Billions poured into projects to cut fuel cost but consumers yet to gain

oil tanks

A multibillion-shilling bid to relieve consumers from expensive fuel has failed to yield fruit in what remains unclear in the pump pricing calculations made by the Energy Regulatory Commission every middle of the month.

Since June 2018, Kenya Pipeline Company has commissioned two projects worth Sh57.3 billion with an expected direct benefit of reducing the cost of petrol, diesel and kerosene, but the regulator is yet to pass the gains down.

KPC Managing Director Joe Sang on Tuesday told the National Assembly’s Committee on Energy that its Sh48.4 billion new pipeline from Mombasa to Nairobi and the Sh5.3 billion spent on additional tanks in Nairobi had a direct impact on the cost of fuel.

“ERC has been compensating transporters at the rate of Sh1 per litre in the pump price since we had limited capacity on the pipeline. With this new line coming on board, effective September 2018, the ERC has removed the Sh1 and this has gone directly to the pump price. So that is a key benefit brought about by line five (the new 20-inch pipeline),” Mr Sang said.

The KPC boss also told MPs that the additional 133 million-litre storage at the Nanyuki Road depot has been able to cut demurrage charges by half apart from increasing the country’s security of supply from 12 to 16 days of cover.

Consumers pay up to a shilling per litre to cater for demurrage, which is compensation given to ship owners due to the delayed discharge of product from the ships.

Most of the delays have previously been attributed to lack of storage and slow pumping of fuel from Mombasa using the old 16-inch pipeline.

Mr Sang’s revelations that the demurrage charges had dropped from the monthly average of Sh154 million to Sh74 million in October negates the latest fuel pricing revision, which largely comprised October imports.

ERC increased the price of all the three products, with diesel, which fuels buses, trucks and farming tractors, going up by Sh3.11 to Sh112.83 and petrol used by motorists by 2.38 to hit Sh118.11 per litre and setting the stage for hard times for households. The higher cost of diesel is expected to cause a ripple effect across all sectors of the economy.

“The Free on Board (FoB) price of Murban crude oil lifted in October 2018 stood at $82.30 per barrel, an increase of 2.43 per cent from $80.35 per barrel in September 2018,” the ERC said in an explanation that also blamed the 0.28 per cent shilling depreciation over the period.

The upward revisions negate the relief expected from the multibillion-shilling investments in pipeline and storage projects and follows the last six months’ trend of price rises covering the entire period since the two projects were completed.

ERC, which had promised to respond to our queries on how the close to Sh4 million savings every month (since June) in reduced demurrage and saved transport costs have been accounted for and whether consumers should expect any relief at the pump, did not honour their pledge by the time of going to press.

The regulator, which uses the 2010 Energy (Petroleum Pricing) Regulations to price the petroleum products every month, has set bridging rates at Sh7.50 per kilometre per 1,000 litres plus VAT for transport from Mombasa to Nairobi, Nakuru, Kisumu and Eldoret.

That is why motorists in Mandera are now paying Sh130.97 per litre of petrol and Sh125.69 for diesel — the highest cost for fuel in the country — while those in Mombasa pay the lowest at Sh115.48 and Sh110.21 per litre of petrol and diesel respectively.

The new 450 kilometre Mombasa — Nairobi pipeline is expected to achieve its maximum flow rate of one million litres per hour from the current 800,000 litres per hour in a month’s time, with more expected relief on demurrage costs.

So lucrative was the demurrage compensation that Treasury Cabinet Secretary Henry Rotich proposed a 20 per cent tax on the demurrage charges made to non-residents in a bid to level playing fields with resident ship owners.

The charges, which amounted to Sh2.5 billion in 2016, have been an additional pain at the pump, with Kenya being a net importer of petroleum products since the collapse of the Kenya Petroleum Refineries Limited in 2013.

Proper vessel planning, fuel evacuation and storage hitches at the import terminals, for example, have been cited as among the contributors to the high demurrage, further complicated by the fact that under the Open Tender System (OTS) through which the petroleum cargoes are procured, it takes 30 to 45 days between placing an order and delivery of the cargo.

The oil marketers are also compensated for “pipeline losses” at a maximum allowable rate of 0.25 per cent and another 0.5 per cent depot losses, all of which are borne by motorists at the pumps.
Fuel prices have been on the rise since June when a litre of petrol in Nairobi cost Sh108.81 while that of diesel was Sh103.6.

Kerosene has experienced the sharpest rise from Sh84.1 per litre to Sh111.83 announced on Wednesday.

The introduction of the 8 per cent value added tax on petroleum products in September forced motorist to scale down their fuelling budget to a six-month low in September in a move that dims government plans to reap billions from the petroleum products to fund its budget.

ERC data shows that motorists purchased 105 million litres less of the two motor fuels, with diesel experiencing a bigger negative of 58 million litres in September. Petrol, which is largely used in private cars, recorded a sales drop of 46 million litres after the VAT kicked in.

Analysts say the drop in use of motor fuels have a longer ripple effect in the economy since fuel consumption has a direct impact on productivity.

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