Kenyan households are spending Sh881 more to buy 13 kg of cooking gas due to less competition in imports of the commodity, a new government-backed report has revealed.
A study on the cost of services for the supply of liquefied petroleum gas (LPG) by a consultant hired by the Energy and Petroleum Regulatory Authority (Epra) shows that the lack of competitive tenders for the delivery of LPG has resulted in Kenyans accessing a kilo. LPG at a wholesale price of Sh159.7, but the same price at Sh91.9 if the import window is opened to bid for all players.
This means that a household can pay Sh2,400 for 13 kg of cooking gas which currently sells for Sh3,200.
Currently, the import of LPG in the country is carried out by several players and without auctions, the system of Kurrent Technologies Ltd and Channoil Consulting Ltd- the company hired by Epra to conduct the study is flawed.
The two consultants proposed using the Open Tender System (OTS).
Under OTS, local companies bid to import oil on a monthly basis, with the lowest or winning bidder supplying the industry for two months and paying for the cargo within days of delivery.
The OTS system has been used to import fuel products like petrol and diesel until March last year when Kenya temporarily switched to a government-to-government deal where Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company supply the country with products.
A lack of supply to import LPG, a leaked report notes, has seen the product land in Mombasa at a higher than market rate.
This has reduced gas usage and increased charcoal consumption as more LPG traders shun Mombasa and move to Dar es Salaam for cheaper cooking gas.
While a kilo of LPG would land in Mombasa at Sh87 under the competitive import process, the product now lands at Sh135.3, a report on service charges in the supply of petroleum products in Kenya shows.
After landing in Mombasa, other shipments and gas handling charges push the wholesale price to Sh159.7 per kilo, a price that will drop to Sh91.9 a kilo if the import window is opened for all players to bid.
The draft report for Epra notes that if a ton of LPG lands in Mombasa at a price of $1,002.4, the cost will drop to $685.4 under the OTS, which will require infrastructure upgrades at the port of Mombasa.
“Our suggestion that the Landed Cost Mombasa is the quoted price is a premium to the Saudi contract price. So, in this case, the quote would be the CP (contract price) plus $101.4. (This reflects our expectation of the price),” the report notes.
Expensive landing costs mean a ton of LPG sold to wholesalers is $459.7 (Sh59,379) more than at OTS, a cost that is ultimately passed on to households.
The two consultants found that due to high prices in Mombasa, some Kenyan traders have sourced LPG from Tanzania despite thousands of households turning to charcoal to avoid expensive cooking gas.
“Market data shows that there is currently importation of materials by road from neighboring countries, especially from Dar es Salaam. This should not happen because Mombasa has better infrastructure for shipping and storage and Dar es Salaam is 400km further from Nairobi than Mombasa.
“There seem to be two explanations for this anomaly. The first is that the prices charged at the terminal in Mombasa are too high and the second is that unlicensed operators have found a way to smuggle gas across the border to avoid regulation. The first seems to be a more plausible explanation makes sense,” the report said.
The consultant recommended that Epra adopt an OTS system for LPG imports, which would open the market to competition and reduce prices. The report notes that under the OTS, the wholesale price of LPG will fall between 30 and 114 percent.
“It is expected that once the OTS is launched, the TGP (Terminal Gate Price) should be around CP (contract price) plus $140. This compares to the current terminal price in Mombasa of CP plus $200 for contracted customers and CP plus $300 for non-contracted customers ,” the report notes.
“The current TGP in Dar es Salaam with infrastructure, which is cheaper, Mombasa is CP plus $200,” he added.
The report notes that as a result of the increase in LPG prices in Kenya, more households are using charcoal for cooking, as LPG demand declines from 2021, a health hazard and deviating from the country’s goal of increasing LPG use to 15kg per capita. in 2030.
“Until 2021 (Kenya) looks good to achieve. However, the escalation of the war in Ukraine in February 2022 disrupted the LPG market and increased prices. This combined with the fact that there is a lack of competition or import regulations, resulting in higher prices than the competitive market that same,” the report said.
Demand for LPG is down from 373,865 metric tons in 2021 to 360,594 metric tons last year as more households use charcoal, with the cost of cooking using charcoal now being cheaper than LPG.
“Therefore, it is important to keep the cost of LPG cooking in the main urban market below the cost of charcoal cooking. To do this by keeping prices through the value chain as low as it would be in a competitive market, but ensuring that it will pay the necessary investment to increase the efficiency of the value chain and continue to grow in the market,” the report said. .
