Finance and Energy officials have launched plans to renegotiate an intergovernmental agreement signed in March with the United Arab Emirates (UAE) and Saudi Arabia to supply petroleum products on credit, with less than two months to repay for the first time the amount accumulated during that period. About $3 billion (Sh420 billion) in debt.
The government sent a delegation from the Energy and Petroleum Regulatory Authority (Epra), the National Treasury and the Ministry of Energy, which had been in the UAE last week to negotiate easing of some terms in the intergovernmental agreement.
Kenya is expected to pay about $500 million (Sh70 billion) by the end of September, the first payment owed to UAE state-owned companies that have supplied oil products on credit over the past six months.
The intergovernmental agreement is expected to strengthen the shilling by easing oil marketers’ monthly scramble for the dollar, but the Kenyan currency has continued to weaken, averaging 140 per dollar compared with around 130 for the Kenyan currency. The agreement was signed in March.
“I want to reassure Kenyans who face the challenge of accessing dollars that we have taken steps to ensure that the supply of dollars in the coming weeks will be very different as our fuel companies will now pay for their fuel in Kenyan shillings,” President William S. Ruto said in March.
He later added that the shilling could fall to 120 shillings against the dollar in a few weeks.
“I’m giving you free advice. Those hoarding dollars may suffer. You better do what you have to do because this market is going to be different in a few weeks,” he said.
Energy Minister Davis Chichier told lawmakers at the time that the deal would ease pressure on local foreign exchange reserves.
However, some members of parliament’s energy committee pointed out that fuel could end up being more expensive and that delaying payments amounts to putting the pot on hold.
Reliable industry sources have now told the Sunday National that the government wanted to renegotiate some of the fixed terms of the agreement, which later proved costly due to falling oil product prices.
Epra director general Daniel Kiptoo said it was too early to reveal the outcome of ongoing negotiations, adding that it was “work in progress”.
“I’m still in the Middle East. Let’s respond when we come back on Monday,” Mr Kipto told reporters. Sunday country.
Fixed clauses in the deal that were supposed to cushion Kenya from volatile fuel prices have taken a hit as a drop in global oil product prices failed to get reflected at petrol pumps.
Companies that export fuel to the neighboring landlocked country have preferred to buy their products in Tanzania and ship them through Uganda in recent weeks, depriving Kenya of much-needed revenue.
“Even with the longer route through Uganda, you can make higher profits. The intergovernmental agreement is hurting us,” said an oil marketing company executive who asked not to be identified for fear of reprisals.
About 40 percent of the oil imported by Kenya is exported to Uganda, Rwanda, Burundi and the Democratic Republic of Congo, with thousands of traders and transporters employed in the supply chain.
In the old open market tendering system, Epra usually set local fuel prices based on international average product costs plus allowed importers freight and premium margins.
In this deal, however, state-owned Saudi Aramco, the Emirates National Oil Company (Enoc) and Abu Dhabi National Oil Company Global Trading Company (Adnoc) signed a nine-month agreement to supply oil to Kenya.
The two companies have finalized the terms of the commercial cooperation. They will transport 250,000 to 350,000 tons of gasoline and 330,000 to 380,000 tons of diesel per month. It will also import 80,000 tons of aviation fuel per month.
That left Kenya with no flexibility to negotiate cheaper fuel, while the shilling failed to appreciate against the dollar as expected.
Supplies have remained flat even as local demand for the fuel has fallen, leaving a glut in the market and unnerving confirming banks who fear they could lose money if imported fuel is not sold out.
KCB, NCBA, Absa Kenya, Stanbic and Co-operative, along with the African Export-Import Bank (Afreximbank), were selected as local lenders to issue Letters of Credit (LC) to Gulf suppliers.
By issuing a letter of credit, the bank undertakes to pay the supplier for the imported product if the local off-takers (Gulf Energy, Oryx Energy and Garana Petroleum) fail to pay for the fuel.
Banks are getting cold feet after a sharp drop in fuel demand, forcing the government to look for Middle Eastern banks to issue letters of credit, the sources said.
The Epra boss did not respond to our query on whether the UAE delegation had signed off on the new confirming bank.
Mr Kiptu also did not respond to a question from the Sunday National on whether the government had successfully negotiated a delay in the start of repayments for fuel supplies.
Kenya expects to pay $500 million (Sh70 billion) a month to Gulf suppliers after the first tranche begins in September.
Dealers said fuel demand fell as prices continued to rise.
John Njogu, chief executive and national coordinator of the Petroleum Exporters Association of Kenya (POAK), said demand had halved since value-added tax on fuel products was doubled to 16% from July 1.
“Since the new tax came into effect, our members’ sales are 30% to 50% of what they were before. People are not using their vehicles at all,” Mr Njogu told the media Sunday country.
He added that falling demand would only make the plight of retailers worse, with retailers incurring higher working capital costs every time fuel prices rise.
The operator is negotiating with Epra to review the Sh4.14 margins stipulated under the regulatory framework.
The last time its margins were reviewed was in 2018, when petrol was selling for about Sh90 a litre, while diesel was selling for Sh80 a litre.
Petrol and diesel prices have since climbed to Sh192 per liter and Sh176 per liter respectively, increasing dealers’ working capital needs without a commensurate cushion on their profits.
Dealers now say they want reimbursement for increased finance costs, electricity, transport, rent and staff overhead.
“Our membership is closing. If Epra doesn’t respond to our concerns, we will cease operations,” Mr Njogu said.
Additional reporting by Julian Amberko