Posted  Sunday, October 23  2011 at  21:40

Kenya’s projection of long-term economic growth points to higher demand for petroleum products which has seen marketers seek larger storage capacity to enhance supplies and incomes.

Local oil marketers said that storage inefficiencies resulting from ageing facilities at the Kenya Petroleum Refineries Limited (KPRL) and Kenya Pipeline Company’s (KPC) ineptness hamper supplies forcing them to raise prices.

Listed oil marketer Kenol Kobil is among oil marketers that have resorted to enlarging storage capacity to enhance supple and earnings. This year, the company managed to remain on a growth path despite a tough market environment.

The company’s 83 per cent growth in earnings to Sh2 billion this year was attributed to prudent management of its fuel stocks, extensive fuel storage facilities, and diversification.

The company has been involved in acquisition and expansion of storage facilities to mitigate any disruptions in the distribution system.

“We have reduced our reliance on the KPC system to avoid inconveniences that come with lack of capacity,” said public relations manager Charles Njogu.

Profit warning

Recently, the firm acquired a new terminal in the Democratic Republic of Congo with a capacity of four million litres.

The firm targets to create storage capacity of up to 70 million litres this year.

Kenol Kobil has also invested significantly in depot facilities in various parts of the country, as well as in Tanzania, Burundi, Uganda and Mozambique.

The firm is also building a terminal in Lusaka, Zambia, with capacity to store six million litres of fuel.

Investment in inventories stretched the firm’s borrowing costs by Sh6 billion to Sh20 billion in the first half of the year compared to the same period last year.

However, all is not well with other market players such as Total Kenya which has issued a profit warning after its half year earnings dropped by 73 per cent.

The firm linked the decline in profits to a drop in sales volumes and the rising cost of doing business.

Instances of oil shortage at various outlets were common in the first half of the year.

“Additional storage facility has become important at a time when there is high oil price volatility with rising demand while operating costs are also on the rise,” said Mr Eric Musau, an investment analyst at Standard Investment Bank.

With projections of continued long-term economic growth pointing towards higher demand for oil, the country’s constrained storage capacity and supply system need an upgrade.

Oil marketers are moving to avoid storage fees and reduce time wasted while lining up at for fuel at depots. They are investing billions of shillings in new depots.

Infrastructure bottle necks

Energy Regulatory Commission (ERC) director Kaburu Mwirichia said the number of firms seeking approval permits for construction of depots as they seek to offset infrastructure bottle necks was rising.

KPRL processed 878,567 tonnes of petroleum products in the first half of the year against demand of 2.1 millions tonnes, pointing to lack of capacity and need for emergency measures by oil marketers.

Independent oil marketers and trading companies such as Vitol Group, Gulf Energy, and Petrocity are among firms that are investing in new storage facilities in a move to stabilise their supplies and cut expenses.

The Vitol Group, a large oil trading company based in the Netherlands, has been building a products storage terminal in Kipevu, Mombasa.

When fully operational, the terminal will have 65million litres of storage capacity. It will be one of the largest and most modern oil facilities in East Africa. The property was acquired as an incomplete facility from Triton when the firm went into receivership.

Rising demand

Vitol Kenya Ltd project manager Paul Mecca said that rising demand for petroleum products in the country and her neighbours calls for more storage capacity.

He said that oil marketers had expected Kenya Pipeline Company to invest in a truck-loading facility which was not the case.
Vitol’s depot, which will have a truck-loading facility, will cost Sh3 billion and have capacity to hold 110 million litres.

This is about 10 per cent of the government proposed national strategic reserve that could hold one billion litres.
However, the plan was shelved for a larger master-plan encompassing an infrastructure for the entire fuel industry.

Local oil marketer Gulf Energy is also investing in a depot in Nairobi’s Industrial Area. The facility will have a capacity of 3.5 million litres, said Mr Mwirichia.

The strategic location will enable the depot to tap oil from the KPC system and supply it to various points of sale along the Mombasa-Nairobi highway.

Globally, increased volatility of oil prices has seen most players in the supply chain invest in their own depots, a job that was once left to producers and refiners. Investment banks such as Morgan Stanley have built storage tanks to speculate on fuel prices.

Petrocity, a regional oil marketer, is investing Sh1.5 billion in strategic oil reserves in an effort to guarantee supply to cover the firm against volatile prices and sell to other marketers.

The firm is setting up the facility at Konza, in Mukaa district, along the Nairobi-Mombasa highway to cater for Nairobi’s growing demand for fuel. The city consumes more than 50 per cent of the country’s oil.

“Consumption of petroleum products is on the rise and companies are seeking to stabilise their supplies and reduce over-reliance on other marketers,” said National Oil Corporation (Nock) managing-director Sumayya Athman.

The market players are also seeking to increase the speed at which they can evacuate their products to the market as opposed to queuing up at competitors’ depots.

The move will also cut fees charged on renting depot facilities.

The Petrocity project also aims at increasing availability of petroleum products to new entrants and independent dealers who have limited access to truck loading facilities in Nairobi.

The project will have two phase in which 12 tanks with capacity to store 120 million litres will be build. The facility will store gasoline, diesel, and kerosene.

Ferrying products

It will be located close to the Kenya Pipeline Corporation pump station in Industrial Area to ensure availability of fuel and access to Mombasa Road to ensure ease of ferrying products.

Early this month, the government said it had no resources to construct the strategic fuel reserve.

“There are very significant competing needs for funds at Treasury, limiting the ability of the government to set up fuel reserves,” Mr Patrick Nyoike, the permanent secretary in the Ministry of Energy said in an interview with Business Daily.

Mr Nyoike said the government was looking up to private investors to invest in oil reserves.

The government has since advertised a tender for a feasibility study that would result in a master-plan for petroleum supplies across the entire country.

However, wary of the duration that such a project would take, private players are setting up their own facilities to save costs associated with renting depots.

The slightest indication that oil prices could be heading southwards due to declining global economic growth provides an opportunity for bulk purchases.

Volatile international crude oil prices and lack of sufficient storage facilities, combined with domestic challenges such as price caps and exchange rate fluctuations, will continue to give a hard time to investors in the oil marketing business.