Oil experts have expressed mixed reactions over effect of price controls on businesses with small fuel marketers saying they are bearing the brunt of the caps as multinationals have money to diversify into lucrative ventures.
Analysts say it is the small independent oil firms that are losing business as the review of the tax system that provides for upfront payment of taxes together with introduction of price controls in the petroleum market has denied them the pricing power they used to gain marketshares from the oil majors.
“There are no games of flexibility of competition. The hands of marketers are tied,” said industry analyst, George Wachira.
Industry data shows for the past six months there have been major realignments with some of the big firms shifting focus to other products that are not covered by the controls like investing in jet fuel, fuel oil, cooking gas. Other oil firms have diversified into power generation.
Smaller players have been slow to gain marketshare from the oil majors over the past year as they rely on petrol and kerosene whose prices are regulated by the government—taking up only one per cent marketshare from the big companies compared to the more than 10 per cent in the three years to June 2010.
Between January and June, the majors controlled 85.3 per cent of the market in June 2007 compared to 79.3 per cent in March 2011 and 78.3 per cent in March 2010.
But have small petroleum firms matured to gradually make a strong challenge to predominant multinational presence? Analysts say their retail growth strategies are holding them back as most have retained the same number of stations for very long compared to multinationals that have a larger presence to dominate the market.
Only KenolKobil, a Kenyan fuel retailer with presence in nine other African operating markets, is gaining strong presence. The other small players have failed to sustain a big impression in the market going by the growth they have registered over the last years.
Despite local operators having lower overheads, and as such, expected to command strong market presence in the era of price controls introduced last December, most have failed to increase their capital base by reinvesting in the business.
Petro Oil is among the firms with plans to scale down operations, citing a difficult operating environment, but industry players say the company has many problems.
“Petro Oil has been deteriorating consistently due to lack of reinvestment in the business for the last four years. It is not control that is affecting it,” said an industry analyst.
State-owned National Oil Corporation of Kenya (Nock) despite staring at huge losses following a botched diesel import scam in March this year is among those making an impact in the downstream market, helped by acquisition of ex- Chevron stations.
But unlike national petroleum marketing companies in other countries which have embraced professional approach to business to create and maintain a strong brand, Nock is yet to achieve this kind of growth. Industry players say the significance and benefits brought about by these small firms is now under threat with the recent price controls. “Pressure controls are to be implemented full throttle. There are no two ways. We must reduce prices,” said Mahmoud Mohammed, Energy assistant minister.
Some industry players say the price controls are affecting everyone and it is becoming hard for companies to expand due to low earnings.
Peter Njeru, chief executive for Riva Petroleum—an independent firm—said price controls are a threat to small firms and the entire industry is feeling the heat.
“All oil industry players are feeling the effect. Its not only low margins, but the sector will witness reduced safety and investments levels in coming days,” he said.
“The controls are such that the margins are too low for companies to break even, invest in long-term projects like petrol stations and depots. The parameters (exchange rate, demurrage, margins) in the price formula are still not fully agreed upon by oil companies and ERC,” said Mr Njeru, who is also an official of the Petroleum Association of Kenya, the umbrella body for independent players.
Margins are guaranteed
However, Mr Wachira says under price controls, margins are guaranteed . “There is no difference between the main market in Nairobi. Before controls, money was being made in Nairobi and very little beyond Naivasha and western Kenya,” he said. Mwendia Nyaga, a petroleum consultant at the ministry says price controls have emerged as a threat to the independents, but not the oil majors.
“Total Kenya’s marketshare has been taken up by Nock and KenolKobil. At Sh3 a litre for an investment worth Sh65 million in a retail station is not enough. Financing overhead costs is zero or negative,” said Mr Nyaga.
Analysts say KenolKobil is gaining from its existence in markets, especially western Kenya, where other majors such as Shell and Total pulled out citing unfair competition from low prices by independents.
Mr Wachira says apart from location of stations, bulk supply in aviation and fuel oils to thermal power generation plants, is a strategy that is working for KenolKobil among other firms.
“KenolKobil has stations where Total and Shell do not. They are mostly the branded stations outside the main business centres where the independents that were previously low priced were found. KenolKobil has the highest number of products on the road. To survive, they did not stop trucking. There has been a deliberate effort to recapture lost marketshare,” Mr Wachira said.
“We have recorded organic growth by focusing on various segments of the business including fuel oils. We have also relied less on the pipeline,” said David Ohana, the general manager for KenolKobil.
“We have contracts for KenGen Kipevu I and III (120MW) for 18 months and six-year long contracts for Rabai Power (90MW),” he said.
KenolKobil’s share price has risen from Sh9.15 in May to Sh11.10 by closing of trading on Thursday last week on increased demand spurred by expectations for 50 per cent growth forecasts on first half profits over last year. The KenolKobil’s share price has risen by 20 per cent in one month while rival Total, whose net profit stood at Sh206.7 million in the three months to March compared to Sh206.3 million in a similar period last year shed one per cent.
Total Kenya’s strategy
For Total Kenya, a four- fold reduction of diesel intake by the Aggreko power suppliers with a capacity of 60 megawatts, down from 250MW last year, coupled with sale of ex- Chevron stations to Nock and Oilcom—another independent player as well as over-reliance on the pipeline has taken a toll on its dominant presence with a third of the overall share during 2010.
Shell is seeking to re-enter the western Kenya market to grow sales.
“Kenya Shell is looking to buy or lease fully developed stations in Eldoret. The stations should be located within a distance of maximum of three kilometres from Eldoret town centre. Stations outside this radius will also be considered,” said the firm’s retail manager Leah Munuve.
Tsavo Thermal Power with an installed capacity of 75MW is also being supplied by Shell.
The petroleum market has been dominated by a few multinationals often perceived as cartels due to their mode of operation. Sub sector liberalisation in the 1990s, brought in competition through a number of indigenous oil marketing companies.
In the free market era, retail service stations have been used by oil companies to balance losses made in other less lucrative business segments. Now, this will not be possible with the pricing formula.
The more integrated oil marketers may seek to increase their margins in business segments not directly impacted by the price formula which include cooking, lubricants, jet fuel, furnace fuel oil, marine sales, exports, and services at retail stations.