Fuel Price crisis: How Kenya’s subsidy system works.

The Energy and Petroleum Regulatory Authority (EPRA) is established as the successor to the Energy Regulatory Commission (ERC) under the Energy Act, 2019 with an expanded mandate of inter alia regulation of upstream petroleum and coal.

The functions of the Authority as provided in Section 10 of the Energy Act 2019 include:

Regulate generation, importation, exportation, transmission, distribution, supply and use of electrical energy with the exception of licensing of nuclear facilities.
Regulate importation, refining, exportation, transportation, storage and sale of petroleum and petroleum products with the exception of crude oil.
Regulate Production, conversion, distribution, supply, marketing and use of renewable energy.
Regulate exploration, extraction, production, processing, transportation, storage exportation, importation and sale of coal bed methane gas and other energy forms.
Regulate, monitor and supervise exploration and production of petroleum operations in Kenya in accordance with the law relating to petroleum, the regulations made there under and the relevant petroleum agreement.
Provide such information and statistics in relation to upstream (exploration and production) petroleum operations in Kenya to the Cabinet Secretary responsible for matters relating to petroleum as may be required from time to time.
Collect, maintain and manage exploration and production petroleum data.
Receive, review and grant an application for a nonexclusive exploration.

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How does Kenya get its fuel?

Like most of its East African neighbours, Kenya depends on imported refined petroleum products (petrol, diesel, jet fuel and kerosene) mainly from the Middle East. Oil marketing companies are the importers. The State estimates demand for the next import cycle and issues an open tender for the supply of petrol, diesel and kerosene.

The winner orders the products, which it stores and distributes via the network of the state-owned Kenya Pipeline Company to other marketers, according to demand quotas. The tender is only open to the country’s 93 oil marketing companies.

Small retailers get their fuel from the established oil marketers since the established marketers do not have a countrywide reach.

How are the prices of oil set in the country?

A few big firms are able to influence prices. In Kenya, about six marketers can influence prices. These are Vivo Energy Kenya, Total Kenya Limited, Rubis, National Oil Corporation of Kenya, Ola Energy Kenya and a conglomerate of 45 other companies.

A maximum price cap was implemented in 2011 by the Government; this was as result of the marketers raising the price of fuel in response to increases in global crude oil prices between 2007 and 2008. Ironically they did not reduce the price when international prices fell at the tail end of 2008.

Energy and Petroleum Regulatory Authority (EPRA) manages the price cap. It sets maximum pump prices every 14th day of the month for various towns and cities in Kenya. The regulatory price takes care of the international crude oil cost, exchange rate, transport, storage and the marketer’s margin.

It is important to note that the actual retail prices are set by individual firms based on their unique circumstances but they cannot exceed the regulator’s caps.

What is the stabilization Fund and how does it work?

The Stabilization Fund was envisaged in Kenya’s Price Control Policy, as a mechanism for cushioning the economy when global crude prices skyrocketed. The Fund became operational in 2021. It is meant to cushion consumers from unpredictable swings in global oil prices.

Without the Fund, the forces of demand and supply would push retail prices beyond the regulatory caps, making the business untenable for oil marketers. Compensation from the Fund to oil marketing firms is based on a certain percentage of their respective fuel costs.

The Fund became fully operational in April 2021. In particular, the Fund was to remain operational as long as international crude oil prices rose above US$50 per barrel. By early 2021, international crude oil prices had risen to $55 per barrel. From each litre of petrol and diesel sold by oil marketing firms, Kes 5.40 would go towards the stabilization Fund.

Oil marketing firms have often experienced stock outs due to a significant mismatch between demand (largely driven by panic buying) and supply. It would equally take a few more days to get their next supply, hence dry pumps for some days. In addition, these firms would not exceed their allocation of stock by government despite increased demand for fuel.

Increase in fuel prices?

The current regime is aiming to forestall fuel shortages by:

Increasing the capacity of the state-owned National Oil Corporation to store much more in fuel reserves. Such a reserve would stabilize supply in the event the private oil marketing firms engage in hoarding or opt to export their stock to the international market.
Scrapping the stabilization Fund, this, though legal, is not entrenched in the Kenya Energy Act 2019 or the Petroleum Act 2019. This means higher pump prices but supply might be much more assured.
Also as supported by International Monetary Fund (IMF) pushing for its scrapping. In a July report, the institution said National Treasury had agreed to do away with the subsidy programme and would be slowly pulling out and allowing local prices to reflect the market realities such as the high crude oil cost and the weakening shilling.