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Mega storage and pipeline projects raise hope for improved efficiency in oil industry

The Kenya Pipeline Company storage tanks in Nairobi. Photo/FILE
The Kenya Pipeline Company storage tanks in Nairobi. Photo/FILE 

The petroleum industry, long hit by inefficiency, is expected undergo a major transformation when several mega projects meant to inject extra capacity are concluded in the short term.

A range of projects are lined up to expand the country’s petroleum storage and pipeline facilities to match the growing demand for products in the region.

“We are deliberately addressing the storage issue because it has caused serious challenges to the industry over the years. We have been vulnerable as country without sufficient capacity to back up our stocks,” said Joseph Njoroge, the principal secretary in Energy and Petroleum ministry.

In one of the key projects, the Kenya Pipeline Company (KPC) plans to more than double the capacity of its fuel terminal in Nairobi to cater for the extra load of petroleum products when a new pipeline linking the capital with Mombasa becomes operational in 2016.

The oil firm said it will construct four additional storage tanks with a total capacity of 133.52 million litres, an equivalent of 22 per cent of its present total national capacity of 612.32 million litres.

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The Nairobi terminal with a present capacity of 100,528 cubic metres is KPC’s second largest after the Kipevu Oil Storage Facility (Kosf) that holds 326,333 cubic metres of petroleum products.

“The objective of this project is to provide sufficient capacity for receipt of higher volumes of products expected once the Mombasa -Nairobi pipeline is replaced, enhance operational flexibility and provide window for tank maintenance when they fall due and maintain adequate stocks for petroleum products to cushion the economy from product outages when there are delays in importation or failure of the system,” KPC said in a tender document without giving details on the financing plans.

Analysts said an expanded KPC facility in Nairobi would also help marketers reduce demurrage charges and improve on the Open Tendering System (OTS) by removing restrictions on quantities of products that can be imported.

“Extra storage capacity is a plus for the industry because marketers currently live hand to mouth. The country survives on the little existing capacity, which is quite dangerous in the event of a disruption,” Mohammed Baraka, a lubricants dealer says.

Kenya is under pressure to boost its storage facilities and develop a strategic national petroleum reserve to stabilise supplies. The country has no strategic reserves presently and relies solely on oil marketers’ 21-day oil reserves required under industry regulations.

“We can no longer afford to exist without sufficient reserves because the pain of disruptions in supply to an expanding economy is too much,” Mr Njoroge said.

Extra storage facilities are considered critical by oil marketers in the region because of the thin margins realised from sales. In fragmented markets such as east Africa’s where margins are small, bulk supplies hold the key to profitability.

Primary facility

Currently the Kosf is the country’s primary facility of receiving imported refined petroleum products, both distillates and spirits, and has a storage capacity of 326 million litres, while its operational capacity is 269 million litres.

This comprises 58 million litres of petrol, 108 million litres of diesel and 103 million litres of dual-purpose kerosene.

The Energy and Petroleum ministry says the Kosf capacity is not adequate for regional demand of petroleum products estimated at 450 million litres per month.

“The capacity is constrained by low product evacuations at Nairobi and low flow rate on Nairobi to Western Kenya pipeline. Frequent rehabilitation of aged tanks results to ullage constraints and lack of operational flexibility,” the ministry said in a review.

According to the Economic Survey 2013, the total quantity of petroleum products imported into the country grew by 11.5 per cent from 3.8 million tonnes in 2010 to 4.2 million tonnes in 2011 and declined by 3.3 per cent to 4.1 million tonnes in 2012.

Petroleum dealers said the expansion of KPC’s terminal in Nairobi would help address the congestion at Kipevu.

“The Kipevu facility is stretched and holding more products in the hinterland and closer to the market would boost operations,” Mr Baraka said.

According to the Economic Survey 2013, consumption of petroleum fuels in Kenya rose from 3.1 million Tonnes of Oil Equivalent (TOE) in 2007 to 3.9 million TOE in 2011 and fell to 3.6 million TOE in 2012, partly due to supply constraints.

Incentives

The ministry has proposed a roll out of incentives, including tax breaks and land to help attract investment towards the construction of extra petroleum storage facilities and to help break the dominance in the oil marketing business.

It said although the licensing criteria had been simplified to facilitate the entry of indigenous traders in the oil business, the market remained an oligopoly with 80 per cent controlled by just four multinationals — Total Kenya, Oil Libya, Vivo Kenya and KenolKobil — that boast of private storage facilities.

“The government plans to put in place a strategy to encourage the growth of indigenous OMCs (oil marketing companies) by establishing more infrastructure for storage and sourcing,” the ministry said in its final published Energy Policy document that is set to be submitted to the Cabinet and Parliament for approval.

Statistics showed that as at December 2013 there were 88 OMCs licensed to import petroleum products while 176 companies held licences to market petroleum products in the country.

“Establishment of open access storage facilities by investors who are not necessarily OMCs should be encouraged as a matter of policy to further facilitate the operations of OMCs, which might not have individual storage facilities,” the ministry said.

“Incentives on land, levies and taxes should be put in place to attract private sector investment in storage facilities,” the ministry said.

Some players, however, faulted the strategy of dishing out incentives to encourage indigenous firms into the oil marketing business.

“A subsidy to grow indigenous Oil traders on top of the existing price control and other excellent regulations would be an undesirable and pointless risk to investment in the country” Polycarp Igathe, the managing director of VIVO Energy Kenya said.

But even as the government attempts to lure more private players to invest in storage facilities, some of them have already plunged into the business.

A private investor, VTTI, last year commissioned a Sh5 billion facility near Mombasa to supplement the strained national storage tanks at the Kosf.

Capacity

The VTTI facility is expected to provide an alternative storage and satisfy the needs of investors currently deprived of independent storage tank capacity to suit their demand to service the region.

“Our policy is to offer capacity to any OMC needing terminalling services and treat any customer on a first come-first serve basis. This will naturally benefit the independents as they don’t have storage facilities and they can then focus on building a retail and commercial network,” Merlin Figueira, VTTI general manager, told the Business Daily.

VTTI, the international bulk storage logistics firm that bought out the incomplete asset from troubled Triton Limited, said the facility with a total capacity of 111,000 cubic metres became operational at the weekend.

Much of the refined oil has to be trucked to neighbouring land-locked countries, meaning extra expense for the consumer. Road transport is slow and unreliable due to the breakdown of trucks and damaged roads.

“We want to a holistic solution to the supply challenges by having adequate storage facilities across the country. We want to have sufficient stocks of products conveniently stored across all the major towns across the country so that we avoid the inconveniences suffered whenever we have disruptions to the pipeline,” the Energy PS said.

The capacity expansion drive has also been directed at the existing main fuel pipelines. The Kenya Pipeline Company (KPC) last month called for bids for the financing of construction work on the new 450km pipeline.

The government is seeking up to Sh43 billion in loans to pay for the pipeline.

KPC is also planning to construct a new 122km pipeline between Kisumu and Sinendet to meet an increased demand of petroleum products in the region.
“The bottom line is to have an all-round efficient system from piping to storage,” Mr Njoroge said.

LPG plant

Besides the new pipelines, KPC plans to build a new liquefied petroleum gas (LPG) storage and bottling plant in Kajiado County.

Procurement manager Nicholas Gitobu said the company is seeking a suitable 80-100 acre site for the plant in Kajiado, preferably along the Nairobi-Mombasa railway line.

“Interested landowners with unencumbered titles are invited to submit offers,” he said in a public notice Thursday.

“The land must be fronting the railway line by between 0.5 kilometres to one kilometre along the railway line for operational purposes. It should be approximately 50 kilometres away from Nairobi city centre,” he said.

KPC said the Kajiado project will have an initial capacity of about 2,250 tonnes.

“The project timeline will depend on how soon we get the land,” the company spokesperson, Jacinta Sekoh, told the Business Daily.

A study jointly conducted by the Energy ministry and the World Bank in 2005 recommended that LPG facilities with a total capacity of 8,700 tonnes be set up in Nairobi, Mombasa, Kisumu, Eldoret, Nakuru and Sagana.

The study had recommended development of LPG facilities at Mombasa (6,000 tonnes), Nairobi (2,000 tonnes), Nakuru (150 tonnes), Eldoret (200 tonnes), Kisumu (300 tonnes) and Sagana (50 tonnes).

At the time the cost of establishing the bulk LPG import handling, storage and distribution facilities in Mombasa was estimated at $28.6 million while that of establishing the inland facilities was put at $43.3 million.

These budgets are, however, expected to be much higher currently given the rise in costs of construction materials and equipment.

Demand for LPG in Kenya and the east and central Africa region is presently constrained by lack of LPG import facilities at Mombasa and a weak distribution network.

Data by the Kenya Bureau of Statistics showed that demand for LPG has increased in the last five years from 49,400 tonnes in 2005 to 93,600 tonnes in 2012, an increase of about 89.4 per cent.

The study had estimated the demand in Kenya at 76,674 tonnes by 2010 and in other countries in the region at 17,105 tonnes.

Storage capacity, however, was low at 3,960 tonnes, comprising 1,250 tonnes LPG tanks at the Kenya Petroleum Refinery Limited (KPRL), 1,300 tonnes at the Shimanzi Oil Terminal and 1,410 tonnes owned by the oil marketers.

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