, the findings of the cost-of-service study go beyond the design of the government-to-government arrangement, saying it failed to create a mechanism that would allow end consumers to fully benefit from the extended credit period.
“If allowance is made for an additional 175 days of extended credit, the price differential drops to Sh0.42 per litre.
“However, the price increases used do not appear to be adjusted for the extended cost credit component. Rather, the much higher supplier premium is used directly to drive up prices,” the advisers said.
In their findings, the advisers noted that they could not make a detailed assessment of the commercial terms of the deal between the two governments because they were confidential.
“The original framework arrangements were for a duration of 270 days, or effectively 9 months, from their commencement date of 1 March 2023. It is understood that these contracts have recently been extended until the end of 2024.
“It was not possible to study the detailed commercial terms of the framework agreements between governments because we understood them to be confidential,” the report said.
The discoveries come at a time when fuel prices in Kenya remain the highest in East Africa, partly due to increased taxes on petrol and diesel.
Over the past year, the government has increased the value-added tax on fuel from 8.0% to 16%, and raised the road maintenance tax to Sh25 in July from Sh18 a litre. A litre of diesel was selling for Sh162 in Nairobi before the Gulf supply deal in February last year. It rose to Sh196.47 in January before falling to Sh171.60 this month on the back of a strong shilling, lower global prices and subsidies.
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