Fuel crisis sign of failed government

Corruption, negligence, poor management and harsh taxes are to blame for the ongoing fuel crisis, say oil industry workers.

Public transport vehicles (matatus) at a Nairobi fuel station.

Public transport vehicles (matatus) at a Nairobi fuel station.

For many years, there was little expansion of storage and oil transmission networks. At Kipevu oil terminal in Mombasa, storage tanks built more than 20 years ago have not been extended.

Over the past five years, heavy demand from Kenya, Uganda, Rwanda, Southern Sudan and the Democratic Republic of Congo has stretched storage capacity to its limits.

Oil shortages have become so bad that unless remedial action is taken, flights at the Jomo Kenyatta International Airport will soon be grounded.

The oil pipeline from Mombasa to Nairobi, managed by the state-owned Kenya Pipeline Corporation (KPC), was recently upgraded at a cost of billions of shillings. The upgrade was supposed to enhance capacity from 440,000 cubic metres to 880,000 cubic metres. President Kibaki himself commissioned the upgraded system just weeks ago.

Its now been revealed that in spite of the billions spent on the upgrade, KPC only manages 550,000 cubic metres on a good day. Rampant power blackouts, system breakdown and vandalism of the pipeline means that the maximum 880,000 cubic metres flow is unlikely to be achieved.

A section of oil workers who talked to the Nairobi Chronicle say that the statutory requirement that oil companies process crude oil at the Changamwe Oil Refinery is a major contributor to fuel shortages. The colonial era facility is so derelict that major oil companies have pulled out, leaving their stake to the government. Changamwe is prone to breakdowns, and it cannot process unleaded petrol and low-sulphur diesel.

“Kenyans don’t know that they are buying leaded fuel mixed with imported unleaded fuel because our refinery cannot produce unleaded,” discloses an oil worker. And because Changamwe produces diesel with high sulphur content, its product has to be ‘blended’ with imported diesel in order bring down sulphur to acceptable levels.

“This refinery should be shut down and a new one built from scratch,” concludes the oil worker.

But the government insists that Changamwe is viable and has invited Libyan investors to rehabilitate the refinery. Apparently, the government lacks the massive funds needed for upgrading.

The oil industry says the imposition of advance tax by the Kenya Revenue Authority has worsened a bad situation. KRA introduced advance tax as a means of curbing the dumping of duty free fuel meant for export into the local market. With this measure, KRA collects taxes at the port of Mombasa before fuel is distributed to consumers.

In effect oil companies must pay billions of shillings to the KRA before they are allowed to sell. Consequently, they must borrow to pay the tax. When advance tax was introduced, the price of fuel immediately shot up by Shs3 a litre due to interest payments for tax loans. In a global financial environment where credit is hard to come by, oil companies will find it challenging to borrow to pay advance tax. Already, one oil company – Triton Petroleum – fell into receivership this December.

Incidentally, Triton is said to have hogged up more than half the storage capacity at Kipevu even though the company has a meagre 4% market share. The hogging of space has denied other oil companies storage, forcing oil-laden ships arriving at Kilindini to drop anchor in the high seas while waiting for the Kipevu tanks to be emptied. Of course, the shipping companies impose delay surcharges on oil companies and this cost is passed to consumers in the form of high fuel prices.

Arbitrary enforcement of standards by the Kenya Bureau of Standards (KEBS) and the KRA are adding to the woes afflicting the oil industry. In November, KEBS turned away a gas ship claiming that the gas was, “below standard.” The move, which caught importing oil companies unaware, resulted in a month long shortage of LPG in the country. Industries cut production as households turned to charcoal for their cooking needs.

“Nobody knows which standards KEBS and KRA are imposing,” says an oil industry insider, “the rules change everyday. What is legal today may become illegal tomorrow without any communication or consultation. Its a very unpredictable working environment.”

Corruption is a major cause of the worsening oil shortages. Like everything else at the port of Mombasa, shady deals are common during the import clearing process.

The management of KPC is influenced by political horse-trading, meaning that top executives at the corporation may not be fully conversant with the dynamics of the international oil market. As the industry struggles with shortages, KPC is busy investing in offices and gymnasiums.

The fact that importation of oil is managed by a committee in the Ministry of Energy doesn’t make matters any better. A fully, liberalized environment perhaps would improve efficiency instead of the current regimen of a half-liberalized, half state-controlled industry. As though that were not enough, some major oil companies are owned by politicians.

In spite of the bad situation, the government plans to micro-manage the oil industry. From January 2009, price controls may be imposed to “protect consumers from exploitation by multi-nationals.” The government is also encouraging state-owned National Oil Corporation of Kenya (NOCK) to expand its operations in retailing and distribution of fuel though its prices are the same as those of multinationals.

As Kenya’s oil industry gets chaotic, multinationals are deciding to leave. The ruling elite are reportedly salivating at the prospects of grabbing huge chunks of the lucrative oil market but it is the ordinary consumers who will pay through the nose for scarce fuel.

Indeed, as Kenya’s second president used to say, “bad politics equals bad life.”

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