Downstream sector involves licensing and monitoring of the operations of all countrywide retail network of 1200 petrol service stations operated by Multinationals (e.g. Total, Shell, OiLibya etc), National and Independent Operators. The compositional ownership of this retail network stations constitute Multinational (73%), National (8%) and Independent Operators at (19%). Kenya has a total of 53 Oil Marketing Companies (OMCs) that participate in the importation of petroleum products for Kenya and the Great Lakes region whose demand is approximately 500 million litres a month. Importation of these products is through the Open Tender System (OTS).
Kenya imports refined petroleum products through the OTS. Importation of petroleum products through the OTS allows the oil marketing companies to access petroleum products at the same price and therefore ensure competition in the petroleum market. Since the OTS is run through monthly tenders, it entails sourcing of petroleum predominantly from the spot market whereby petroleum is sourced from the open market without any prior contracts. The industry recognizes that OTS is an effective supply system that creates a competitive and a transparent means of availing the product to Kenyans, through the economics of scale. Challenges experienced by the OTS has shown that spot buying exposes the country to price volatility and unreliability as opposed to long term supply contracts which come with price stability and reliability. Generally long –term agreements present the best terms for securing and procuring reliable supplies of petroleum products. According to statistics, 70% of worldwide petroleum is procured through long-term agreements. The contracts are either through government to government agreements or commercial with national oil companies. In Africa, for example, the nation of Ghana has such an arrangement in place. The country gained tremendously by hedging half of its crude oil requirements. Hedging was the reason why Ghanaians had not seen any price increases at the pumps since the beginning of 2011, although crude prices had increased from more than US$ 90 per barrel in December 2010 to about US$ 120.
Hedging policy is therefore extremely beneficial to any government if adopted. However, to achieve competitive terms through long -term agreements, the quantities must be substantive to provide economic consignments. The implementation of Legal Notice 96 of 2010, which mandated the National Oil Corporation of Kenya (NOCK) to import 30% of the country’s petroleum requirements (25,000 MT AGO and 20,000 MT DPK), do not make up sufficient quantities for competitive long-term contracts. NOCK is currently operating 80?? petrol stations country wide and accounts for 8% of the market share.
A National Oil Corporation of Kenya Petrol Station
By 2013 NOCK will be facilitated to acquire 70 additional retail stations to increase the market share to 15% so as to effectively moderate domestic prices. Furthermore, the use of government negotiations for the purchase of petroleum products should be encouraged to reduce the impact of high petroleum prices in Kenya.
National Oil’s LPG Cylinders