Gulf firms in State deal cut fuel costs as contracts are extended

The ="https://www.standardmedia.co.ke/business/business/article/2001513843/fuel-prices-remain-unchanged-three-months-in-a-row">cost of fuel< could fall in the coming weeks after the three Gulf firms that sell petroleum products to Kenya under the government-to-government deal agreed to lower costs by between six and 13 per cent. 

At the same time, the government has extended the contracts for the three Gulf oil firms to the end of 2027. It is the third time that the deal has been extended.

The ="https://www.standardmedia.co.ke/health/index.php/national/article/2001508236/state-extends-fuel-import-deal-with-middle-east-oil-firms">government in 2023 signed 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 was expected to reduce demand on the dollar and stabilise the shilling. 

A document from the Ministry of Energy and Petroleum seen by The Standard indicates the government had put in a request for review of the freight and premium, urging the firms to consider the long-term nature of the deal, which will now last for more than five years following the latest extension. 

The oil firms agreed to the request, with the new rates applying to both remaining and ="https://www.standardmedia.co.ke/business/amp/article/2000155516/fuel-prices-whose-interests-does-energy-regulator-serve">additional volumes of petroleum products< that Kenya will import under the agreement.

Super petrol

The three firms will lower the freight and premium cost by between six and 13 per cent. The cost of products will continue to be dictated by the market.

The fight and premium rates for Jet A1 fuel will drop by 13.2 per cent, diesel by 11.4 per cent, while super petrol will drop by 6.6 per cent.

Adnoc, which supplies Kenya with diesel and kerosene, has dropped the cost of freight and premium to $78 (Sh10,140) from $88 (Sh11,440) per tonne of diesel.

It has also dropped the freight and premium for kerosene to $97 (Sh12,610) from $111.75 (14527.5) per tonne. 

Enoc (Singapore), which supplies Kenya with super petrol, has reduced the freight and premium cost by $6 per tonne to $84 (Sh10,920) from $90 (Sh11,700). 

Aramco supplies Kenya with diesel and petrol. It has dropped the freight and premium cost for diesel to $78 (Sh10,140) from $88 (Sh11,440) while that of super petrol will drop to $84 (Sh10,920)  from $90 (Sh11,700) per tonne. 

The new freight and premium chargers are now cheaper than Uganda’s, which entered into a similar deal with Vitol Bahrain.

The new freight and premium is expected to result in lower retail prices of fuel when the Energy and Petroleum Regulatory Authority (Epra) announces pump prices for the April-May pricing cycle next week.

The government resorted to the oil import deal in April 2023 as it tried to stabilise the local currency that was on a free fall. The deal reduced demand for US dollars within the oil industry.

The sector players used to pay for oil imports using dollars, spending about $500 million (Sh65 billion), which strained the country’s forex reserves and was seen as a threat to the security of petroleum supply.

Combined with other macroeconomic factors, the huge demand for the dollar had in turn seen the shilling weaken to historical lows, dropping to Sh160 to the US dollar at some point in 2023.

Through the deal, the country gets a six-month credit period, which in the initial months significantly reduced demand for the dollar.

Credit period

Under the deal, the three Gulf companies nominated local firms to handle business on their behalf in Kenya, including selling products to local oil firms in local currency, converting this to dollars over time and paying the suppliers once the six-month credit period expires. 

The deal was initially supposed to run for six months but was extended to run till December 2024 and further to the end of December 2025. In the latest extension, the oil firms will keep supplying Kenya with fuel until the end of 2027.

Before the government-to-government deal, oil marketers imported petroleum products through the Open Tender System, where oil marketing companies would consolidate their needs and competitively select one of their own to import on behalf of the industry.

The firm charging the lowest freight and premium got the job. While the system was run by the industry, it was supervised by the ministry.