Vehicles at the pump
Recently, President Museveni signed into law the Petroleum Supply (Amendment) Act, 2023. This law will give the Uganda National Oil Company (UNOC) exclusive rights over the importation of petroleum products into the country.
UNOC will buy the fuel from Vitol EC Bahrain. The justification the government gave for the introduction of Vitol EC in this equation is that UNOC is not financially-sound to guarantee the refiners that they will not pull out of this commitment. Since UNOC cannot commit $2.2 billion to secure the 2.5 billion liters destined for Uganda from the refiners, they sought out Vitol, which in their view is a $500 billion company that can make this commitment.
Anyone who thinks that this arrangement will give us competitive prices is simply naive. Currently, Kenya has three companies that do exactly what the Uganda government is proposing to do with the UNOC monopoly – Saudi Aramco trading, ADNOC for Abu Dhabi and ENOC.
These companies interface with the refiners. The Kenyan government has designated three oil-importing companies that buy from Saudi Aramco. This provides a certain level of competition which has a bearing on price. UNOC seeks to replace these three Kenyan companies so that it imports fuel into Mombasa.
On paper, this idea appears good and attractive, especially if they do not restrict themselves from getting supplied by only Vitol. But government and, in particular this government that has been around for nearly four decades, has never been good at doing business.
If UNOC was able to source cheap fuel with Vitol, they would continue doing so as they would outcompete the oil marketing companies (OMCs). But they cannot and UNOC is making losses; so, they want guaranteed profitability and get rid of competition.
I can absolutely guarantee with certainty that UNOC has not turned a profit since they started trading in petroleum products in Uganda. And now they are running the risk of getting petroleum products from a global trading company like Vitol, which employs certain leverage ratios (loans) when sourcing commodities.
It is possible that our prices will be dictated by how much profit target UNOC wants to declare in a given year, and not by market forces. A combination of all these factors cannot bring our fuel costs down. There are a lot of high fixed costs that are independent of global prices and regional platts oil price that UNOC will do nothing about.
The pipeline pumping costs from Mombasa to oil terminals in western Kenya, where Ugandan OMCS pick their oil from, are all fixed and UNOC cannot do anything about them. When you add our expensive inefficient transportation methods for our petroleum products, this UNOC deal will not bring down the price.
This move comes at the time when OMCS have been divesting from Uganda for the last seven years because it is not profitable to run an OMC. The largest contributors to fuel costs are the prices in Kenya; this is billed in United States dollars and it is basically the global price; transportation to Kenya ports in Mombasa and then oil companies add a small margin usually in the range of $10 – $20 per 1,000 litres.
This proposed UNOC-Vitol deal will do nothing about this. In Uganda, the market is saturated with many oil companies and competition is basically based on pricing. Most companies are making little margins on fuel as it is the only way to compete and increase sales.
And there is little in form of product differentiation. As this is happening, government is introducing a monopoly supplier that will make everything worse. The days when a litre of fuel was Shs 3,500 are long gone. If you think government is good at business, take time off to find out what happened to the oil industry in Sri Lanka last year.
sammyobedgiu@gmail.com
The writer is a civic human rights activist and biotechnologist
Source: The Observer
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