- The proposed changes will convert the process from the current open tender system to Government-to-Government arrangement.
- Under the Constitution of Kenya, a public procurement system ought to be fair, equitable, transparent, competitive and cost-effective.
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Now that the dust has settled on the so called “government-to-government” tender arrangement, where Kenya claims to have employed 'diplomacy' in order to purchase oil from friendly Gulf states at a cheap price, it's time to review and deliberate on this policy change regarding the importation of petroleum products.
The proposed changes will convert the process from the current open tender system to government-to-government arrangement.
This arrangement has been constituted under the Petroleum (Importation) Regulations, 2023 (Legal Notice No. 3 of 2023). These regulations may be cited as the Energy (Revocation) regulations of 2023 that also revokes the Petroleum rules of 1981.
Background that informs the 'Arrangement'
The government, for the first time since 2015, floated what it christened “a government-to-government arrangement tender” that was deliberately structured and closed to restrict participation to state-owned national oil corporations of the Gulf States, such as Saudi Aramco, Emirates National Corporation and Abu Dhabi National Oil Corporation.
Kenya's trade balance (the difference between exports & imports) has been widening. In 2019, the monthly average deficit was $984.3 million. In 2021, this figure grew to $1.07 billion deficit. In 2022, the deficit was $1.19 billion. In essence, this means that there are less dollars flowing into the economy than are flowing out and this has exerted pressure on the Kenya shilling.
At a recent National Assembly Departmental Committee on Energy hearing, the Cabinet Secretary Davis Chirchir is quoted as having stated that the foreign exchange reserves were under pressure since the dollar requirements by oil marketing companies account for 30 per cent of Kenya’s total dollar requirements.
The CS went on further to state that, the newly agreed-upon measures would enhance the country’s forex reserves, leading to a reduction in currency speculation and the revitalisation of the inactive interbank market.
This is where the government's concern came from. Since petroleum is/was imported through open tender system, it required oil marketing companies to source for dollars to meet the import bill, and with the scarcity of dollars in the market, the unofficial explanation is that Kenya last year ran an artificial exchange rate market, which caused a biting shortage of fuel resulting in rationing of the essential commodity. The parallel exchange rate saw lenders buying and selling the US dollar at levels well above the official rates mandated by the Central Bank of Kenya
To cure this problem, the government used the shortage of dollars as a window of opportunity to source for petroleum products. This is where Legal Notice 3/2023 on Petroleum Importation Regulations comes in.
Part II Section 3 of this legal notice states that, "importation of petroleum products under these regulations through a government to government arrangement shall be deemed to have occurred through the Open Tendering System". Section 5 of the new regulations, firmly puts the Ministry of Petroleum in charge of the Government to Government Petroleum importation exercise.
The idea behind the system being introduced is that, instead of buying from spot contracts, oil will be imported through long-term contracts. The tender for a nine-month contract was floated with the payment for the petroleum products to be made within six months.
What does the deal entail?
The government of Kenya received seven bids after the tender was floated.
Saudi Aramco, Saudi Arabia's National Oil Company, was nominated to supply two Diesel cargo consignments monthly. On the other hand, Abu Dhabi National Oil Company was chosen to supply three cargo consignments of Super Petroleum on a monthly basis. The agreements are for six months and credit based. ADNOC and Saudi Aramco will supply the products to their nominated local Oil Marketing Companies( OMCs).
The nominated local OMCs will pay the two in dollars starting on the 7th month after supply. The nominated local OMCs will supply the larger market and will be paid locally in Kenya Shillings.The first imports were received in the first week of April 2023.
What does government-to-government procurement constitute?
Public procurement in Kenya is governed by the Public Procurement and Asset Disposal Act 2015, whose full title is, "An Act of Parliament to give effect to Article 227 of the constitution ; to provide procedures for efficient public procurement and for assets disposal by public entities; and for connected purposes". This legislation came into effect on January 7, 2016, repealing the previous Public Procurement and Disposal Act of 2005.
The recent adoption by Kenya of the procurement method known as “government-to-government procurement” which is a method of procurement that occurs where a bilateral or multilateral agreement is entered into between the Government of Kenya and a foreign government, agency, entity or multilateral agency. Usually, such an agreement would be a financing agreement such as a grant or a concessional loan with respect to a project or supply of goods and services.
It is normal for such an agreement to provide that a specific supplier shall undertake the project or supply the goods and services that is being financed under the agreement. The method is not regulated under Kenyan procurement law and raises queries in relation to its compliance with the minimum requirements of a public procurement system set out in the Constitution of Kenya.
Under the Constitution of Kenya, a public procurement system ought to be fair, equitable, transparent, competitive and cost-effective. A question arises as to whether the Government-to-Government 'Arrangement Tender' between Kenya and the other National Oil Companies from the Gulf States for the importation of petroleum products on credit is a cost-effective procurement method as is required under the Constitution of Kenya. Does this so- called Petroleum purchase 'arrangement' qualify or meet the threshold of a Government-to-Government multilateral agreement? Not by a mile.
In my opinion and specifically with regard to this petroleum purchase arrangement, the resulting contracts cannot be deemed to have been on the best available terms to Kenya as the tender was not competitive at all. The very short time given to bidders is also a subject of debate in the petroleum sector. The tender was advertised on a Wednesday and closed on Friday - for such a lucrative multi-billion dollar deal. Value for money cannot be said to have been attained.
The two most common and basic sales models for Petroleum products are term and spot contracts. For a National Oil Company trading desk, the key task is to discover the difference between the price of the crude it is selling and an international benchmark price, and then decide how to maximise that difference in their favor.
There is a longstanding belief that term contracts are best for buyers and that spot deals are best for sellers, yet term contracts have become more flexible and can be seen as a string of spot deals.
Whether a sale is done through spot deals or term contracts, producers selling their exports can receive prices that are full value and likely very close to equal value. Producers mostly sell their crude the way buyers prefer. Roughly two-thirds of all traded oil is sold on a term basis, with the balance sold on a pure spot basis, the price for an individual oil cargo.
All sales, whether term, tenders, auctions or exotic retroactive pricing, are ultimately priced against spot crude benchmarks. The spot market tells the world what different types of oil are worth that day. Physical trades are monitored by pricing companies, such as Platts or Argus.
Contrary to popular belief, money from oil is not made at the pump but from negotiations and relationships with banks and refineries in the Gulf. In this case, the tender documents clearly shows under the subtitle ‘bidding prices’ that the price basis shall be the reference price known as Platt, and specifically that, the bidding price shall be, “Platt Asia, Pacific Raba Gulf Markets PLUS freight and premium”.
If this was the case then, and since Platt price was used as the reference and allowing prospective bidders to compete only on freight, a big question lingers as to why this tender was locked for a whole 9 months, barring other International Oil Companies and seasoned Oil Traders from bidding?
As a matter of fact, it has been reliably learnt from one local weekly magazine that a prominent trader and regular winner of the OTS contract shared correspondence with a refinery from the gulf showing that he had prices that were way below what was quoted by the preferred bidders. This proves the point with the implication of this being that, there is no assurance that oil imported into the country under the so-called ‘government to government’ arrangement would be cheaper.
The so-called 'government to government' arrangement are Term contracts which explicitly link their prices to benchmarks through formula pricing. A simple formula pricing involves a differential that is updated each month and applied to an established benchmark. Saudi Arabia sets adjustment factors for its formula prices in the first week of every month and communicates them to clients, which is seen as standard procedure.
Term contracts have a clause specifying where the buyers will pick up the oil. The free-on-board price is set for the designated port. Buyer and seller can also make arrangements so the cargo gets delivered by the seller, which then results in a delivered price that includes cost, insurance and freight. Term contracts also have clauses that determine when the price of crude gets triggered, such as when the cargo is loaded and the ship sets sail, sometime at sea, or when the cargo arrives at the port of destination.
Another issue proving to be controversial are the liberal range of privileges and concessions which the government offered to the sole local oil marketing company, which has since been nominated to import the cargo. The details are contained in a letter of comfort by the National Treasury that was included in the bid documents.
It says: “On or before the commencement date, the nominated OMC shall obtain and maintain a letter of Credit confirmed by a financially sound and reputable investment grade international bank acceptable to him." The truth is that every big OMC in this country is capable of doing what these Gulf corporations were offered, why were they left out?
Proper scrutiny of the details of the tender document shows that there is little in the new arrangement to show that it is indeed, “a government-to-government” arrangement, where Kenya employed diplomacy in order to purchase oil from friendly Gulf states at a cheap price.
Why was the National Oil Corporation of Kenya, a fully integrated State Corporation involved in all aspects of the petroleum supply chain covering the upstream oil and gas exploration, midstream petroleum infrastructure development and downstream marketing of petroleum products skipped in the government-to-government deal that Kenya got into with other National Oil Companies from the Gulf States for the importation of petroleum products on credit?
Wouldn't it have made sense for the government of Kenya to give conditions for the suppliers and to demand the involvement of Nock? Nock should have been strategically placed in the contract to enable it to generate some revenue and to ease the burden and strain that it currently is to the Exchequer.
The idea that Nock would have been unable to handle this kind of transaction estimated to be worth north of $3 Billion dollars as it is currently struggling to repay a loan of Sh8 billion does not add up. With the backing of the Kenyan government via letters of comfort and other available financial instruments, NOCK would have received a much needed revenue stream, except that it probably wasn't meant to be a beneficiary. Isn't this the same government that involved Kenya Railways in the development of SGR when it was literally on its death-bed?
The recommendation inter alia is that the Kenyan procurement legislation should be reformed in order to regulate this mode of procurement in future. There's a Latin saying that goes,"Ubi fumus ibi ignis." - Where there's smoke, there's fire.
Energy economist (oil and gas)