Will the drop in demurrage costs cut petrol prices?

News that Kenya Pipeline Company’s newly-constructed storage tanks at the Nairobi Terminal have brought down demurrage costs by 50 percent could not have come at a better time.

Kenyans are in the middle of a fight to survive the ripple effects of the recent steep rise in cost of petroleum with the September addition of 8 per cent value added tax on pump prices.

The government, through KPC, has over the past couple of years undertaken a number of essential petroleum infrastructure projects to enhance availability of fuel in the domestic market as well as in neighbouring countries that depend on Kenya for their needs.

These include replacement of pipelines, enhancement of storage capacity and investment in loading facilities to create a sufficient and efficient oil and gas infrastructure that can offer adequate, reliable and cost effective supply of petroleum products across the region.

At the centre of Kenya’s and East Africa’s gas and petroleum supply challenges has been the fact that development of requisite infrastructure has trailed the pace at which demand is growing.

This makes KPC’s May 2018 completion of four new storage tanks with capacity of 133 million litres a milestone for Kenya and the region. The Sh5.3 billion project commenced in November 2014 with the award of the contract to Prashanth Projects Ltd (PPL).

Now fully operational, the new tanks have, besides guaranteeing security of supply of petroleum products, also enhanced operational flexibility and increased tank turnaround at Kipevu oil storage facility in Mombasa resulting in more ullage creation and significant reduction of demurrage charges.

Demurrage charges are incurred as vessels wait at the Mombasa port to discharge fuel into KPC’s system because of insufficient capacity.

This is what makes the new capacity critical in the petroleum market.

In June, for instance, just before the tanks became operational, demurrage costs stood at a monthly average of Sh154 million. This had by October fallen to a monthly average Sh79 million -- almost 50 percent reduction in the costs that have dogged the market over the past four decades.

With this sharp fall in demurrage charges, it is expected that Kenyans will soon start paying less for their fuel as demurrage is a significant factor in the Energy Regulatory Commission’s pricing of petroleum products. At the moment, tanker owners charge marketers demurrage penalty which adds to about Sh1/litre.

The four additional tanks each with a capacity of 33.4 million litres – coupled with the recent completion of the new Mombasa-Nairobi pipeline popularly known as Line 5 -- - offer sufficient capacity for receipt of higher volumes of diesel and super petrol products.

It is clear that the new tanks and Line 5 bear the potential to adequately serve Kenya and the region’s petroleum demand that is expected to stand at 11.4 billion litres in 2020 and 24.5 billion litres in 2044 by gradually bringing down the cost of fuel and by extension the cost of living.

JOE SANG, MD, Kenya Pipeline Company.