Implications of Uganda’s decision to stop buying fuel from Kenyan firms

However, as only Kenya-registered companies are allowed to use the Kenya Pipeline Company’s (KPC) oil pipeline, UNOC will likely have to enter into a special arrangement with Kenya to enable it to use the infrastructure to transport its fuel.

“UNOC and Vitol Bahrain E.C have negotiated a five-year contract, and the partner will be financing the business by providing a working capital facility backed by its global balance sheet and working with UNOC to ensure competitive pricing of petroleum products,” said Minister of Energy and Mineral Development Ruth Nankabirwa Ssentamu. It is estimated that last year Uganda imported petroleum worth $1.6 billion

Uganda’s change of policy comes after Kenya decided to ditch competitive bidding for importation of the product, leading to fixed prices. Kenya in March ditched the Open Tender System (OTS) that has been in use for importing fuel for nearly a decade in favour of direct procurement under a government-to-government deal with Saudi Arabia and the United Arab Emirates (UAE).

This is a heavy blow to Kenya’s OMCs which have been supplying 90 per cent oil to Uganda through their associates there.

The firms have been earning billions of shillings in revenue from transiting fuel to Uganda, which will not only affect local jobs but also reduce tax revenue collection.

The transit fuel has also been a critical source of US dollars for OMCs which allowed them to better handle the dollar shortage that hit Kenya in recent years, especially last year.

An oil marketing company executive who spoke to Nation however said there is little risk of Kenya immediately losing its position as the transit route of fuel to Uganda as its main competitor Tanzania currently has no oil pipeline.

Uganda has further sidestepped Kenya and picked Tanzania to host buffer fuel stocks on its behalf to ensure stable supply in case of market disruptions. By June 2022, some 111 OMCs were operating in Kenya, according to the Energy and Petroleum Regulatory Authority (Epra), a majority of whom are small dealers who are not engaging in the transit business.

Vivo Energy Kenya is currently the largest oil marketing company in Kenya by market share and is the distributor of Shell-branded products in the country.

In the financial year 2021/22, Vivo had a market share of 23.83 percent, according to industry data from Epra. Others include Total Energies (17.3 percent), Rubis Energy (10.02 percent) and Ola Energy (6.82 percent).

Other significant players in the OTS include Oryx Energies, Be Energy, Tosha Petroleum, Galana Oil, Hass Petroleum, Gapco Kenya, Petro Oil, Fossil Supplies, Stabex International, Gulf Energy, and Lake Oil.

In the government-to-government deal, the three Gulf State-owned firms - Saudi Aramco, Abu Dhabi Oil Company (ADNOC), and Emirates National Oil Company (ENOC) – were given leeway to handpick local OMCs which would distribute fuel on their behalf.

Gulf, Oryx, and Galana were the local OMCs that were handpicked to distribute the fuel products to other oil companies for the duration of the deal.

Uganda said Kenyan OMCs were giving it second priority, threatening its fuel supply.

“Despite the price-competitive nature of the Open Tender System in Kenya and its relatively normal supplies, it exposed Uganda to occasional supply vulnerabilities where the Ugandan OMCs were considered secondary whenever there were supply disruptions,” said Uganda’s Minister of Energy Dr Ruth Ssentamu.

Further, both private and public fuel depots in Tanzania are much smaller and currently cannot support the storage required by UNOC which poses operational challenges.

Another blow to Kenyan OMCs is that the Uganda market has been a major source of liquidity, especially during subsidy regimes when fuel prices skyrocket forcing the government to step in to stabilize prices. 

In the fuel shortage crisis that hit Kenya between March and April 2022, oil companies were diverting most of their product to the export market which allowed them to collect cash up-front.

In contrast, selling the product locally was problematic for them from a cash-flow point of view as they would sell the product at zero margins and thereafter wait for months for compensation of the subsidy from the government.

This even forced the government to step in to enforce the 60:40 ratio, where firms were mandated to sell 60 percent of their stock to the domestic market and re-export only 40 per cent.

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