Opinion  :: Columns  :: Nairobi Notebook


Will petroleum short-change Kenyans?
Eric Ombok
Published: 09-SEP-06

It is about two months since Kenya’s Finance Minster, Amos Kimunya, increased the fuel levy per litre of petrol from $0,08 (Ksh5,80) to $0,12 (Ksh9) by introduction of an additional tax of $0,04 (Ksh3,20) per litre on June 15 when he delivered his maiden speech.

I will not support or condemn his decision, but will try and provide you with the information to arrive at objective conclusions. But before I do that, I wish to state that Kenya finds itself in the unprecedented situation where the price of one litre of petroleum is more than a dollar.

The minister scrapped the requirement for road licences on motor vehicles from which the government has been collecting $8,18mn (Ksh600mn) per annum. In its place he increased the fuel levy and estimated that tax collection under the levy will increase from $122,74mn (Ksh9bn) to $204,57mn (Ksh15bn). These funds are usually meant for repair and maintenance of roads.

Let me now turn to the more important facts and figures. As of 1998, Kenya was the region’s largest oil consumer and Africa’s 9th largest net oil importer. Kenya imports petroleum worth $4,19bn per annum. Domestic annual consumption of petroleum products is, on average, 2,4 million tonnes. This is comparatively low, partly due to the relatively small economy, which is heavily dependent on labour-intensive, rain-fed agriculture.

Actually, the main source of energy in Kenya is wood fuel, which accounts for about 70 percent of all energy consumed. Petroleum accounts for only 21 percent, hence there is plenty of room to increase consumption of petroleum products, which grew from 1,931 million tonnes in 1990 to 2,986 million tonnes in 2000.

Over the same period, crude oil imports rose from 2,178 million tonnes to 2,448 million tonnes. Imports of refined petroleum products rose from 1,326 million tonnes in 1990 to 1,388 million tonnes in 1998, mainly due to deregulation in 1994.

The number of companies licenced to conduct oil-trading business has increased since deregulation in 1994. Before then, only seven oil companies were involved in oil importation and marketing of petroleum products.

The same companies today control over 75 percent of the domestic petroleum distribution and retail market products. There are about 10 new entrants who are active in importation and distribution of petroleum products.

Import duty and other taxes applied to the petroleum products accounted for about 10 percent of total government revenue. Value Added Tax (VAT) accounts for over 70 percent of all revenue raised from oil taxes, import duty accounts for 25 percent and the fuel levy accounts for the remainder.

A report by the Institute of Policy Analysis and Research (IPAR) says, “The oil product pricing had an overall effect upon supply since pricing policy was not developed on sound economic criteria. Pricing was viewed by industry players as a tool to manipulate demand to cope with short-term imbalances.”

With the date of completing a $300mn tax-free port in Djibouti only 17 months away, fears are quietly being raised by Kenyan oil marketers that the Kenyan consumer will not share in the benefits of the project.

The free port being constructed by the Dubai-based Emirates National Oil Company (ENOC) is expected to be in place by 2008. Most oil imports from the United Arab Emirates will now be sourced from nearby Djibouti, since the free port will also have the capacity to handle oil tankers and container ships.

The Mombasa-based Kenya Petroleum Refineries Limited (KPRL) operates as Kenya’s only oil refinery. It handles oil primarily from the United Arab Emirates. The government charges $4 (Ksh288) per barrel of crude oil refined at KPRL. Every month, the oil marketers import one shipment of 45 000 tonnes of crude oil and another 45 000 tonnes of refined products, the latter of which includes diesel and super/unleaded fuel.

The Djibouti free port has the potential of reducing the unit cost of a barrel of oil for Kenya to below $50. Currently, the unit cost runs above $60. Mombasa could further lose a large proportion of its business, especially to Tanzania, as hinterland countries such as Uganda and even Rwanda will prefer to import their commodities cheaply through the Dar-es-Salaam port.

This is particularly real for the Ugandan situation, where ENOC has a fully-fledged distributor for the market. Already exports to the neighboring landlocked countries have been declining over the years due to several inefficiencies in our petroleum industry.

Transportation of oil products from Mombasa to Nairobi is done primarily through a 450km long, 14-inch diameter pipeline whose capacity is 2,6 million tonnes. In 1994, a 446km long eight-inch and six-inch pipeline from Nairobi to Kisumu and Eldoret was also commissioned. The current installed pumping capacity is 44 000 litres. About 55 percent of all oil products moved in the country is transported through the pipeline. Kenya Railways transports about 20 percent and the remainder moves by road.

With these remarks, I now rest my case.

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