PRESENTATION TO THE 11 TH UNCTAD AFRICA OIL, GAS, TRADE AND FINANCE CONFERENCE THE OIL TENDER SYSTEM IN KENYA: CAN IT MEET THE DEMAND? Mr. Peter G. Nduru Petroleum Consultant Ministry of Energy Kenya NOT AN OFFICIAL UNCTAD RECORD

1.Background Kenya imports all its petroleum requirements Prior to 1994 the Kenya petroleum refineries limited (KPRL) was fully protected through the “white oil rule” Crude was processed at KPRL to meet all the while oil requirements To balance the demand barrel with the refinery yield surpluses were exported and deficits imported

Partial deregulation Price controls removed KPRL Base Load was introduced to ensure production of 28,000 tonnes of LPG p.a. as there was no alternative supply mechanism KPRL was protected at a minimum guaranteed throughput of 1.6 million tonnes p.a. (Base Load) to be shared among the licensed importers pro- rata their market share Suspended duty was introduced on refined product imports as additional protection for KPRL

3.New Entrants After deregulation Ministry of Energy started licensing new entrants to enter the market The new entrants faced problems in accessing crude to meet base load requirements The majors also posted high crude price premia making them more uncompetitive This resulted in frequent defaults in meeting the base load requirements

4.Legal Notice No. 197 of 28 th November 2003 issued under the Petroleum Act, Chapter 116 of the Laws of Kenya Minister to determine amounts of both crude and refined products to be imported Established the Open Tender Systems (OTS) for both crude and refined products All licensed importers are required to use the OTS for crude oil 70% of the balance of demand is imported through the OTS as refined products

5.Open Tender Systems There are two tender systems arrangements: crude and refined products All license importers must participate Sellers are same as Buyers Procedures, rights and obligations for all parties are articulated in two signed agreements Penalties are provided for defaulting (e.g. for late/non-payments etc)

6.Operations of the Open Tender System 6.1Crude Base load is allocated per company per quarter pro- rata the markets shares KPRL schedules crude importation programmes per the processing agreement setting crude quality and import date ranges Ministry of Energy calculates each company’s participations per each cargo Tenders are called two months in advance Winning tender price is lowest premium plus freight above Official Government Selling price (OSP) for month of loading.

6.Operations of the Open Tender System (continued) 6.2Refined products Supply coordination office calculates projected imports monthly in advance by product/quality indicating date range Kenya Pipeline Company (KPC) confirms availability of both ullage and Jetty Approximately loading date range is fixed by having predetermined sailing times from different load ports to Mombasa Tenders are called one month in advance Winning tender is lowest premium plus freight above Platts quotations average for five days around Bill of Lading date.

7.Year 2006 OTS performance PMSJETAGOMURBANARAB MEDIUM TOTAL S Quantity(000’ mt) Average tender premia ($/mt) Average winning premia ($/mt) Savings ($/mt) Savings (million $)

8.Advantages of the open tender system Country enjoys economies of scale on freight and premiums Accessibility of crude/refined products by all licensed companies at market prices Enhanced competition by availing crude and products to all companies Smooth supply mechanism for petroleum in the country Coordinated utilisation of import facilities resulting in reduced demurrage charges Savings in overall oil import bill (2006 estimate at US $13.9 million)

9.Challenges Fluctuations in international crude prices resulting in defaults by some companies. Buyers tend to default when prices are falling Inability of KPRL to add value and meet product quality specification Incapability of KPC’s facilities to meet demand Exclusion of demand volumes for other countries importing through Kenya. This limits the optimisation of the import jetty/tankage usage.

YES !!! The oil tender system can meet current and future demand in Kenya