Category Archives: oil industry

Of Games and Theories: Fuel Prices…

You have no idea how my pocket flinched at the news of increase in fuel prices. (see the notice by ERC here).  I literally frowned as I imagined queuing at the chaotic bus stands to avoid the rumbling belly of my petite car. Why do these fuel prices keep going up and in the same rhythm come tumbling down? Why is it that sometimes everyone seems to be hurriedly dashing to fuel stations and in other times station owners are desperately investing in ‘happy’ franchises to attract more customers? Even the non-car owner, the one using public transport is directly affected by the fluctuating fares that usually don’t come down after significant upsurges. What exactly is the game? Or is there a plausible theory?

So I brushed through a couple of articles on the volatility of oil prices and whoa! it took me back to the fourth of nine rows of our 20xx macroeconomics class. The demand, supply, and price elasticity curves, that gave me a really hard time in year One of campus, suddenly begun to make sense. (looking forward to the day I will say the same for parallelograms!)

The theory. Positive shocks would be as a result of increased production from OPEC (Organization of the Petroleum Exporting Countries) as well as non-export oil-producing countries. The increased supply in oil would automatically lower its prices. However, if any of the quotas of these 13 countries (Nigeria, Algeria, Libya, Angola – just to proudly mention the current African member states) are curtailed in the sense of production or political issues, then prices automatically go up due to increased demand for oil. Negative shocks would result from significant decline in demand. Case in point – China. When such a large economy experiences severe downturn, the whole world cries because this very large customer is unable to buy in its unusually large quantities.

The games. In a monopoly (one seller/producer for a product), no competition exists and so the company can demand any price it from its customers for this precious commodity. For duopolies, the two companies have to work in a way that they balance their margins and market share else they can easily find themselves at the mercy of the consumer. The real games lie with oligopolies such as the OPEC cartel because the real power (pun intended) lies at their feet. And the more power an OPEC member state wields, the greater its political influence. Some theorists argue, though, that cartels help regulate the volatility present in every commodity market. Well I don’t know about that, all I remember is that some of us really suffered from the cartels that happened at the University library.

PS: Did you know that chewing gum, crayons, lipstick, sports equipment, and wrinkle-resistant clothes are made from petroleum (by) products?

Guest post by Tesha Mongi (visit her blog

Kenol Kobil 2016 AGM

KenolKobil had its annual shareholders meeting on May 12, at the Hilton Hotel in Nairobi. The board chairman spoke of the company’s performance in the three years since they had lost Kshs 6.2 billion. They had thereafter embarked on a turnaround that involved reducing costs, divesting from non-performing territories, focusing on profitable business rather than growing their market share, paying down debt, and corporate governance moves (separating the role of  Chairman & CEO role) .

Highlights

Regional Business: 

  • Tanzania: The company would up their short foray in Tanzania where they were losing $2 million a year. They had a depot that was part of their venture was an expensive lease, and while fuel prices in Tanzania are set by the government, many companies sell below that price as they don’t pay taxes. The directors said that Kenol was a responsible company that could not and decided to close shop.
  • DRC: They invested here, but did not ship product there as they were not happy. with the business climate and decided to sell out.
  • Burundi is doing well despite the political turmoil there.

The board faces shareholders at the 2016 KenolKobil AGM

Dividends: One shareholder said the dividend was too low, but the chairman said they have a consistent policy of paying 25% of net  profit as dividend, while the Group MD (GMD) said they still had to pay down a lot of debt.  One long-term shareholder told the meeting, that it was better for the company to be conservative with dividends, rather than aggressive, like other companies, and come back in a  few years to ask shareholders to invest more money in a right issues

Property: They have decided not to put up an office building in Haile Selassie street in downtown Nairobi for now as the office property market is saturated.

Goodies: Lunch box (which Hilton guards would not allow to be eaten on site), and tote bag. Some shareholders pleaded for the company to provide them with caps and umbrellas to promote the brand.

Odd Point: One shareholder asked why the AGM had not started with  prayers. The Chairman said it would not be productive, as they would have to have prayers for Christian, Muslim, Jewish, and traditional African religions  to be fair to all shareholders present.

Oil Pipeline, Economics & Politics

It’s been reported that the oil pipeline from Uganda is going to go through Tanzania, not Kenya. Two forgotten facts about the Uganda oil decision are that; (1) President Museveni of Uganda has been steadfast that he wanted to refine oil in Uganda, not export raw crude (2) Uganda’s oil has been said to be waxy or heavy. This means it would require complex heating to keep it flowing along a complex oil pipeline through the rift valleys and hills – to the coast of Kenya.

M7 poster 2

The cost, insecurity and difficulty of building infrastructure have been cited reasons that Uganda opted to go through Tanzania. Still Kenya has several LAPSSET projects on the cards including an oil pipeline to go to Lamu where there would be a new highway, railway, coal plant and modern, deep-sea port.

Pipeline Impact

Last year at the TDS Nairobi summit, during the 10th  Ministerial Conference (MC10) of the World Trade Organization (WTO), a session was held on local content in extractive (and oil) industries. Some interesting comments there included:

  • It is a legitimate objective for any resource rich country to try to maximize the value of its resources.
  • If a country puts restrictions on raw exports, it may distort the local economy; it creates artificial demand – and if it is not efficient, local related industries will not survive.
  • Kenya energy expert Patrick Obath suggested that Kenya, Uganda and South Sudan have to talk together and implement projects together for projects like the oil pipeline to be viable. That would also have to happen to get more value-addition from the oil in the countries e.g. can the countries plan to get fertilizer from oil?
  • With mining, you have 20 years of opportunity for local suppliers and jobs, but with an oil pipeline that’s only there in the beginning, then goes away once the pipeline is built (there wont be many local jobs after, and communities don’t get an economic boom from having an oil pipeline passing through their land..which may lead to some local frustration).

More on Kenya Pipeline:

oil tankers

  • The Kenya Pipeline Company is charged with transporting and storing of petroleum products.
  • A (presidential task force on parastatal reforms proposes the Treasury incorporate a holding company known as the Government Investment Corporation (GIC), into which Kenya Pipeline Company should be transferred to determine (its) intended privatization.
  • Meanwhile Kenya Pipeline is continuing with its projects including replacing the current Mombasa-Nairobi Pipeline.

KQ & Fuel Hedging

Last week, Kenya Airways (KQ), announced a pre-tax loss of Kshs 29.7 billion (about $297 million) for the year 2015. This was a shocker as it was the largest announced loss in corporate Kenya’s history and the airline’s management have given various reasons for the loss.

The summarized results released show that the airline had unrealized losses on fuel derivatives of Kshs 5.7 billion ($57 million) for the year and realized losses of Kshs 1.6 billion ($16 million)   After their last big loss of 2009 many thought, they would shy away from fuel hedging, but that practice is quite common and is very useful for airlines.

  • A 2014 Bloomberg piece notes that Air France-KLM hedged 63% of its estimated $2.4 billion fuel bill for the third quarter, compared with 74% of its $2.5 billion consumption a year earlier. Also that, Ryanair Holdings Plc, Europe’s biggest discount carrier, kept its coverage unchanged for this financial year at 90%.
  • Kenya Airways fuel bill was about $400m in 2014. The KQ 2012 rights issue Information Memorandum noted that, in December 2009, the KQ Board approved a fuel hedging policy of hedging for up to 80% of the Group’s fuel requirements for the upcoming 12 months and for up to 50% of its fuel requirements for the upcoming 24 months, on a rolling basis.
  • Fuel hedging in Africa:   Two of KQ’s main rivals are Ethiopian Airlines (ET) and South Africa Airways (SAA). ET recognizes that jet fuel is a major expenditure of the airline (about $791 million in 2012) and they manage this risk using various hedging strategies for a maximum period of two years on a rolling basis; and the maximum to be hedged is 75%. At SAA, where fuel is also their biggest cost (35% or $754 million in 2012), their policy is to hedge a maximum of 60% of the fuel exposure on a 12-month rolling basis.
  • The hedges have actually worked well in Kenya Airways favour except for the spike years of 2009 and 2015. There was no loss in 2012 and 2013, a slight gain in 2014 and now a larger loss in 2015.
  • So fuel hedges are not a factor in KQ’s record loss.

Capital Gains Tax in Kenya

It’s a new year, and with it comes the reintroduction of the capital gains tax (CGT) in Kenya. This is not the first time it’s appeared (it was suspended in 1985), but previous attempts to reintroduce it in 2007 and 2011 were set aside by parliament. This time it has stuck and is now the law, with the a 5% tax imposed on the transfer of land, buildings and investment shares.

While guidelines have been published by the Kenya Revenue Authority (KRA) it’s still unclear how the tax is to be determined such as on the buying and selling of shares.

For the last few weeks there’s been a mini-rush to complete the sale of some land and share deals. e.g. Equity Bank’s divestiture from Housing Finance with a sale of 24.9% to British American Investments (Britam) for Kshs 2.7 billion ($30.3 million) was concluded on December 31, 2014 (presumably beating the tax deadline).

With land deals, there may be some double taxation, in that  that while a buyer pays stamp duty of 4% of the sale value, the government will also deduct 5% from the amount paid to the seller for the same piece of land.

CGT will apply when  a property is gifted, abandoned or when the rights to a land title. Exemptions allowed under CGT include transfers that involve retirement benefits, divorce, land that is less than 100 acres, when a company issues shares, motor vehicles, estates of dead people, in corporate restructurings, and if someone sells a house they have lived in for more than 3 years.

Curiously the guidelines have something special for Kenya’s budding extractive industry, but which some investors are not happy about as for sector, which includes, oil, gas, and minerals comes up for some special attention: The net gain on disposal of interest in a person owning immovable property in the mining and petroleum industry is taxable..at 30% for residents and 37.5% for non residents.