Kenya's oil sector on edge amid escalating US-Israeli war on Iran

Kenya could be staring at a fuel supply crisis if the war launched by the US and Israel against Iran persists.

The conflict could throw the economy into a full-blown crisis and is already threatening higher pump prices, but also disruption of supply chains, high cost of essential goods and a strain on the country’s foreign exchange reserves. 

Analysts warn that a prolonged crisis could hit the country’s economy hard in the coming months but also note that Kenyans could start to feel the impact at the pump in April following the surge in crude oil prices in the last week.

The cost of murban crude has rallied to $103 per barrel this weekend from about $70 before the US and Israel launched the attacks, and Iran retaliated.

Kenya, which relies solely on fuel imports, has failed to invest in strategic oil reserves despite requirements by the law, which analysts say could offer a degree of comfort by cushioning from a sudden spike in prices and even stave off shortages.

Strategic reserves are giant storage tanks that can hold petroleum products that are then tapped in case of emergencies.

The Energy and Petroleum Regulatory Authority (Epra) on Thursday assured Kenyans of security of supply, noting that the contracts that Kenya signed with Gulf oil companies under the Government-to-Government (G-to-G) oil deal obligated them to keep bringing petroleum products. “We have contacts with our existing suppliers who have confirmed that they will be able to meet all their obligations. This is one of the benefits of entering into an arrangement with state-owned entities and also one of the credences of this transaction (G-to-G) that the country is in,” said Daniel Kiptoo, director, general Epra.

“The planned cargoes that we have scheduled in the course of this month through to the start of April are firm cargoes. And we hope that this continues going forward, recognising that this is a very fluid situation that we’ll continue to monitor on a day-to-day basis.”

The government in March 2023 signed the deals with Saudi Aramco, Abu Dhabi National Oil Company (Adnoc) and Emirates National Oil Company (Enoc) for the supply of diesel, super petrol and kerosene on an extended credit period. The deal, which was supposed to reduce the local oil industry’s demand for the US and stabilise the shilling, is expected to run to the end of 2027. 

Kiptoo also said pump prices that will be announced next Saturday will not be affected by the conflict, which started on February 28.

Epra computes pump prices based on prices of fuel delivered into the country between the 9th and the 10th of the preceding month, which means the retail prices announced on March 14 will be based on fuel brought in early February. Analysts, however, see prices going up in subsequent months, including the April-May pricing cycle, whose prices will be based on current prices, with Murban crude oil prices having already gone up by over 42 per cent to $103 per barrel on Saturday.

Petroleum Outlets Association of Kenya (POAK) chairman Martin Chomba warned that while the impact might not be immediate, Kenya might start seeing higher costs of fuel prices soon.

“I do not think there is an immediate cause of concern for Kenya because of the arrangements that we have,” he said.

“But when you look at it from a geopolitical angle, our fuel passes through the Strait of Hormuz… Iran has sunk a few vessels, and vessel owners are sceptical, and if this is prolonged, then we are definitely going to feel the heat.”
“We might be affected not because we cannot buy fuel or because the procurement system is not working, but because of matters that are out of reach for the government and its partners. If you cannot pass through the Strait of Hormuz, you have to use longer routes, which might mean a delay.”

He explained that Kenya largely consumes murban crude. It is not just Kenya and the region that use Murban crude, but 20 per cent of global oil goes through the strait that has now been closed. 

“Our fuel security is in the hope that this conflict does not go beyond what was expected to be a short-lived situation. If it prolongs, everybody must make contingency plans. We had better start making these contingency plans. Before the stocks that the government is talking about are depleted, we should know what we need to do to guarantee security of supply,” he said.

“We cannot sit and hope that this will ease off in a few weeks.”

Chomba also said the lack of strategic oil reserves in Kenya is a major concern. Had Kenya taken the issue of Petroleum Strategic Reserves seriously, he noted, there would be a level of comfort, as the reserves would be able to help absorb any shocks that could result from a conflict such as this and protect the economy in case the matter persisted.

The government has for years been planning to set up strategic fuel stocks and at some point mandated the National Oil Corporation (Nock) to go about acquiring and maintaining the reserves that could last the country up to 90 days. The fuel would be stored by the Kenya Pipeline Company (KPC). “We do not have strategic oil reserves. We have a law that requires the Ministry to provide for strategic reserves, but this has never happened. The Petroleum Act of 2019 requires the country to have strategic reserves that would last at the very least 90 days. But today, the installed capacity that we have cannot take us more than a month if we do not have vessels docking at Mombasa,” he said.

“Energy, and especially petroleum, should be secured. We have to make sure that we position ourselves to be self-sufficient, probably for three to four months.”

Kiharu MP Ndindi Nyoro also raised concerns about the situation, including what appears to be an inevitable hike in retail prices. He further pointed out that a major concern in pricing petroleum products in the country is taxes, which account for a significant chunk of pump prices.

“When you look at what is happening in Iran and the direction that oil prices have been taking, Kenyans will soon hear choruses from the government, because they want to raise fuel prices, they will now start blaming Iran and the Middle East,” he said.

“Within two months, you will see Epra increase fuel prices in a manner that is higher than global oil price trends.” He also said high taxes are a major concern. Taxes and levies account for 45 per cent of the retail cost, currently at Sh178.28 for super petrol in Nairobi. Despite protests about high tax levels, the government has, in recent years, hiked taxes.

The government in July 2024 increased the Road Maintenance Levy by Sh7 per litre to Sh25 from Sh18. Earlier in 2024, the Energy Ministry increased the Epra levy to 75 cents per litre from 25 cents per litre. In 2023, the Finance Act doubled the Value Added Tax (VAT) on petroleum products to 16 per cent from eight per cent. 

Because of the successive hikes, Nyoro said, Kenyans could not feel the impact of lower oil prices. 

“In 2022, oil prices hovered at around $100 per barrel,” he said, adding that in subsequent years, global oil prices dropped by about 30 per cent until the recent conflict. “Local fuel prices did not go down commensurately because the government introduced an eight per cent VAT on fuel and also increased the road maintenance levy. The government actually waited for a time when fuel prices were to go down, and the then minister gazetted the Sh7 increase.”

“So, before they come to tell us about how they are going to raise oil prices, they must tell Kenyans why they have denied Kenyans the opportunity to buy fuel at a lower price due to higher taxes.”