Total wrestles Sh7. 5b KenGen diesel supply deal from NOCK

State-owned National Oil Corporation of Kenya has lost a Sh7.5 billion a year bulk diesel supply contract with power producer KenGen after the two firms failed to agree on the terms for renewal.

Under the contract signed in March NOCK was to supply 170 tonnes of diesel to thermal plants at Embakasi in Nairobi and Eldoret that are owned by UK’s Aggreko, which produces emergency power on behalf of KenGen.

“KenGen asked Nock to extend the contract up to December 31 but we had our conditions that KenGen was unwilling to meet,” NOCK managing Director Mwendia Nyaga told the Business Daily without revealing more.

It is understood that NOCK wanted the price renegotiated in view of changing market conditions since the contract was entered into.

At the time, crude oil prices were at $48 per barrel (or 159 litres) while local diesel prices were Sh64 at the distributor level.

Nyaga said the company would focus on the expansion strategy unveiled a few years ago while looking for opportunities in the bulk supply business.

The contract will now go back to Total from next Tuesday.

Total used to supply the oil together with Triton Petroleum which was placed under receivership a year ago.

The transfer of the contract now means that Total will be supplying all emergency power stations in the country after it won in August the tender to supply Aggreko II which has a capacity of 140 megawatts in Nairobi (80) and Naivasha (60).

NOCK was supplying Aggreko 1 which comprises Embakasi (100 megawatts) and Eldoret (50 megawatts).

Monthly averages for diesel supplied to emergency power plants stand at 60 million litres a month.

This is a 62 per cent rise since March,” said Peter Nduru, ERC’s director for petroleum

While happy at the volume of business, Total managing director Felix Majekodunmi described the contract as challenging.

The KenGen deal represents volumes equivalent of what Total pushes through its retail network of 172 stations.

“KenGen’s is a tight contract, with fixed prices. It is highly competitive and tough. We have to manage our risks,” he said.

Industry sources indicated that the contract does not cover demurrage charges and the price is fixed for the entire term irrespective of market dynamics, making it less attractive for dealers with no hedging instruments.

Market share

During its term, however, the contract helped NOCK double its market share from 3.8 per cent to 8.2 per cent according to latest data from the Petroleum Institute of East Africa, an industry monitor.

With bulk supplies a key factor to market share in a fragmented market, Total’s market share is projected to rise from the current 24.3 per cent to about 29 per cent.

Unlike NOCK, Total is more flexible in its bulk supply pricing because it has a vast storage network in key consumption areas.

Dealers without adequate storage are often forced to lease space from rivals, who market sources said charge in the region of one shilling a litre per week.

NOCK was leasing the storage facilities for Aggreko in Embakasi from Total.

In the KenGen contract, the contracts are awarded to oil marketers who demonstrate they have adequate storage facility and financial resources to set up pipelines and pumps on a Build, Operate and Transfer basis.

The facilities are then transferred to KenGen but it is not clear whether the dealers are given adequate time to recoup their investment.