Oil and Gas: The Challenge of Protectionism in Kenya

Posted on June 24, 2014

By Caroline Katisya-Njoroge, Company Secretary, Kenya Petroleum Refineries Limited, Mombasa

Introduction

The current global financial crisis has caused many countries to consider protecting their industries and economies against external competition. The oil and gas industry is no exception. The East African region like any other economic block has for several decades employed protectionist policies. Although these may not be similar to the trade barriers being debated in more developed countries, they bear some consideration.

East Africa is totally dependant on imported crude and refined petroleum products mainly from the Middle East region. Recently, deposits of 400 million barrels of hydrocarbons was discovered in the Lake Albert Basin in Uganda and a few years back large deposits of natural gas was discovered in the Songo Songo region of Tanzania. Exploration efforts continue. In the meantime the East African countries depend on oil imports as commercial extraction of the deposits is expected to start in the next five or so years. The downstream [1]business continues to be dominated by companies affiliated to multi nationals. During the high crude oil prices in mid 2008, the dominance of multi – national companies was brought under sharp focus as consumers protested against the high pump prices. In view of the above, the East African governments through various policies, regulations and laws have always attempted to protect the local market.

Legislative Framework

In Kenya the energy sector is governed by the Energy Act No. 12 of 2006. This legislation replaces the Petroleum Act and Electric Power Act which were repealed. The Energy Act is a comprehensive legislation that encompasses the petroleum and natural gas, electrical energy and renewable energy sectors. Statistics show that Kenya relies on biomass (wood fuel et al) to provide 68% of its energy needs, 22% is obtained from petroleum products and 9% from electricity.

The Energy Act establishes the Energy Regulatory Commission (ERC) as the regulator of the energy sector. The ERC has several functions as set out in the Act which include regulation of importation, exportation, transportation, refining, storage and sale of petroleum products, protecting consumer, investor and other stakeholder interests and monitoring fair competition in the energy sector. The Energy Regulatory Commission was established in 2007 and is in its nascent stages.

Price Control

The ERC in line with its mandate has recently embarked on drafting regulations to control pump prices. The Energy Act requires all proposed regulations to be recommended by the ERC to the Minister for Energy after consultations with the public. Although the National Energy Policy of 2004 states clearly that government will let market forces determine prices, during the Parliamentary readings of the Energy Bill a last minute clause was inserted in section 102 giving the Minister for Energy power to make regulations determining the retail prices of petroleum and petroleum products. Accordingly the ERC in line with its function of protecting consumer and stakeholder interests has recommended regulations that will control pump prices.

The regulations propose a formula for pump prices which incorporates the crude or refined product prices, freight, local transportation costs, financing, insurance, the refinery processing fees, taxes and a profit margin. The proposed pump price regulations have attracted resistance from oil marketers who would prefer to have the market forces and competition control pricing. The regulations have been viewed by economists as taking the country back to the pre-1994 days before the industry was liberalized. There is mention of a possible suit by wholesalers who claim that the Energy Act only empowers the Minister to determine retail prices and not wholesale prices as the regulations propose to do.

Protection of supply

Kenya is the only country in the East African region with a refinery. The Kenya Petroleum Refineries Limited was established in 1960 and runs a refinery in Mombasa, close to the port. The refinery is a processing plant which turns crude oil into finished products such as gasoline, kerosene, LPG, fuel oil, bitumen and other products. The refinery in Kenya is a simple refinery. This means that it cannot refine the residue of its processing products unlike more complex refineries which are able to extract valuable products from their residue and hence improve their margins. The refinery processes about 50 per cent of the fuel supplied in Kenya. This has been enabled by section 31A of the Petroleum Rules and Ministerial regulations which require all oil marketers to process a share of 1.6 million tones of crude at the refinery. The oil marketers process the crude in accordance with their market share. Due to the age of the refinery the products produced from the refining process are more of the less desirable fuel oil than the more profitable gasoline. The refinery however is able to provide the country with half the demand for LPG and modest amounts of kerosene and jet fuel. This cushions the country against delayed imports of refined products and sudden global price increases. Calls have been made to do away with the refinery due to its inefficiencies and instead have the country rely on imported refined products, but these calls have been resisted as a planned upgrade will guarantee the refineries efficiency. The National Energy Policy of 2004 which governs the sector clearly states that one of government’s objectives is to remove non tariff barriers to entry into the market by removal of the requirement for minimum crude processing requirements. Once the refinery has been modernised it is expected that this policy will be fully implemented.

The importation of crude and refined product is undertaken through the open tender system which is a procurement system that requires an oil marketer to bid for the supply requirements for the entire market. For an oil company to participate in the open tender system it must be licensed and meet the conditions set by the ERC. The successful bidder then imports and sells the product to the other oil companies as per their share of the market. The quality and quantity of products and their pricing is closely monitored by the Ministry of Energy. The importation of petroleum products through the open tender system is regulated by section 31A of the Petroleum Rules, Legal notice No. 197 of 2003 and the tender terms and conditions for the delivery of crude oil into Kenya. The open tender system ensures supply of product. It also ensures that products are imported at the lowest bid price and that the price is not subjected to fluctuating international market prices.

The National Oil Corporation of Kenya (NOCK) was set up by the government in the 1970s as a response by government to supply problems and price hikes experienced in the mid seventies. NOCK was initially an upstream enterprise but now undertakes downstream activities. NOCK is fully owned by government and manages and advises the government on exploration efforts in the country in accordance with the Petroleum (Exploration and Production) Act. The company owns over sixty seven stations and is in the process of bidding for some of the Chevron stations as Chevron departs from the Kenyan market. NOCK‘s mission is to take control of a considerable share of the market so that it can have an influence on fuel prices for the benefit of consumers. All this is undertaken under the watchful eye of the Monopolies Commission which limits the market share of any one oil marketer so as to encourage competition. NOCK has currently been gazetted to import 90 days strategic stocks for the country for the next three years. This will ensure that the country is secure against the vagaries of the global market supply situation.

Conclusion

Various mechanisms are in place to protect the Kenyan populace from the sway of global fuel prices and supply problems. The depressed international crude oil prices are expected to have an impact on supply. The dependence on oil imports and the delayed modernization of the refinery amongst other factors continue to expose the Kenyan petroleum sector to the ongoing world economic crisis. The energy sector is key to the development of the country and continued protection however unfashionable may be required particularly during these difficult times.

References

  1. Business Daily, Nation Newspapers, ‘ERC formula for fuel prices raises queries’, Mungai Kihanya, 4th March 2009
  2. Energy Act, Laws of Kenya
  3. East African Community Secretariat, Strategy for the Development of Regional Refineries, February 2008
  4. Legal Notice No. 197 of 2003
  5. Legal Notice No. 31 of 2006
  6. Legal Notice No. 137 of 2007
  7. Misc. Civil Application No. 1638 of 2004 Total vs. Ministry of Energy (judicial review proceedings arising from the implementation of the open tender system)
  8. National Oil Company of Kenya website http://www.nockenya.co.ke
  9. National Energy Policy, 2004, Republic of Kenya Sessional Paper No. 4 on Energy, 2004
  10. Petroleum Exploration and Production Act, Laws of Kenya
  11. Petroleum Insight, The Magazine of the Petroleum Institute of East Africa, Jan-Mar 2009

[1] Downstream refers to marketing of finished products, filling stations etc. as opposed to upstream which refers to exploration and crude production from wells.

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