Kenya Facing Fuel Crisis As Oil Companies Protest New Tax System

Excerpt of report by Kennedy Senelwa and Tom Mogusu entitled “Fuel crisis bites as companies protest new tax rule” published by Kenyan newspaper The Standard website on 10 August; sudheadings inserted editorially

A major fuel crisis began yesterday as the Kenya Petroleum Refineries announced it would shut down its plant in five days because multi-national distributors are not taking new stocks.

Leading petroleum companies stopped placing orders to protest Kenya Revenue Authority’s 1 August tax rule that they pay duty for products up front. This means the country is surviving on the fuel already in the hands of companies and transports chaos will possibly follow after pump stations run dry.

The effect started being felt yesterday in various stations upcountry where stocks were depleted.

There was panic some of the dealers could hoard the product in anticipation of higher prices due to fall in supply. In some parts of the country, there were reports of prices shooting up by as much as five shillings.

The situation could only change if KRA strikes a compromise with the companies. The companies rejected KRA’s initial offer that the tax be paid in two instalments.

Oil companies yesterday defended their decision to hike prices.

Marketing companies said the shortage was inevitable as customs officials had stopped loaded oil tankers from leaving depots run by Kenya Pipeline Company (KPC) unless the taxes are paid up front.

The Kenya Petroleum Refineries (KPRL) in Mombasa can no longer hold more fuel as there was no movement of the products through the pipeline.

Chris House, the refineries general manager, said the plant might be forced to close down in the next five days.

“We anticipate a total refinery shutdown in five days’ time if the above situation does not change,” said House in a letter to Joseph Kinyua, the Treasury permanent secretary.

“This would have severe implications on supply of products in the country,” said the letter that was also copied to energy minister Simeon Nyachae and heads of oil companies.

Over 90 per cent of oil is transported through the pipeline and is collected by dealers in Nairobi, Eldoret and Kisumu. KPC, the company responsible for the pipeline, said it was not to blame for the taxes.

It said the issue was KRA’s domain, adding that operations at its depots were returning to normal.

Excise duty

Senior officials of oil companies said the requirement for payment of taxes up front had caused extra financing costs, disrupting the loading of fuel at KPC depots and delivery to retail outlets.

“There are many trucks queuing at depots in Mombasa, Nairobi, Kisumu, Nakuru and Eldoret but they are unable to load,” they said.

They said from 1 August, companies were required to pay 50 per cent of taxes due to oil products within 4 days at the refinery or at the KPC depot in Mombasa.

A bank guarantee has to be drawn to cover the remaining 25 per cent payable on the 15th day and 25 per cent of remainder the 30th day.

A legal notice published on 8 June says excise duty on oil products shall become due and payable at the time of importation or time of release by customs from KPRL.

Oil firms said the new regulations had increased requirements for working capital to execute bonds for transit products and the industry was not consulted earlier to ensure smooth implementation of the new rules.

Peter Mecha, the KPC operations manager, said loading of transit products was going on well but there was a problem with fuel destined for the domestic market because marketers had failed to pay the required taxes.

Under the new system, exports to neighbouring states can only be loaded at KPC depots in Kisumu and Eldoret.

Mecha said customs officials were the only people authorized to allow loaded trucks to leave depots in Mombasa, Nairobi, Nakuru, Kisumu and Eldoret.

Fuel prices

Meanwhile, a leading oil company yesterday defended the decision to hike pump prices.

George Mwangi, the country manager for Kenol-Kobil, said higher pump prices had been triggered by increased crude prices.

“The current increase in pump prices has been necessitated by a sharp increase in the cost of product (crude oil and refined product prices) in the international market,” he said.

An oil industry analysis also indicates that between January 2005 and July 2005, the price of Murban Crude, which is the main type bought and refined for the Kenyan market, went up by 35.6 per cent, from 42.10 dollars (3,192 shillings) to 57.10 dollars (4,389 shillings) a barrel. [Passage omitted]