RESERVE CAPACITY

Why Kenya won't benefit from low global oil prices for long

This was an opportunity for Kenya to import crude oil to build up a reserve stock.

In Summary

• Would there have been a silver lining to all this gloom for net oil importers such as Kenya?

• Certainly yes, but subject to the availability of adequate strategic reserve storage capacity in the country.

An employee holds a gas pump at a petrol station
An employee holds a gas pump at a petrol station
Image: FILE/ REUTERS

Aircraft fleets are currently grounded, factories have gone quiet and more than 2.5 billion people are in some form of lockdown.

Governments are fighting an invisible enemy, the novel coronavirus.

The consequence is a massive disruption of all aspects of the global economic and social order.

The world energy market, especially the oil and gas sector, has suffered one of its greatest shocks since the oil crisis of 1973, except that then, the prices went north, while this time round they have dived south.

 
 

As of April 20, the price of West Texas Intermediate (WTI) which is the US benchmark crude had plummeted to a record low of below $15 per barrel since 1999 from an average price of $60  in January. This translated to a price slump of more than 75 per cent.

The BRENT, which is the UK benchmark crude has not fared better either, having dropped from an average price of  $64 per barrel in January to 27.24 on April 20.

Diesel prices are Thursday expected to fall by close to Sh20 a litre - the largest margin in 13 years, Business Daily reported on Thursday.

"A brief sent to the Petroleum Ministry by the energy regulator and seen by the Business Daily indicates that the pump price of diesel will fall to Sh78.07 per litre in Nairobi from the current Sh97.56, representing a drop of 19.9 per cent," the daily said.

Ocean-going crude vessels are full everywhere and storage facilities the world over are choking.  OPEC was thrown into a spin in March when Saudi Arabia and Russia, two of its key producers, could not initially agree on the level of production cut-back that would stabilize the market and ameliorate the oversupply and lack of demand problem.

However, mid-April,  some agreement was reached by the 23 odd members of the Organization of the Petroleum Exporting Countries to cut down production by 10 million barrels per day.

This was not without protestation by some of the members such as Mexico, which only agreed to cut its own production by 100, 000 barrels per day as opposed to the 400, 000 barrels requested by OPEC.

But what do these cutbacks mean for the weaker members of OPEC who do not have the financial reserves to survive the set period?

 
 

Going forward, OPEC and the International Energy Agency have warned that the weaker members who rely almost entirely on oil revenues to finance their national budgets would suffer up to 85 per cent revenue loss.

Nigeria, for example, relies on oil revenue to finance up to 90 per cent of its budget.

It had based its 2020 budget estimates on an oil price of $57 per barrel. Consequently, it has been forced to revise its budget downwards.

SILVER LINING FOR  OIL IMPORTERS

Would there have been a silver lining to all this gloom for net oil importers such as Kenya? Certainly yes, but subject to the availability of adequate strategic reserve storage capacity in the country.

A report quoted by the Daily Nation on April 25, 2019 and attributed to the Petroleum Institute of East Africa (PIEA) put Kenya’s constrained fuel consumption at 5.92 billion litres per year.

This consumption figure is constrained by the high cost of fuel in the country. Previous years performed better and registered figures above six billion litres annually, which translates roughly to 16 million litres of consumption per day.

The current storage capacity in the country is almost exclusively provided by the Kenya Pipeline Company, which is assessed at about 645 million litres.

Under the best conditions and when all the tankage is full, this would only last the country about 40 days, yet the International Energy Agency recommends at least 90 days of fuel reserves for countries in order to wade off supply disruptions.

The fact that international oil prices have hit an all-time low would have been a great opportunity for Kenya to import both crude and refined oil to build up a reserve stock and maintain a steady supply with a view to stabilising oil prices in the country.

However, we may not benefit from this situation because of the limited storage capacity of only 645 million litres.

We, therefore, do not have the infrastructural capacity for a strategic oil reserve, with the net effect being that the benefit of low oil prices may not be felt at the pump by the consumer.

With adequate reserve storage capacity, the current oil glut in the international market would have presented the best opportunity for the country to buy cheap and stockpile for the coming days in order for the low oil prices to be felt at the pump level by consumers.

Then what options can the Kenyan government explore going forward and informed by the present scenario?

In the current oil marketing structure in the country, all oil Imports are done by the Oil Marketing Companies. Moving forward, my humble submission is that the government should consider importing its own oil to go into the national strategic reserve.

This would enable it to take advantage of the international oil glut and rock bottom prices and pass the same to the consumer through low prices at the pump.

In addition to the existing tankage held by KPC, the government should consider developing national strategic storage facilities and the attendant infrastructure. Sites like Lamu, which is the center of the LAPSSET Corridor project should be front runners for consideration.

Eliud Owalo is a management consultant specialising in strategy formulation, implementation and control. 


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