Industry

Kenol faces closure over refinery row

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Kenya Petroleum Refineries stopped processing crude for Kenol-Kobil on July 13th over a Sh456 million debt. Photo/FILE

The energy sector regulator on Thursday warned of a possible expulsion of oil marketer KenolKobil from the Kenyan market, raising the prospect of supply disruptions and a steep rise in prices of petroleum products.

KenolKobil, Kenya’s second largest petroleum marketer by marketshare, is facing action from the Energy Regulatory Commission (ERC) for breach of the law that requires all oil marketers to refine at least 40 per cent of their products at the Kenya Petroleum Refinery Limited (KPRL).

The company was thrown out of the Mombasa-based refinery in June following a dispute over unpaid refinery fees that it has moved to court to contest. ERC has given the firm two weeks to meet the requirements of its operating licence or have it withdrawn.

The refineries stopped accepting crude from KenolKobil for processing on July 12 after an arbitration court found the oil marketer had not paid Sh456 million in processing fees to KPRL following a dispute over revised rates.

KenolKobil which is challenging the arbitration award is in turn demanding in excess of Sh4 billion in revenue losses it claims arose from KPRL’s inefficiency.

“You have 14 days from the date of service of this letter to show cause why the above licence should not be revoked,” ERC said in a August 17 letter to KenolKobil.

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The firm’s officials could not be reached for a comment on Thursday.

The action is expected to add pressure on the firm’s share price at the Nairobi Stock Exchange (NSE) where it has been trading sluggishly in the past three months.

Stock brokers said the Sh456 million dispute with the refinery has seen many investors give KenolKobil counter at the NSE a wide berth, leaving the share price on a free fall.

The marketer is also facing multi-billion legal challenges from Kenya Ports Authority, the Kenya Revenue Authority and Kenya Pipeline Company.

Investors fear that the huge claims could wipe out KenolKobil’s profits or push it to the edge of bankruptcy and have been waiting for signals that they are being resolved.

The marketer’s share has oscillated between Sh10.70 and Sh9.90 in the past three months, helped by a thin float at the NSE.

“The company’s financials are looking good but the disputes have been a turn off to investors,” said Erick Musau, a financial analyst at African Alliance.

A possible exit of KenolKobil from the petroleum retail market is raising concerns that consumers may soon have to grapple with an acute supply disruption given the large market share it controls and the heavy investments its rivals would require to plug the gap.

Kenol’s market share stood at 19.6 per cent in the first half of this year behind market leader Total with a 31 per cent stake, according to data from the industry lobby — Petroleum Institute of East Africa (PIEA).

The French oil giant Total overtook KenolKobil last year after it acquired American firm Chevron’s assets in Kenya.

KenolKobil however remains the marketer with the largest retail network of 180 stations compared to Total’s 176 — making it a critical player in the distribution of petroleum products in the country.

“An abrupt ouster of KenolKobil from the market will disrupt supplies in the short term since it has a big share of the market,” said a marketer who requested anonymity fearing possible conflict with the regulator.

Should ERC throw Kenol out, its rivals, notably Total and Shell, would require time to restructure their storage and finances to handle the additional demand.

“But who will want to commit resources on temporary demand given the possibility of Kenol settling the disputes and returning to the market,” added our source.  

Smaller oil marketers reckon that the exit of Kenol could also alter the pricing landscape, arguing that will allow Shell and Total to dictate prices to the disadvantage of consumers.

Total, Shell and KenolKobil control 68 per cent of the market and have been setting the pace for petroleum pricing making the exit of one of them easing the competitive pressure that keeps prices relatively stable.

“Total and Shell will be tempted to look for bigger margins should ERC make good its threat at expel Kenol,” said another marketer.

This is compounded by the fact that the owners of Shell are preparing to cede a majority shareholding to a consortium led by PE shop Helios Partners—a transaction that has reduced its aggressiveness in the marketplace.

This means that Total is set to emerge the victor should Kenol be expelled from the market — a move that is likely to catch the attention of the monopolies commission as it may push the French firm beyond the market dominance threshold of 33.3 per cent. 

Kenol Kobil is on its part facing the prospect of incurring heavy losses Kenya being its most important market that accounts for a significant fraction of its revenues.

More recently, KenolKobil has been on an aggressive expansion drive with big buyout deals in Ethiopia, Tanzania, Zambia and Rwanda.

It has been keen to diversify its earnings away from Kenya where margins have been thinning out with increased competition and high cost of doing business.

In recent years, the combination of capacity constraints on the national pipeline and a high cost business environment has slowed down the petroleum industry’s earnings forcing out a number of big oil players.

The firm’s grip on the local oil market has recently loosened with a re-energized Total Kenya, helped with the acquisition of Chevron assets.

Kenol’s share of the market share has dropped to 18.7 per cent in June from 23.6 per cent last year

The group posted profit of Sh1.1 billion in the six months to June compared to a loss of Sh431 in the same period last year helped by higher fuel prices.

Its turnover stood at Sh60.3 billion for the first half, compared to Sh43 billion in a similar half last year.