Kenya is reviewing how banks will be confirming letters of credit issued in support of the government-to-government fuel deal with the Gulf after the country risked supply disruptions from a delay in discharging a product last week.
The Business Daily has learnt that there was a delay in discharging super petrol which arrived last week in what the Energy and Petroleum Regulatory Authority (Epra) has attributed to hitches in paperwork by the issuing and confirming banks.
Epra director-general Daniel Kiptoo, however, said that any potential disruption to the supply of a product was averted and that the government is in the final stages of streamlining the process of confirmation of letters of credit to avert the recurrence of such incidents.
“Letters of Credit had been issued, confirmation was delaying on account of paperwork issued between issuing and confirming banks but that has been sorted and vessels are discharging. We have almost concluded a structure which will do away with Letters of Credit confirmation,” Mr Kiptoo told the Business Daily.
Some market players have, however, questioned the viability of such an arrangement given that letters of credit are anchored in engagement between the issuing and confirming banks.
“The way it works is that consignment will be discharged only upon confirmation of the letters of credit. The foreign banks give confirmation based on their assessment of the balance sheets of the issuing banks. Maybe last week’s incident points to something deeper. I am not sure what the director-general is talking about but I am not hopeful,” said a player behind one of the large chain of pump outlets.
On March 13 this year, Kenya shelved sourcing of petroleum products through the open tender system in favour of a credit-based deal with Saudi Aramco, Abu Dhabi National Oil Company, and the Emirates National Oil Company.
Letters of credit are commitments from one's bank that the seller will receive payment as agreed.
This comes at a time when Kenya is set to pay Sh247.43 billion ($1.64 billion) as the next instalment of the debt owed to the three Gulf oil firms that are supplying fuel under the government-to-government deal.
The Senate Committee on Energy heard that the United Arab Emirates and Saudi Arabia oil companies have received Sh127.26 billion ($848,378,738) from the supply of fuel on credit since the deal was sealed in March.
“We have paid $686 million since March to the international oil marketing companies. We have a balance of $1.087 million that is pending at the Kenya Commercial Bank (KCB) that will be paid once the letters of credit mature,” Paul Limo, the chief executive of Gulf Energy, told the Senate.
Angeline Maangi, the managing director of Oryx Energies, said the firm had paid Saudi Aramco $85.85 million for fuel supplied to Kenya under credit, leaving a balance of $161 million in the bank pending maturity of the letters of credit (LCs).
“I have attached a cover letter detailing the oil supplies by Galana. We have $478,064,249.96 of which we have paid $76,525,738, leaving a balance of $401,535,515 that is awaiting the LC to fall due,” Anthony Munyasya, the chief executive of Galana Energies told Senators.
The payments were made in September when the six-month credit period for the fuel cargo imports lapsed.
The deal has since been extended to December.
Gulf Energies, Oryx Energies and Galana Energies were handpicked by Emirates National Oil Company, Saudi Aramco, and Abu Dhabi National Oil Company to represent the foreign firms' interest locally having demonstrated the ability to import fuel on behalf of the sector through the open tender system.
“We are basically administrators on behalf of the Saudi and UAE international oil companies,” Mr Limo told the committee chaired by Nyeri Senator Wahome Wamatinga.
The three local oil firms appeared before the committee to shed light on the deal.
Narok Senator Ledama Ole Kina demanded to know if the companies have capacity to pay for credit oil imports.
He sought to know whether there are challenges in the deal and whether the country is likely to run out of petroleum products due to the failure by the local firms to raise enough dollars to pay for the fuel imports.
Mr Limo said the country has to pay for the fuel imports after 180 days and the three firms and KCB have an arrangement where the bank starts buying dollars after 90 days of fuel supply.
