Kenya Risks Gasoline Shortage, Higher Prices From Next Month

Kenya may face a “spike” in gasoline costs and a shortage next month because of a dispute between fuel retailers and the country’s only refinery, said Vivo Energy Kenya Ltd. Managing Director Polycarp Igathe.

Ten fuel-marketing companies have refused to adhere to a rule that they purchase 40 percent of their fuel needs from the refinery, the Oil Industry Supply Coordination Committee said in a letter sent to Kenya Petroleum Refineries Ltd., or KPRL. The April 19 letter from the committee, which represents companies including KenolKobil Ltd., Total Kenya Ltd. and Nairobi-based Vivo Energy, the three biggest fuel suppliers by market share, was forwarded to Bloomberg by two of its members.

From July 1, “fuel supply into Kenya is at risk and perhaps supply costs will spike due to an increase in demurrage costs as all players import their product needs,” Igathe said in an interview on June 14 in Nairobi, the capital. Offloading at the port in Mombasa may be delayed as multiple companies import instead of only KPRL, he said.

Kenyan fuel retailers want KPRL to stop importing crude and selling them the refined output because equipment at the 50-year-old facility is outdated. Inefficiencies at the refinery mean it costs petroleum companies 10 shillings (12 cents) per liter more than importing it themselves, according to the committee.

“If you don’t pick from KPRL you make more profit than the competitor because KPRL supply is expensive” Igathe said. “It is unfair for KPRL-compliant oil marketers to make losses for obeying the law.” Vivo is a licensee of The Hague-based Royal Dutch Shell Plc, according to its website.

Closure Threat

Last month, Kenya’s Energy Ministry threatened to close the refinery unless it details a plan to finance an upgrade. Workers at the plant held a strike last week over concerns that they may lose their jobs. Losses at the facility, which is managed by Essar Energy Plc of India in a joint venture with the government, have cost the state 13.1 billion shillings over the past 28 months, according to the ministry.

“In response to that letter, the oil-marketing companies, the Ministry of Energy and KPRL have agreed that the companies continue uplifting whatever stock we have bought up to June,” Managing Director Brij Mohan Bansal said by phone. After the stock of crude oil purchased by the refinery is finished “the government has to think of what will be done,” he said.

The refinery has a processing capacity of about 80,000 barrels per day, according to data compiled by Bloomberg.

Raising Finance

KPRL said in April its considering raising $1 billion of debt and equity for a planned upgrade of the facility. Renovations at the Mombasa-based refinery will increase processing capacity to 4 million metric tons by 2019 from 1.6 million tons now and improve efficiency, it said.

The upgrade has been delayed by at least three years. In April 2011, the government said it expected work to be completed by 2015-16.

Under the merchant model, the refinery began sourcing and processing its own fuel and selling it to oil marketers. Previously, under the toll system, it refined products bought from the fuel distributors and sold it back to them for a fee.

Imports of refined petroleum rose to 2.8 million metric tons in 2012 compared with 2.24 million tons in 2011 as imports of crude dropped as the refinery was being converted to a merchant facility, according to the Kenya National Bureau of Statistics’ 2013 economic survey.

The Energy Regulatory Commission, the industry regulator, reviews retail prices every month and set pump prices for gasoline at 108.18 shillings per liter on June 14.

Kenya’s shilling declined as much as 0.2 percent and traded unchanged at 85.65 a dollar by 11 a.m. in Nairobi.

Before it's here, it's on the Bloomberg Terminal.