How Kenya’s $40M Bond Fee Hike At Vitol Terminal Hampers Uganda’s Competitive Fuel Prices Effort

by Business Times writer
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Uganda’s efforts to ensure competitive fuel prices at the pump are far from yielding results as Kenya increases the Vitol terminal bond fee to USD 40 million.

Last year, Ugandan Parliament amended the Petroleum Supply Act 2008 and granted the state-owned company, Uganda National Oil Company (UNOC) the exclusive right to import and supply all petroleum products in Uganda.

The government said that this amendment would enhance the security and efficiency of petroleum supplies in the country while eliminating the role of middlemen.

President Yoweri Museveni pointed out that diesel for bulk suppliers was priced at 83 USD per barrel, but Kenyan middlemen sold it to Uganda for 118 USD per barrel. Similarly, petrol priced at 61 USD per barrel was sold at 97 USD per barrel.

Following the passage of the Petroleum Supply Amendment Bill 2023 by Parliament, UNOC signed a multi-billion-dollar agreement with Vitol Bahrain to meet its fuel needs. This agreement provided Vitol with exclusive rights to procure and import fuel from international refineries for UNOC, with delivery points at Mombasa in Kenya and Tanzania.

Under this arrangement, UNOC would then import these petroleum products from Mombasa to Uganda, and distribute them to private marketing companies such as Vivo (Shell), Total Energies, and Stabex, among others.

Last week on Wednesday, Uganda received its first oil consignment imported directly by Vitol for the Uganda National Oil Company (UNOC) from the United Arab Emirates (UAE).

The vessel carrying 58,000 metric tons of petrol arrived at Mombasa port in Kenya.

It was the maiden vessel as UNOC implements the sole importation of fuel products mandate. The fuel would get into the Kenya pipeline infrastructure and later to Uganda via trucks.

This landmark development addresses long-standing issues such as overpricing of fuel by Kenyan middlemen and supply instability, which have led to frequent fuel price hikes in Uganda.

The move cut out Kenyan middlemen and put an end to the abnormal profits they have been making on Uganda.

Uganda’s Competitive Fuel Prices Ambition in Limbo

Just days after Uganda’s first fuel consignment arrived at Mombasa, the Kenyan government increased bond fee for Vitol terminal to USD 40 million which makes Uganda incur additional costs on fuel importation thus shuttering the country’s ambition of having competitive fuel prices at the pump.

The Minister of Energy and Mineral Development, Ruth Nankabirwa says Kenya’s move will force UNOC to also increase fuel prices which will subsequently lead to hiked prices at the pump.

“We expect the prices to be manageable, to be more competitive for as long as we are not pushed to incur costs at the port because as I speak now, I will be going back to Kenya to meet my colleague, Hon [Davis] Chirchir because of one thing; they have increased the bond fee at Vitol terminal where we are going to offload our products,” Nankabirwa said.

“When you increase the bond fee to the tune of 40 million US dollars, then that means that you are pushing UNOC to also increase, and therefore, Ugandans are likely not to see a reduced pump price,” she added.

Energy Minister Ruth Nankabirwa

Uganda imports around 2.5 billion liters of fuel annually, incurring an expenditure that exceeds USD 2 billion. A striking 90% of this fuel enters Uganda through Kenya’s port of Mombasa, giving Kenya considerable influence over Uganda’s fuel market and supply chain.

Although Kenya reaps substantial revenue from this arrangement, the fuel supply to Uganda has been fraught with instability. Furthermore, Kenyan middlemen involved in the process have been reaping significant profits, often to the detriment of Uganda’s economy.

This combination of supply instability and exploitative practices has led to persistent and substantial increases in fuel prices for Ugandan consumers, exacerbating the country’s economic challenges.

Nankabirwa said Uganda government is engaging Kenyan government to scrap the hiked bond fee at Vitol terminal at Mombasa port.

“I am still in negotiations with the Kenyan government to make sure that they don’t force on us this kind of thing. The bond fee at VTTI in Mombasa, that is Vitol terminal in Mombasa where we are storing our products; 40 million is a deterrence. And this is not how the East African Community spirit should operate.”

Kenya’s move, she said make Uganda fail to realize competitive fuel prices.

“We will see competitive prices if all factors remain constant. One factor is already not constant, they have increased the bond fee; that must be felt at the end user price. Let Ugandans wish me success in my negotiations so that the bond fees go down,” Nankabirwa said.

Now that UNOC has the absolute mandate to import and supply petroleum products to Uganda, the government had hoped that concern of fuel shortages in the country would be a thing of the past.

This, according to Nankabirwa would curb hoarding of fuel by fuel dealers and ensure competitive prices.

“When products are imported in the country by someday else, you can’t be sure, but now, the fact that it is UNOC who is importing with their supplier partner, we shall be able to secure the products first of all. You know the factors that make the prices go up are many but one of them is the scarcity of the product that you are dealing with. When there is scarcity, people tend to keep the product away so that prices go up and they make super profits. So, the fact that UNOC is going to aim at making sure that the country is kept wet, it means that that hoarding of fuel will not be there. So, the prices will not be erratic. The prices will be competitive,” she said.

Impact on the Economy

Fuel is a critical component for the functioning and growth of any economy. Its availability and affordability directly influence key sectors such as transportation, manufacturing, and agriculture, which are essential drivers of economic activity.

When there is a shortage of fuel or when fuel prices escalate, the ripple effects can be severe. Transportation costs rise, affecting the movement of goods and people, leading to increased prices for consumer goods and services.

Manufacturing processes become more expensive, reducing profit margins and potentially leading to higher prices for finished products.

The economy suffers from reduced efficiency and increased operational costs across these vital sectors, underscoring the importance of a stable and affordable fuel supply for sustainable economic growth.

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