Kenya to pay oil marketing firms for not increasing April fuel prices

Kenya’s Ministry of Petroleum and Mining has agreed on a plan to compensate disgruntled oil marketing companies (OMCs) for the lower profit margins they made in April by not increasing pump prices.

This was in order to protect consumers against rising global crude prices, which are currently at $65 per barrel from an average of $39.68 per barrel in 2020.

Under the agreed plan, the oil marketers will be compensated based on the value of cargo volumes factored in the pricing formula for the April-May pump prices computation, with the refund rate being equivalent to the margin reduction per litre per product for pump prices in Nairobi for the period April 15 to May 14.

But motorists and households will still bear an additional burden of paying the oil dealers an extra Ksh0.5 ($0.0046) per litre of fuel of which the OMCs claim is the administrative cost of processing the receipt and disbursement of monies from the National Treasury.

This cost is expected to be factored in the May-June fuel pricing circle, according to the resolutions of a meeting held virtually on April 15 between the Petroleum and Mining ministry, Energy and Petroleum Regulatory Authority (EPRA) and the oil marketing companies.

“The administrative fee incurred by cargo buyers (OMCs) during this process is considered a prudent cost and shall be included in the import cost build of the Open Tender System (OTS) cargoes to be considered in the May-June pricing cycle and the OTS agreement to be amended to accommodate such situations in future,” according to the minutes of the meeting signed by the Principal Secretary in the Ministry of Petroleum and Mining Andrew Kamau and EPRA acting chief executive Daniel Kiptoo.

“The cargo importer (oil companies that won the tender to import petroleum products on behalf of the industry) shall net off Ksh0.5 ($0.0046) per litre, inclusive value added tax as administrative fee for the disbursement, documentation and processing activity.”

The cargo importer is expected to ensure that funds received are disbursed to cargo buyers (OMCs) within five working days of receipt.

The meeting was meant to deliberate on the petroleum pump price stabilisation for the period April 15-May 14. The importation of super petrol, diesel and kerosene into Kenya is undertaken through the Open Tender System (OTS) in accordance with Legal Notice No 24 of 2012.

The OTS mirrors the prevailing prices of petroleum products in the international markets.

Negotiations with the National Treasury to remit the margin compensation funds was to start on April 19 after the verification of the cargo volumes factored in the pricing formula for the April-May pump prices computation.

However, the Petroleum and Mining Ministry Principal Secretary Andrew Kamau and the acting Director-General of EPRA Daniel Kiptoo could not confirm the status of the payment as our calls and text messages to their mobile phones went unanswered

Last month, EPRA retained fuel prices at a 10-year high despite an increase in their landed cost, with the regulator cutting the oil marketers margins by about 30 percent to Ksh7.95 ($0.07) per litre of petrol from Ksh12.39 ($0.11) which is usually treated as fixed rate in the pricing formula.

Margins on diesel declined to Ksh10.08 ($0.09) a litre from Ksh12.36 ($0.11).

The margin adjustment left the fuel prices for the April 15-May14 period unchanged with EPRA arguing that the move was meant to protect the interests of consumers and investors in the petroleum sectors. As a result, a litre of petrol in Nairobi continued retailing at Ksh122.81 ($1.14), diesel Ksh107.66 ($1) and kerosene at Ksh97.85 ($0.91).

On March 14, increases were made to the price of super petrol by Ksh7.63 ($0.07) per litre, diesel by Ksh5.75 ($0.05) per litre and kerosene by Ksh5.41 ($0.05) per litre, the largest increase in the past 10 years setting the stage for increased cost of living and an economic slowdown due to increased transportation costs and increased input costs for manufacturers.

The huge increase in fuel prices was the fourth consecutive increase in four months, pushing motorists in Nairobi into buying super petrol at Ksh122.81 ($1.14) per litre, diesel at Ksh107.66 ($1) per litre and kerosene at Ksh97.85 ($0.91) per litre.

In Kenya, taxes and levies constitute about 49.98 percent and 43.94 percent of the total price per litre of super petrol and diesel respectively.

This compares unfavourably with Tanzania and Uganda where the cost of fuel is relatively cheaper due to less government taxes.

However, in Uganda the government announced its intention to increase the tax per litre of petrol and diesel by Ush100 ($0.02) in order to increase revenue in the next financial year (2021/2022), which will raise the tax on petrol to Ush1,450 ($0.4) per litre and Ush1,130 ($0.31) per litre of diesel.

The proposal will help the Ugandan government to raise an additional Ush196 billion ($54.7 million) in the 2021/2022 financial year.

In Kenya there are several levies and taxes that EPRA takes into account in its fuel pricing formula.

These include Excise duty, Road Maintenance Levy, VAT, Petroleum Development Levy, Railway Development Levy, Anti-adulteration Levy, Merchant Shipping Levy and the Import Declaration fee.

In Tanzania, government taxes on the price per litre of super petrol and diesel stand at around 40.72 percent and 35.39 percent respectively while in Uganda government taxes on the unit cost of super petrol and diesel are estimated at 34.02 percent and 27.78 percent respectively, according to a representation by EPRA to the Senate Standing Committee on Energy in March this year.