What you’ve not been told about fuel scarcity

By Patrick Kagenda

Big money, greed, poor policy causing shortages

Uganda’s petrol czar, Mr. Ivan Kyayonka, possibly does not know how it feels to drive into a fuel station and find no fuel. He has been the chairman of Uganda’s top fuel dealership, Shell, for around two decades and refills the 180-litre tank of his favorite Toyota Prado VX at the pump of his Shell office in Kampala.

Although the price of fuel at the pump is hitting the Shs 3,000 mark, he still refills his tank at a lower price, as Shell company staff policy allows.

Possibly, he feels no qualms about driving his monster vehicle, which guzzles one litre in a mere seven kilometers. The average car can travel at a fuel consumption of around 12 kilometres per litre, but even that litre is becoming hard to find.

Anger is mounting around Uganda with the scarcity of cooking gas, petrol, kerosene and diesel.

‘These fuel stations should at least put up signs when they don’t have fuel,’ said an irate motorist, ‘it is painful when you keep turning into these stations and there is no fuel and no warning.

‘After using cooking gas for over 10 years, I bought it for the first time on the black market at a Shell station,’ another angry consumer fumed recently when cooking gas ran out at stations around the country. Kitchens at top institutions that normally rely on Shell gas, including the ones at Makerere University, felt forced to resort to firewood.

Ugandans today consume 2 million litres of fuel; that boils down to 1.2 million litres of diesel, 600,000 litres of petrol and 200,000 litres of kerosene per day. Without reserves, Uganda will require an uninterrupted supply line through Kenya.

Consumers have become easily jittery since the fuel crisis occurred in early 2008. In January, just a day after violence broke out in Kenya over disputed general elections, Uganda ran out of fuel. Queues grew at filling stations, prices soared and the black market thrived. At one point, petrol shot up to Shs 10,000 a litre.

Under the Petroleum Act 2003, oil importers are required to keep reserves of up to only ten days worth of fuel in storage facilities, but this may not provide a sufficient buffer to prevent fuel shortages.

A report entitled ‘Determinants of Fuel Supply Costs’, prepared by the Energy Ministry in June 2008, warns that the demand for oil products is projected to continue increasing due to the increase in generation of electricity, economic activity and the sheer number of cars.

It recommended a strategy for storage and transportation facilities in order to accommodate the demand.

It noted that truck registration expenses, a shortage of tax incentives for investors in the sector, rail transport inefficiency and absence of functioning ferries on the Tanzania route ensure breaks in supply even without other glitches.

Kyayonka has his own laundry list of excuses for the scarcity.

He blamed a breakdown at the Mombasa plant for the cooking gas scarcity. Before that, when the first serious shortages started in mid-2007, he blamed the high international prices of crude oil and repairs on the oil pipeline from Mombasa to Eldoret. When scarcity persisted, he claimed that the pipeline’s small size and age contributed to the problem. Next in line was the December 2007 Kenya election, then the truck drivers’ strike, the ban on four axle trucks and the shilling’s depreciation against the dollar.

When fuel prices persisted despite the price of crude sinking as low as US$51 a barrel in November from an all-time high of US$147 in July, fuel dealers claimed they were holding stocks procured at the higher international prices. They also claimed that the impact of the decrease in world prices was more than offset by the 21 percent depreciation of the Uganda shilling, which hit a 12-month low average of about Shs 2,000 to the US dollar.

Over the same period, Tanzania enjoyed a drop in pump fuel prices from TShs 1,700 in October to TShs 1,550 in November.

And by mid-November, pump prices in Rwanda for both diesel and petrol rose to Rwf 756 per litre after reductions by order of the government from Rwf 870 for petrol and Rwf 880 for diesel.

In Kenya, the price dropped from Kshs 110 to KShs 93 in August.

Even in times of steady supply, Uganda retains the highest fuel prices in the region.

‘Fuel dealers are either merely speculators or they just exploit situations; even those who have fuel may just hoard it for the sake of increasing the price,’ says Mr Benon Basheka, head of the Higher Degrees Department and a procurement scholar at Uganda Management Institute.

He adds, ‘Rwanda transport from the same source with Uganda through Uganda and they take the fuel to Rwanda, but in Rwanda it is much cheaper there than it is here. That tells you if the logic of the supply chain was to work, Rwandan fuel should be much more expensive than Uganda’s or that the disruptions were supposed to be as frequent there, but that is not the case.’

The Permanent Secretary to the Ministry of Energy, Mr Fred Kabagambe Kaliisa, speaks more directly than Kyayonka. When Kenya erupted in January, sparking fuel scarcity in Uganda, he dismissed the clamour for more fuel reserves, arguing that a storage of refined oil fails to make sound strategy for fuel security.

Meanwhile, Kaliisa’s boss, Minister for Energy Daudi Migereko, seems bent on expanding storage facilities in Jinja and putting up new storage facilities in Kampala.

‘We have been going through the process of land acquisition,’ he said recently. Obviously, the policy on reserves is not clear even at the top.

Kaliisa, Uganda’s leading oil sector expert, said plans for investment in more storage were abandoned when Uganda discovered oil.

He favours the construction of a pipeline from Dar es Salaam to Kampala and from Eldoret to the Jinja storage facilities before reaching Kampala. First announced in 1999, Kenya and Uganda signed a formal agreement in October 2002 and set construction to begin in April 2002 over a four-year period under the auspices of the EAC. The pipeline would cost US$ 80 million. To date nothing has happened.

One explanation provides that with the discovery of oil deposits in Western Uganda, Museveni is pinning his hopes on the planned construction of a mini-oil refinery in Hoima for the production of heavy fuel oil, paraffin and diesel by mid-2009.

Meanwhile, the pipeline remains the most cost-effective idea for moving oil products, but Ugandan companies are not Kenya Pipeline Company (KPC) partners. This means they buy from big importers in Kenya or import through their sister companies in Kenya.

Theoretically, Ugandan companies are free to join the KPC shipper group in the KPC pipeline from Mombasa to Kisumu/Eldoret but a requirement to contribute a share to the line fill makes it impossible for strapped Ugandan importers.

Inefficiency in the oil sector is compounded by the small volumes moved over long distances.

Changing from four-axle to three-axle trucks, a decision likely to reduce the quantity of fuel carried by each road tanker from say 42,000 litres to 35,000 litres, only makes the situation worse. This change would likely raise the transport costs by nearly 15 percent.

The current fuel drought was sparked by a long-distance truck drivers’ strike at the Malaba Border Post parking yard on October 20. Prices swung from Shs 2,500 to Shs 2,800 per litre as a consequence.

While road transport is relatively more expensive, oil companies prefer it because of the limited loss through theft and evaporation. In addition, the turnaround is shorter compared to rail transport.

Trucks are also favoured; since the Kenya-Uganda railway was concessioned to the Rift Valley Railways consortium, some oil companies have reported a turnaround of one month compared to a turnaround of 12 days using the road tankers.

But one major constraint is that much of the route from Kisumu to Nakuru in Kenya and Jinja to Malaba in Uganda is badly damaged.

Mr Peter Ocheng, the Operations and Marketing manager at one of the bigger dealerships, Kobil, concedes that the fuel scarcity is a consequence of inefficient infrastructure.

‘Demand for petroleum products has increased over the years but the infrastructure to deliver it has remained the same,’ he says. ‘Mombasa port is over-crowded and the port of Dar es Salaam is too small to accommodate big ships.’

He says oil tankers are spending up to 30 days at high seas and paying demurrage fees of up to US $30,000, a cost transferred to the final consumer.

One question that seems to persistently bother motorists is why the big companies, Shell and Total, constantly charge higher prices than smaller dealers.

‘The bigger multinational companies have very many outlets, and since the inflow of petroleum products is very low they are experiencing continuous shortages unlike the smaller companies with fewer outlets,’ Ocheng said.

Another explanation is that there is a lot of money in fuel, and while motorists groan, many higher-ups in government so involved in the sector make big money from the scarcity. It is no secret that many players in the fuel sector benefit from strong political backing.

Early this year, for example, Museveni dismissed repeated calls for the government to establish fuel reserves, claiming that such a decision would unnecessarily tie up public monies. He recommended that the private sector manage oil reserves. On January 10, the Cabinet approved setting up a US $26m (Shs 49 billion) project to restock the National Oil Reserve with 30 million litres of fuel.  The project ran into trouble after it was fraudulently handed to Ms Ishta Kutesa, daughter of Foreign Affairs Minister Sam Kutesa, and her husband Albert Muganga, with support from Energy Minister Daudi Migereko.

The deal was further halted after big fuel dealers Shell, Caltex and Total protested against the award procedure and the Public Procurement and Disposal of Public Assets Authority (PPDA) conceded that it was fraudulently awarded. The companies were given only five days to prepare their bids.

The Kutesa Company, Kenlloyd-logistics, is affiliated to Vitol Group that pleaded guilty to paying kickbacks to Iraq officials for oil purchases.

Government needs to come up with more innovations like the 2004 change in tax policy from assessing duty from depots to customs border entry points. This reduced the need for storage since product imports could be directed to destinations such as those in the north and northeast without using the depots in Jinja or Kampala.

Another major constraint remains the Kenya Revenue Authority’s insistence to escort trucks to the Ugandan border so as to avoid offloading in Kenya. This reduces the turnaround given that an already loaded truck has to wait for other trucks to load so as to move together. This is a serious non-tariff barrier.

Unless there are innovations, Kyayonka will continue to drive his Toyota Prado VX, consuming the fuel of two normal cars per kilometer, while all other Ugandans wait for the next bout of scarcity and price hikes. Why? Because the managers of Uganda’s fuel sector prefer to blame fuel shortages on external factors rather than to fix internal constraints, a needless barrier to progress.