How supply inefficiencies are causing pain at the fuel pump

The sudden leap in fuel prices announced by the Energy Regulatory Commission (ERC), hitting a new high in over two years, has shocked many Kenyans.


The price of petrol crossed the Sh100 mark in Nairobi after ERC adjusted it upwards by Sh4.26 for a litre of super petrol, Sh5.03 for diesel and Sh3.75 for kerosene.

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Although the energy regulator attributed the rise to an increase in the landed cost of petroleum, which went up by 8.45 per cent for super petrol and 12.07 per cent for diesel, the consumer could have been saved much of the burden but for supply chain inefficiencies.

Poor vessel planning, fuel evacuation and storage hitches at the import terminals, for example, are among the factors contributing to high prices, which are passed on to consumers.

Such inefficiencies lead to high demurrage charges by ship-owners, who charge for any extra time spent at the port in breach of the contractual laytime.

The charges, which amounted to Sh2.5 billion last year, are claimed later and loaded onto monthly bills.

“If all of us played our roles as required by ensuring we have timely evacuations from oil ships, we would save the country millions in revenue and relieve consumers of these charges,” an importer told the Sunday Nation.

Industry data shows that although demurrage charges have been coming down over time, there is still a long way to go.

The charges, which average Sh180 million per month, were highest at Sh317 million in September 2016, attributed to flare-up of conflict in South Sudan which delayed evacuation of fuel.

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Ms Wanjiku Manyara, chairperson of the industry lobby Petroleum Institute of East Africa, said most of the inefficiencies responsible for high demurrage charges have been dealt with.

“Demurrage was a problem before deliberate interventions started bearing fruit. We have observed very good improvement. With the opening up of infrastructure (pipeline completion and commissioning, and Kenya Pipeline Corporation and Kenya Petroleum Refineries storage and other facilities) throughout this year, we should see a significant reduction in the short to medium term,” Ms Wanjiku noted.

Kenya imports 100 per cent of its refined petroleum products, besides supplying the same to land-locked neighbours like Uganda, Rwanda and South Sudan. When hitches occur in these countries, local consumers bear the blunt.

Open tender system

Planning is further complicated by the fact that under the open tender system, it takes 30 to 45 days between placing an order for petroleum and delivery. Demurrage charges are vessel specific. They are submitted to the regulator though an appointed supply chain management firm — SupplyCor Kenya Ltd.

SupplyCor general manager James Ondigo said the industry is reforming fast to bring down the charges through increased investment in storage facilities and better coordination of fuel supply. However, he said, some scenarios are beyond control.

“The solution lies in planning, since we use common storage systems which may not be sufficient for the industry. We have even gone to the extent of not allowing some vessels to call at our ports to avoid high demurrage charges.

But we have to be cautious to avoid undersupply. Some market eventualities like the infighting in South Sudan are hard to predict,” Mr Ondigo said.

Market regulator ERC prices fuel through a formula that factors in the prices of the product in the international market, the taxes involved and the returns for investors.

The formulae is based on a cost recovery principle, which captures the landed cost of the product, the levies and applicable taxes, demurrage costs, pipeline transport costs, road bridging costs and the margins for dealers.

Local taxes and levies are determined by the government and are largely constant.

They include excise tax, road maintenance levy (Sh18 per litre on both diesel and petrol), petroleum development levy (Sh0.40 per litre on all three), petroleum regulatory levy (Sh0.05 per litre on kerosene and Sh0.12 per litre on petrol and diesel), as well as railway development levy (Sh0.50, Sh0.52 and Sh0.51 on every litre of petrol, diesel and kerosene, respectively).

Demurrage fees stood at Sh166 million last month.