What Uganda hopes to gain from direct fuel shipment

by Business Times writer
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Uganda has taken a significant step in securing its energy independence with the arrival of its first oil consignment imported directly by the Uganda National Oil Company (UNOC) from the United Arab Emirates (UAE).

“Today marks a significant milestone for Uganda as the first vessel under UNOC’s new mandate as the sole importer of fuel products arrives. This historic event emphasizes our commitment to ensuring the reliable supply of high-quality fuel. As a result of this mandate, we will ensure the elimination of speculative price hiking,” UNOC announced. The vessel carrying 58,000 metric tons of petrol arrived at Mombasa Port in Kenya on Wednesday.

It is the maiden vessel as UNOC implements the sole importation of fuel products mandate. The fuel will 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.

Uganda imports approximately 2.5 billion liters of fuel annually, spending over 2 billion US dollars. About 90% of this fuel enters Uganda through Kenya’s port of Mombasa, granting Kenya significant control over Uganda’s fuel market. Despite the substantial revenue Kenya earns from this arrangement, the supply has been unstable. Additionally, middlemen have been profiting greatly at Uganda’s expense. This situation has resulted in continual and significant increases in fuel prices in Uganda.

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. To address this issue, Museveni advocated for the amendment of the Petroleum Supply Act 2008 to grant the Uganda National Oil Company the exclusive right to import and supply petroleum products in Uganda. This bill was swiftly debated and passed in Parliament. Last year, Ugandan Parliament swiftly debated and passed the Petroleum Supply Bill 2023.

The Petroleum Supply Act as amended granted the state-owned Uganda National Oil Company exclusive rights to import and distribute all petroleum products across the country. The government asserted that this amendment would enhance the security and efficiency of petroleum supplies while eliminating the role of middlemen. Subsequently, 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 located in Kenya and Tanzania. Under this arrangement, UNOC would import these petroleum products into Uganda and distribute them to private marketing companies such as Vivo (Shell), Total Energies, and Stabex, among others. This change implied that Uganda would cease purchasing fuel from Kenyan firms starting January 1, 2024.

Since Uganda is a landlocked nation, it would depend on the Kenyan pipeline for fuel imports from Mombasa port. Therefore, UNOC applied to obtain a license in Kenya to function as an oil marketing company and facilitate fuel imports via the Kenyan pipeline. Kenyan middlemen, unwilling to lose their profits, filed a court injunction to prevent UNOC from importing fuel directly, citing existing contracts.

The Kenyan Ministry of Energy and the Energy and Petroleum Regulatory Authority (EPRA) imposed several stringent requirements for UNOC to secure a license. These stipulations included providing evidence of annual sales totaling 6.6 million liters of super petrol, diesel, and kerosene, establishing a branch within Kenya, owning a licensed petroleum depot, operating at least five local retail stations, and achieving a minimum annual turnover of $10 million over the past three years.

UNOC was unable to meet several of these criteria, such as achieving the required annual sales volumes, operating the mandated five licensed retail stations, owning a licensed depot, or reaching the specified annual turnover. However, the company did manage to establish a branch in Kenya. As a consequence, EPRA denied UNOC’s license application due to the company’s inability to satisfy most of the outlined requirements. In response to Kenya’s refusal to grant an operating license, Uganda began negotiations with Tanzania to explore an alternative route for its fuel imports. Recognizing Tanzania’s willingness to support Uganda, Kenya entered negotiations.

In May 2024, President Museveni paid a state visit to Kenya. Discussions between Museveni and Kenya’s William Ruto resolved the outstanding issues, and on May 16, 2024, Uganda and Kenya signed an agreement on the importation and transit of petroleum products through the two countries. The two neighboring East African Community allies reached an agreement regarding the importation and transit of refined petroleum products through Kenya to Uganda, facilitated by the Uganda National Oil Company.

President William Ruto highlighted that this agreement would empower Uganda to directly import refined petroleum products from the producing countries, enhancing the overall efficiency and reliability of its fuel supply chain. “We have just witnessed this agreement which enables the Uganda National Oil Company Limited to import refined petroleum commodities directly from producer jurisdictions thus bringing to an end the challenges faced by the sector in Uganda,” Ruto said. “As leaders, we are committed to implementing all our obligations in order for our people and nations to reap the full benefits,” he added.

WILL THIS REDUCE FUEL PRICES & GUARANTEE STABLE SUPPLY?

The Minister of Energy and Mineral Development, Ruth Nankabirwa says the move will stabilize fuel prices and ensure a more reliable supply, marking a new era in Uganda’s oil importation strategy. However, fuel dealers say that much as Kenyan middlemen have been cut out, fuel prices in Uganda will not be lowered.

In this new financial year 2024/25, the government increased the tax on diesel and petrol by 100 shillings which will have an effect on the price of fuel. The imposition of taxes on fuel products has prompted significant discussion regarding Uganda’s motivations for seeking to lower fuel costs by purchasing directly from refineries. Experts contend that Uganda could achieve lower fuel prices once it begins its own oil production, a milestone expected to be reached by 2025. By producing fuel domestically, Uganda would reduce its dependency on foreign suppliers and further control fuel costs. Analysts suggest that this shift toward self-sufficiency in fuel production will not only stabilize prices but also bolster the nation’s energy security and economic resilience in the long run.

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