How new fuel deal will affect Uganda

The government’s move to grant a monopoly to Vitol, a Swiss-based Dutch global energy and commodities giant, to supply all petroleum products to Uganda, will have far reaching consequences to the country, including driving the cost of fuel higher.

This publication has extensively spoken to industry experts and players who say the step that the country is taking is replete with massive risks that need to be properly mitigated. Our sources requested anonymity to speak freely. They warn that rushing through the processes and lunging into implementation may result in many “regrettable and avoidable mistakes.”

One industry expert said the premiums of Vitol “will and cannot outcompete those of OTS/GtG (Open Tender System/Government-to-Government) in Kenya.” The result, the expert further noted, is an increase in the prices of products in Uganda that is directly proportional to the increased premiums.

He added: “There is undisputed benefit in competition. The lowest premiums will, therefore, come from a competitive bidding process. It is easy for Uganda to start its own OTS that incorporates demand for the forward market and, therefore, enable regular competition between suppliers on the margins.”

Tread carefully

Experts argue that producer and trader combination in the Kenyan GtG system is the best choice for maximising profits due to their efficient handling and logistics.

“Vitol’s historical performance and reputation needs to be verified. This can be achieved by conducting an objective and robust due diligence. We are not convinced that Vitol are the right partners and if they were, then a competitive process should confirm that,” an industry player said, adding, “Unoc (Uganda National Oil Company) should get into the business gradually by starting with the importation of part of the supply or one less risky product like JET A1 (a kerosene-type fuel compatible with most jet aircraft) and increase its portion over time.”

In any event, the experts warn, a monopolistic situation should be avoided at all costs, otherwise the desired benefits will never be realised. They have urged government to institute a committee of core persons who have a deep understanding of the business and the sector to further refine the current proposal and make recommendations that will definitely improve the current system and guarantee the desired benefits while insulating the country “from the obvious dangers of creating a statutory monopoly that includes an external broker on a key sector that has hitherto worked very well despite the many challenges it has faced.”

Murky waters

In July, this publication exclusively revealed plans to have Unoc exclusively source petroleum and related products from Vitol. Unoc will in turn sell to the more than 40 oil marketing firms in the country.

The deal, which has already been cleared by the Cabinet and now awaits an amendment of the law, was secretly structured. It was also neither advertised nor subjected to open bidding processes.

On October 25, Energy minister Ruth Nankabirwa said her ministry plans to amend the Petroleum Supply Act to support Unoc to supply all oil companies with oil.

“Effective January 2024, the oil marketing companies will be directly supplied by Unoc, which will improve security of supply and result in competitive prices,” she said.

Sources with knowledge of how the whole idea was conceived and has been executed thus far told this publication that President Museveni has been “sold on fear” to grant clearance to the deal.

“I can guarantee you, it will fail because of concentration (monopoly) risk; lack of economies of scale; inexperience of Unoc; and sabotage by the Kenyan system. Note that I have no personal interest in this; my interest is purely a national one,” an industry expert with no ties to the business told this publication , adding, “Mzee (President Museveni) is a proponent of integration. Why is he strongly convinced about disintegrating a tried-and-tested integrated fuel procurement system?”

The logical and most viable option, another source said, is for Uganda to be a party to the GtG agreement currently in place between Kenya and Saudi Arabia.

Under the GtG, Unoc alone or with another Ugandan oil company can be nominated as the agent(s) for Uganda like how Gulf, Galana and Oryx (Kenyan oil companies) are agents for Kenya, and Saudi Aramco is for Saudi Arabia.

The agents, the source explained, are entitled to a volume-based fee. Under the “risky monopoly” fuel supply arrangement that the government is trying to enact, Unoc will be earning a handling commission.

“Therefore, Uganda should formalise its participation in Kenya’s fuel procurement system instead of going it alone through Unoc and a monopoly supplier or even with multiple suppliers,” the industry expert advised.

Tricky undertaking?

On a monthly basis, Mombasa port receives eight to nine Long Range (LR1) tankers each of about 90,000 MT of refined petroleum products. Two of these (180,000 MT) are for the Ugandan market.

Another source said decoupling Uganda’s fuel imports from the tried-and-tested Kenya fuel procurement system will deprive Uganda of “economies of scale” hence a fuel price disadvantage to Ugandans.

The source said LR1s for Uganda cannot be procured at a lower price than the 8-9 LR1s or the residual 6-7 LR1s for Kenya and its remaining re-export markets. Any attempt to do so, the source explained, will put Uganda at a disadvantage and drive the cost upwards.

The source further explained that Unoc, a government-owned company, is being used to create a “pathway” for Vitol, a private company, to take over 100 percent of the Ugandan market without due process. The source warned that a trend is emerging from the Lubowa hospital, coffee monopoly scandals to fuel.

A separate source noted:  “Two monopolies are being created; not one. Vitol will first make its monopoly profit by being the only supplier of fuel to Uganda. Unoc will also make its monopoly profit by being the only importer (from Vitol) of fuel into Uganda. Unoc will sell the fuel to Shell, Total, etc. Shell, Total etc. will sell to the public.”

Reliance on Kenya

At least 90 percent of Uganda’s fuel imports go through Kenya’s infrastructure, which includes ports, depots and pipelines. Naturally, another source said Kenya will always give preference to receipt of Kenya’s consignments—hence exposing Uganda to periodic risk of security of supply.

Proponents of the deal say the creation of the monopoly will stabilise stocks and prices while opening a new revenue stream for the government. Those opposed, however, say the government can still generate the revenue through Unoc without exposing the country to the likely impacts of the new deal.

President Museveni made directives on the deal on February 27. Subsequent meetings were held between Unoc officials and Vitol.

Insiders say it is not possible to outcompete the Kenyan petroleum products supply system because it has been designed to be transparent and competitive. Interested Oil Marketing Companies (OMCs), which are businesses involved in the distribution, marketing, and sale of petroleum and petroleum-related products in partnership with their choice of global supplier bid to supply in an open and transparent system.

“This has guaranteed the low premiums that are quoted by the suppliers in comparison, for example, with the Tanzanian supply system where Vitol are a major player. The GtG arrangement has retained these elements, although in a more controlled manner that addresses Kenya’s other needs,” a source said.

The significant differences, they explain, are that the bids are for supply over a longer period instead of the previous one month. The added advantage of the nine-month credit facility with OMCs, this publication has been told, is paying for their requirements in the local currency.

Our sources explain that the competitiveness has not changed despite the higher premiums since the global suppliers are bearing the cost of financing and the risk of payment default while the Kenya government bears the forex risk previously borne by the OMCs.

“Kenya’s consumption brings significant economies of scale in sourcing. The consumption in Kenya is four times higher than the consumption in Uganda. Disaggregating Uganda volumes from those of Kenya by running a parallel supply system will disadvantage Uganda and result in a higher unit cost of sourced products,” a source said, adding that responsible authorities will prioritise the infrastructure for local supply in Kenya given that the product delivery operations are no longer joint and mutual.

Current status quo

Currently, the Kenyan system works with three reputable global suppliers who are not only traders but also producers. Conversely, the Tanzanian system works with multiple suppliers, among them Vitol. Uganda, on the other hand, plans to implement a monopolistic system that involves only one trader, who is not a producer.

Furthermore, the Kenyan system has at least three OMCs who have been in the business for many years, handling the operational aspects while Uganda wants to implement a system that allows only Unoc, who are newcomers just getting into the business.

Creating a monopoly that partners a broker with a newcomer is too risky for the country. Industry experts advise that keen attention needs to be paid to the following issues that need to be considered in reaching the final decisions.

They argue that Vitol does not bring in any new value that cannot be achieved within the current system. Further, Uganda’s security of supply is not guaranteed with single sourcing through one supplier, who is a pure trader/broker.