Ruto Pursues UAE Fuel Deal as Kenya’s Sh420bn Debt Looms
Treasury and Ministry of Energy officials have initiated plans to renegotiate with the United Arab Emirates (UAE) and Saudi Arabia the government-to-government agreement signed in March for the supply of petroleum products on credit, with less than two months until payment of the first $3 billion installment accumulated over the past six months.
A delegation from the Energy and Petroleum Regulatory Authority (Epra), the National Treasury, and the Energy Ministry has spent the past week in the United Arab Emirates negotiating for the relaxation of certain clauses in the government-to-government agreement.
Kenya is anticipated to pay approximately $500 million (Sh70 billion) at the end of September, representing the first installment of the amount owed to state-owned UAE companies that have supplied petroleum products on credit over the past six months.
Different market
The government-to-government agreement was expected to strengthen the shilling by easing the monthly scramble for dollars by oil marketers; however, the Kenyan currency has continued to weaken, exchanging at an average of 140 Kenyan shillings per U.S. dollar compared to approximately 130 units when the agreement was signed in March.
In March, President William Ruto stated, “I want to reassure those in Kenya who were facing difficulties obtaining dollars that we have taken steps to ensure dollar availability in the coming weeks will be vastly different, as our fuel companies will now pay for fuel in Kenyan shillings.”
He subsequently added that the exchange rate between the shilling and the dollar could fall to as low as Sh120 within weeks.
“I offer you free counsel. Those of you who hoard dollars may incur losses. In a couple of weeks, this market will be drastically different, so you must act immediately.
Davis Chirchir, then-Cabinet Secretary for Energy, assured legislators at the time that the agreement would relieve pressure on the country’s foreign exchange reserves.
However, some members of the Energy Committee of the British Parliament pointed out that the fuel could end up becoming more expensive and that delaying payment amounts to delaying the inevitable.
Reliable industry sources have informed GossipA2Z that the government wishes to renegotiate some of the agreement’s fixed terms which have since proven to be costly due to the decline in the price of petroleum products. Daniel Kiptoo, director general of Epra, stated that it is too soon to disclose the outcome of the ongoing negotiations, adding that “work is in progress.”
I remain in the Middle East.” Mr. Kiptoo stated to GossipA2Z, “Let us respond when we return on Monday.” The agreement’s fixed provisions, which were intended to protect Kenya from fuel price volatility, have resulted in a loss for the country, as a global decline in the price of petroleum products has not been reflected at the pump.
In recent weeks, companies that export fuel to neighboring landlocked countries have preferred to purchase the product in Tanzania and convey it via Uganda, depriving Kenya of much-needed revenues.
Even with the lengthier route through Uganda, your profit margin is greater. The government-to-government agreement is detrimental to us, said a representative of an energy marketing company who requested anonymity for fear of retribution.
Approximately forty percent of oil imported into Kenya is exported to Uganda, Rwanda, Burundi, and the Democratic Republic of the Congo, employing tens of thousands of traders and transporters.
In the previous system of open market bidding, Epra typically set local petroleum prices based on the international average product cost plus a freight and premium margin allowed for importers.
Saudi Aramco, Emirates National Oil Corporation (Enoc), and Abu Dhabi National Oil Corporation Global Trading Company (Adnoc) signed a nine-month agreement to supply Kenya with hydrocarbons.
Prices escalate
The companies determined the contractual parameters of engagement. They were to import between 250,000 and 350,000 tonnes of gasoline and between 330,000 and 380,000 tonnes of diesel each month. Each month, an additional 80,000 tonnes of aviation fuel were to be imported.
This has prevented Kenya from negotiating for cheaper fuel, and the shilling has not strengthened against the dollar as anticipated.
The fact that supply volumes have remained constant despite a decline in local demand for fuel has resulted in a surplus on the market, causing unease among confirming banks who fear losing money if imported fuel is not sold out.
The Africa Export-Import Bank (Afreximbank) selected the local lenders KCB, NCBA, Absa Kenya, Stanbic, and Co-operative to issue Letters of Credit (LCs) to Gulf-based suppliers.
By issuing the LCs, the banks commit to paying suppliers for imported goods if Gulf Energy, Oryx Energies, and Galana Oil fail to pay for the fuel.
The government is searching for Middle Eastern banks to issue letters of credit (LCs) because, according to sources, banks have become hesitant to issue LCs as a result of a precipitous decline in petroleum demand. The leader of Epra did not respond to our inquiry as to whether the UAE delegation had signed new confirming banks.
Mr. Kiptoo did not respond to GossipA2Z’s queries regarding whether the government had been successful in negotiating a delay in the beginning of fuel repayments.
After the initial payment is made in September, Kenya will be required to pay the Gulf suppliers $500 million (5h70 billion) per month. According to dealers, fuel demand has decreased as prices have steadily grown.
John Njogu, chief executive officer and national coordinator of the Petroleum Outlets Association of Kenya (POAK), reports that demand has decreased by 50 percent since the increase of the value-added tax on petroleum products to 16 percent on July 1. “Since the new tax went into effect, our members’ sales have fluctuated between 30 and 50 percent of their prior levels. Mr. Njogu told GossipA2Z that people are simply not driving their cars.
Struggle of retailers
He added that the decline in demand worsens the plight of retailers, who have been incurring higher working capital costs whenever petroleum prices increase.
The operators are in negotiations with Epra regarding a reevaluation of their Sh4.14 margin that is stipulated by the regulatory framework.
The last review of their margin was conducted in 2018 when petrol was retailing for approximately Sh90 per liter and diesel for approximately Sh80 per liter.
Since then, gasoline and diesel prices have risen to approximately Sh192 and Sh176 per liter, respectively, increasing the dealers’ working capital requirements without a corresponding margin cushion.
The dealers are now requesting compensation for increased financing costs, electricity, transportation fees, rent, and personnel expenses.
“Our members are closing their businesses. If Epra does not address our concerns, we will cease operations,” said Mr. Njogu.
Ruto Pursues UAE Fuel Deal as Kenya’s Sh420bn Debt Looms
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