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Turmoil in oil sector

By Joseph Were

Libyan companies pressure Shell, Total

This month, the Kenya Petroleum Refinery Ltd in Mombasa is set to close for routine maintenance. As a result, Uganda could suffer disruptions in supply.

The Mombasa refinery shutdown also comes at a time of significant developments in the fuel sector.

Top on the list is the increasing marginalisation of the traditional supers Shell and Total, the emergency of a regional monopoly called Tamoil of Libya, and the creeping rise in the international price of crude.

Other issues include the absence of a regulatory authority for the oil sector, the government’s handing of control of the “strategic” national reserve tanks at Jinja to a Libyan company, Tamoil, and the confusion around several companies under that trade name that are set to become the most powerful player in the sector.

Tamoil is the name of the company or companies that won the tender to construct the Eldoret-Kampala Oil Pipeline; was awarded “” without a tendering process “” the deal to repair and restock the national fuel reserves in Jinja, and another to build the new national strategic Kampala Oil Products Terminal.

At the time, acting Permanent Secretary in the Ministry of Energy, Paul Mubiru is reported to have defended Tamoil because it “had the skills and experience in fuel supply and depot operation and had already produced the design for up-grading the facility.”

He claimed Tamoil was favoured because its build, own, operate, and transfer (BOOT) operations were not costing the government a single penny.

Ugandan fuel operators are not alone in feeling the Tamoil heat.

In Kenya, Tamoil East Africa Ltd was awarded the deal to build a US$60-million liquefied petroleum gas (LPG) storage facility in Mombasa and another US$300 million to upgrade the Mombasa refinery. This is the refinery for most of the products sold in the East Africa region.

None of these projects has advanced substantially, but should Tamoil implement any or all of them, it will be in a position to dictate terms to the governments of both Kenya and Uganda and the other big oil sector players.

Not surprisingly, some major players, like Caltex, are cutting their losses. Caltex quit Uganda after selling its 70 stations to Total in April. The deal included terminals and fuel depots, aviation facilities, and commercial and industrial fuels business in Entebbe. Caltex sold its Kenya operation also to Total.

In an interview with The Independent, Energy Minister Simon D’Ujang said the existing oil firms have nothing to fear.

“Tamoil is only for the oil pipeline and the smooth transportation of the oil from Eldoret to Kampala and later to Kigali. It has nothing to do with retail trading in oil,” he said, “What will happen is that oil will be delivered by pipeline up to Kampala and then picked by trucks for onward delivery to the various destinations.”

But leading sector players, including Shell Uganda boss, Ivan Kyayonka, confirmed that Tamoil has its sights set on retail.

“Tamoil bought most of the stations that we (Shell) sold when we took over the Agip operation but could not use,” Kyayonka told The Independent.

Shell in 2000 bought AgipPetroli’s service station networks, storage and distribution facilities, direct sales of lubricants and bitumen.

There are several retail fuel stations with a Libyan connection trading under the name Oilibya.

Sector experts now claim that if Tamoil entered the retail market, it would lead to “lower stream complications”.

Already, according to them, investment in Uganda’s retail fuel sector has stalled.

“Nobody wants to lose money. Confusion over the role of Tamoil has led players to refrain from investing in new trucks to transport fuel to Uganda,” a member of a leading energy sector committee that meets regularly told The Independent on condition of anonymity.

At the time, the source claimed the Energy ministry was in fact finding difficulty in handing over the oil reserves in Jinja to Tamoil despite a cabinet directive.

But in a recent interview, Minister D’Ujang dismissed the claims.

“I am glad to say that Tamoil last week started rehabilitation of the Jinja storage tanks,” he said at the end of May.

Regarding the implementation of a regulatory framework, which the other sector players see as the only defense against a government-backed Tamoil monopoly, the minister said the issue was being handled by Parliament.

“We can’t introduce or talk about an oil regulatory authority without a law to guide it,” he said. What he did not say is that the sector has been waiting for at least seven years for the regulatory framework to be set up.

In September 2002, then minister of Energy, Syda Bbumba, who is now Finance minister, published the “Energy Policy for Uganda”.

The policy drafters noted that among the key issues under the petroleum sub-sector was the inadequate institutional and legal framework to regulate the petroleum supply industry, resulting in unfair competition and lack of transparency and two; the low storage private capacity compared to national requirements.

Seven years later, these two issues remain unresolved.

The Petroleum Supply Act, 2003 provides for new regulatory framework that aims to monitor the subsector to reinforce and promote competition among the players.

If it does not happen soon, then the country could be placed at the mercy of a Tamoil monopoly, an entity whose credentials have in the past been queried.

Officially, Tamoil is the trading name of the Oilinvest B.V. Group, an oil company based in the Netherlands and set up by the Libyan state-owned National Oil Corporation in 1988.

Tamoil in 2008 also formed a holding company, Oilinvest, which is controlled by the Libya Investment Authority. Oilinvest supplies, trades, and refines crude oil. It also sales refined oil products and operates over 3,000 fuel stations in Europe, especially Italy, and over 150 in Africa.

In 2006, it bought Mobil’s network on Cameroon, Ivory Coast, Gabon and the Isle of Reunion and introduced a retailing brand Oilibya.

Significantly, in 2008 it won the contract to construct a 354-kilometre oil pipeline between Eldoret in Kenya and Kampala after offering the lowest bid, US$ 71 million (later revised to US$ 78 million) against US$ 100 million from the nearest challenger, a Chinese firm. But the work, which it offered to complete in 18 months, is yet to start. The final bill is also likely to be higher. In January 2007, Tamoil claimed the cost of the project had swollen by US$ 12 million.

Unofficially, however, several organisations trading under the Tamoil have sprung up causing confusion over their ownership, technical and financial ability, and their link to Libya. Among them are Tamoil East Africa Ltd, Tamoil Holding, Habib Investments, and Oilibya.

Controversy over Tamoil is not new. In 2006, there were media reports that President Yoweri Museveni had ordered the firm to be investigated.

When Tamoil East Africa Ltd’s credential were queried during the bidding process for the pipeline, according to the leading sector information portal Alexander’s Gas & Oil Connections, it told the Kenya-Uganda Joint Coordination Committee that it was 70% owned by Tamoil Holding and 30% owned by Habib Investments of Habib Kagimu. Kagimu in turn is said to have connections and influence in the Libya and Uganda governments.

Unconvinced, the project consultant, Alain Rosier of Nexant, raised further queries about its ability to design, construct, finance, own, operate, and transfer the pipeline to the two governments after a 20 year period. He was removed.

But Energy Minister D’Ujang claims they are all the same company.

“All the Tamoil’s you are asking about are subsidiaries of the Libyan Tamoil Group,” he said.

If that is correct, then it would suggest that the government is brushing aside concerns by sector players that it is breeding a monopoly.

The Petroleum Supply Act, 2003, Part VII on “Market Competition and Assurance of Supply”, Section 30 (1) states: “Participants in the supply chain shall not form cartels or attempt to control prices or create artificial shortages of products or services, or engage in any other restrictive trade practices or any other acts or omissions which are contrary to the principles of fair competition or are intended to impede the functioning of the free market of petroleum products in Uganda.”

As Shell boss Ivan Kyayonka told The Independent, there is concern that Tamoil could have unfair advantage if it builds and owns the pipeline, repairs, restocks, and operates the Jinja Oil Reserves, and enters the retail trading.

“It is fine for them to build the pipeline because they offered the lowest bid,” Kyayonka said,” and it’s OK for them to repair the oil reservoirs. But whose product will it be when they restock?”

Kyayonka said sector players are concerned that filling the oil reservoirs with Tamoil’s product would mean it has entered the retail trade.

Apparently, government’s claim that it is allowing the Tamoil dominance to emerge because it is not spending a penny on the investments does not hold water.

“The big five (Shell, Total, etc) offered the government a cost-neutral proposal but it was blocked,” a source said.

The proposal was for a similar arrangement that the fuel companies have for Jet-fuel at Entebbe airport. They jointly run the reserve tanks with each company entitled to a specific quota of storage. Shell manages the facility.

But D’Ujang is emphatic: “I want you to get this very clearly. Shell, Total and the other oil companies were allowed to put their fuel there but those tanks are a property of the government of Uganda. Oil companies were only allowed to keep their products there. Now with this new oil pipeline, the reserves will become part of the pipeline and the oil companies that have been using them will have to use their individual reserve tanks. Besides, the oil companies are supposed to have oil reserves for at least ten days.”

That is a tough call as oil companies have depended on small storage depots yet demand has grown dramatically from about 9,000 barrels per day in 2000 to 12,000 barrels per day currently.

Previously, they have held their reserves at the Jinja national reserve tanks but that is unlikely now that they are under repair by Tamoil. The Kampala Storage Terminal is planned for 180 million litres but is also under Tamoil. Hopefully, the government has plans that Tamoil’s growing dominance does not plunge the oil sector into turmoil.

 

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