On Thursday last week, President Museveni signed into law the petroleum supply (Amendment) Act, 2023. This law will give the Uganda National Oil Company (UNOC) exclusive rights over the importation of Oil into the country. UNOC will buy the buy the fuel from Vitol EC Bahrain.
The justification the government gave to introduce Vitol EC in this equation is that UNOC isn’t sound financially to guarantee the refiners that they will not pull out of this commitment. Since UNOC can’t commit 2.2 billion dollars to secure the 2.5 billion liters destined for Uganda from the refiners, they sought out Vitol which in their view is a $500 billion company that can make this commitment.
Anyone who thinks that this arrangement will give us competitive prices is very naïve. Currently Kenya has three (3) companies that do exactly what the Uganda government is proposing to do with the UNOC monopoly. Saudi Aramco trading, ADNOC for Abu Dhabi and ENOC all interface with the refiners. The Kenyan government has designated three (3) oil importing companies that buy from the Saudi Aramco. This provides a certain level of competition which has a bearing in price. UNOC seeks to replace these 3 Kenyan companies so that they import fuel into Mombasa.
On paper this idea appears good and attractive especially if they don’t restrict themselves from getting supplied by only Vitol. But government, and in particular this government that has been around for nearly four decades, has never been good at business. If UNOC was able to source cheap fuel with Vitol, they would continue doing so as they would out compete any Oil Marketing companies (OMCs). But they can’t and UNOC is making losses so they want guaranteed profitability and get rid of competition.
I can absolutely guarantee with certainty that UNOC has not turned a profit since they started trading fuel in Uganda. And now they are running the risk of getting petroleum products from a global trading company like Vitol which employs certain leverage ratios (loans) when sourcing commodities. It’s possible that our prices will be dictated by how much profit target UNOC wants to declare in a given year not by market forces. A combination of all these factors can’t bring our fuel costs down.
There are a lot of high fixed costs that are independent of global price and regional platts oil price that UNOC will do nothing about. The Pipeline pumping costs from Mombasa to oil terminals in western Kenya, where Ugandan OMCS Pick their oil from, are all fixed and UNOC can’t do anything about them.
When you add our expensive inefficient oil transportation methods we use via road, this UNOC deal won’t bring down the price. This move comes at the time when OMCS have been divesting from Uganda for the last 6 to 7 years because it’s not as profitable to run an OMC
The largest contributors to fuel costs are the prices in Kenya; this is billed in US Dollars and it is basically the global price, transportation to Kenya ports in Mombasa and then oil companies add a small margin usually in the range of 10-20 USD per 1000 litres. This proposed UNOC-Vitol deal will do nothing about this.
In Uganda the market is saturated with very many oil companies and competition is basically based on pricing. Most companies are making very little margins on fuel as it is the only way to compete and increase sales. And there is little inform of product differentiation. As this is happening government is introducing a monopoly supplier that will make everything worse.
The days when a litre of fuel was sh. 3500 are long gone. If you think government is good at business, take off time to find out what happened to the oil industry in Sri Lanka last year.
Samuel Obedgiu- Civic Human Rights Activist and Biotechnologist
Email. sammyobedgiu@gmail.com
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