PRESENTATION TO THE 11TH UNCTAD AFRICA OIL, GAS, TRADE

AND FINANCE CONFERENCE

THE OIL TENDER SYSTEM IN KENYA: CAN IT MEET THE

DEMAND?

Mr. Peter G. NduruPetroleum Consultant

Ministry of Energy Kenya

NOT AN OFFICIAL UNCTAD RECORD

1. Background

Kenya imports all its petroleum requirementsPrior to 1994 the Kenya petroleum refineries limited (KPRL) was fully protected through the “white oil rule”Crude was processed at KPRL to meet all the while oil requirementsTo balance the demand barrel with the refinery yield surpluses were exported and deficits imported

2. 1994Partial deregulationPrice controls removedKPRL Base Load was introduced to ensure production of 28,000 tonnes of LPG p.a. as there was no alternative supply mechanism KPRL was protected at a minimum guaranteed throughput of 1.6 million tonnes p.a. (Base Load) to be shared among the licensed importers pro-rata their market shareSuspended duty was introduced on refined product imports as additional protection for KPRL

3. New Entrants

After deregulation Ministry of Energy started licensing new entrants to enter the marketThe new entrants faced problems in accessing crude to meet base load requirementsThe majors also posted high crude price premia making them more uncompetitiveThis resulted in frequent defaults in meeting the base load requirements

4. Legal Notice No. 197 of 28th November 2003 issued under the Petroleum Act, Chapter 116 of the Laws of Kenya

Minister to determine amounts of both crude and refined products to be importedEstablished the Open Tender Systems (OTS) for both crude and refined products All licensed importers are required to use the OTS for crude oil70% of the balance of demand is imported through the OTS as refined products

5. Open Tender Systems

There are two tender systems arrangements: crude and refined productsAll license importers must participateSellers are same as BuyersProcedures, rights and obligations for all parties are articulated in two signed agreements Penalties are provided for defaulting (e.g. for late/non-payments etc)

6. Operations of the Open Tender System

6.1 CrudeBase load is allocated per company per quarter pro-rata the markets sharesKPRL schedules crude importation programmes per the processing agreement setting crude quality and import date rangesMinistry of Energy calculates each company’s participations per each cargoTenders are called two months in advanceWinning tender price is lowest premium plus freight above Official Government Selling price (OSP) for month of loading.

6. Operations of the Open Tender System (continued)

6.2 Refined products Supply coordination office calculates projected imports monthly in advance by product/quality indicating date rangeKenya Pipeline Company (KPC) confirms availability of both ullage and JettyApproximately loading date range is fixed by having predetermined sailing times from different load ports to MombasaTenders are called one month in advanceWinning tender is lowest premium plus freight above Platts quotations average for five days around Bill of Lading date.

7. Year 2006 OTS performance

PMS JET AGO MURBAN ARAB MEDIUM

TOTALS

Quantity(000’mt)

121.8 339.6 425.2

1280.0 320.0 2486.6

Average tender premia ($/mt)

46.90 27.76 32.76

11.21 19.92

Average winning premia ($/mt)

37.54 19.53 21.26

7.78 17.78

Savings ($/mt)

9.36 8.23 11.5 3.43 2.14

Savings (million $)

1.14 2.80 4.89 4.39 0.68 13.90

8. Advantages of the open tender system

Country enjoys economies of scale on freight and premiumsAccessibility of crude/refined products by all licensed companies at market pricesEnhanced competition by availing crude and products to all companiesSmooth supply mechanism for petroleum in the countryCoordinated utilisation of import facilities resulting in reduced demurrage chargesSavings in overall oil import bill (2006 estimate at US $13.9 million)

9. Challenges

Fluctuations in international crude prices resulting in defaults by some companies. Buyers tend to default when prices are falling

Inability of KPRL to add value and meet product quality specification

Incapability of KPC’s facilities to meet demand

Exclusion of demand volumes for other countries importing through Kenya. This limits the optimisation of the import jetty/tankage usage.

YES !!! The oil tender system can meet current and future demand in Kenya