Motorists have been overcharged approximately Sh16.4 billion or Sh2.70 per liter of fuel since Kenya opted for a government-to-government oil supply contract with three Gulf-based companies, boosting the earnings of three local companies at the expense of consumers.
Kenya signed a deal with Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company in March last year, moving away from an open tender system where local companies import oil on a monthly basis.
Now, a consultant appointed by the energy regulator has asked Kenya to end oil supply deals with three Gulf-based companies, as they are expensive compared to the fuel available through open tenders.
A leak report is seen by Everyday Business shows that three local suppliers, including Galana Oil and Gulf Energy, have failed to pass the benefits of the Gulf oil deal and pocketed outsized returns compared to the average margin in the previous open tender system.
The system was previously open to all retailers in Kenya, with the winner supplying the industry for two months and paying the cargo in hard currency within five days of delivery.
“The open tender system (OTS), through monthly competition and awarding of supply contracts, ensures price competition between suppliers which also ensures that the supply premium remains competitive. The OTS mechanism is therefore preferable,” said a report conducted by UK-based Channoil Consulting Ltd and Nairobi-based Kurrent Technologies Ltd.
“For the OTS mechanism, the average supplier premium for January – February 2023 is Sh4.51 per litre. For the government-to-government mechanism, the average supplier premium for June to July 2024 is Sh7.21 per litre, or Sh2 .70 per liter higher than the OTS mechanism for the sample month,” the report added.
The oil supply deal with the three Gulf-based companies is designed to manage demand for dollars and reduce the premium paid by Kenya to its suppliers.
Official data shows that Kenya consumes an average of 380.1 million liters of diesel, super petrol and kerosene per month.
This means that consumers have missed out on benefits worth Sh1.02 billion per month in the government-to-government oil deal or Sh16.4 billion since the start of the Gulf deal in March last year.
The Energy and Petroleum Regulatory Authority (Epra) commissioned a consultant to study the cost of fuel services coming from the UAE’s ADNOC, Saudi Aramco and Dubai’s government-owned refiner, ENOC.
Fuel prices have had a major impact on inflation in Kenya, which relies heavily on diesel for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
The country last year said the deal would help reduce the cost of transporting oil to Kenya and the premiums paid to suppliers.
It comes with credit terms of 175 days, allowing the country to build up dollars to buy over time, instead of needing about $600 million per month to pay for imports.
The oil import agreement, under which the government is the guarantor, has been blamed by government critics for contributing to the rise in the retail price of petrol.
Gulf Energy Kenya, Oryx Energies Limited and Galana Energies Limited are the local OMCs selected to distribute fuel products to other oil companies under the agreement.
However, Saudi Aramco dropped Oryx as the local diesel importer in a G-to-G deal in December last year and chose Asharami & One Petroleum instead.
A local oil marketing company did not immediately respond to a request for comment. The findings of the cost-of-service study, however, poke holes in the design of the G-to-G arrangement, stating that it fails to create a mechanism that would allow end consumers to benefit from a full credit period.
“If allowance is made for the benefit of an additional 175 days of full credit, then the price difference is reduced to Sh0.42 per litre.
“However, it appears that the price used does not correspond to the element of credit that is added to the cost. Instead, the higher premium of the supplier is used directly to increase the price,” said the consultant.
In their findings, the two consultants said they were unable to conduct a detailed evaluation of the commercial terms associated with the government-to-government deal due to secrecy and confidentiality.
“The original framework arrangement had a duration of 270 days, or effective 9 months, starting on March 1, 2023. It is understood that the contract was recently extended until the end of 2024.
“It has not been possible to examine the detailed commercial terms of the government-to-government framework agreement because we are made to understand that they are confidential,” the report said.
The revelations come as fuel prices in Kenya remain the highest in the East African region, partly blamed on increases in petrol and diesel taxes.
Over the past year, the government increased the Value Added Tax (VAT) on fuel to 16 per cent from 8.0 per cent and increased the road maintenance levy to Sh25 up from Sh18 per liter in July. A liter of diesel was sold at Sh162 in Nairobi before the Gulf supply deal in February last year. It rose to Sh196.47 in January before falling to Sh171.60 this month on the back of a strong shilling, falling global prices and subsidies.