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Downstream Restructuring Kenyan Experience

Downstream Restructuring Kenyan Experience. 11 th African Oil & Gas ,Trade And Finance Conference Nairobi 23 rd -25 th May 2007 George Wachira Petroleum Institute of East Africa. NOT AN OFFICIAL UNCTAD RECORD. ABOUT KENYA PETROLEUM DOWNSTREAM.

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Downstream Restructuring Kenyan Experience

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  1. Downstream RestructuringKenyan Experience 11th African Oil & Gas ,Trade And Finance Conference Nairobi 23rd-25th May 2007 George Wachira Petroleum Institute of East Africa NOT AN OFFICIAL UNCTAD RECORD Petroleum Institute Of East Africa

  2. ABOUT KENYA PETROLEUM DOWNSTREAM 26 licensed marketing companies ( 7 companies= 86% market share) 2006 Annual Petroleum Consumption 3,730,000 M3 . Supplied 70 % through crude processing and 30% products imports. Demand growth over 8% per year Supply Chain Infrastructure Jetties at Mombasa with up to 80,000 Mt vessels berthing drafts A 1963 refinery (50% government/50% private). 10,000 Mt/day capacity. Hydro-skimming , but due to be upgraded to include cracking Pipeline from Mombasa to western Kenya . 2006 Annual throughput 3,826,000 M3 . Currently undergoing capacity expansion. Dilapidated rail system quite inadequate for petroleum haulage Road haulage to supplement pipeline and rail Transit for Uganda, Rwanda, Northern Tanzania, DRC, Southern Sudan Petroleum market is liberalized with free market prices Ministry of Energy currently responsible for petroleum policies and regulation Energy Regulatory Commission (ERC) will be responsible for petroleum sector regulation from July 2007 Petroleum Institute of East Africa(PIEA) oil industry stakeholders association. Petroleum Institute Of East Africa

  3. EXISTING & PROPOSED OIL PIPELINE TO UGANDA SUDAN Lokichogio ETHIOPIA KENYA SOMALIA UGANDA D.R.CONGO Eldoret Kampala Malaba Sinendet Port Bell Nakuru Kisumu Nairobi Isebania Kigali RWANDA Namanga Mwanza Voi BURUNDI Taveta Mombasa Dar es Salaam Petroleum Institute Of East Africa TANZANIA White Oil storage tanks Pipeline KEYS: ·Rail siding Kampala, NB: Not drawn to scale Source: Kenya Pipeline co. Ltd.

  4. Essentials of an Effective Downstream Oil Sector • For a country to have an effective downstream oil sector it must have in place • An effective petroleum regulatory framework • Enhances safety, health and environment standards • Creates a a predictable and sustainable market governed by fair competition • Creates foundation for national energy security management ( e.g strategic stocks ) • Creates opportunities to harmonize oil sector with other national objectives and policies • An adequate ,efficient and flexible petroleum infrastructure • Essential for regulations to effectively hold • Prevents frequent regulation waivers and short--cuts • Downstream restructuring must therefore involve regulations and infrastructure Petroleum Institute Of East Africa

  5. Kenya Downstream Regulatory Milestones • Pre-1994 Oil sector was controlled • Wholesale and retail prices prices were set by Government using a cost-plus formula. • Only seven international companies and one NOC were in the market • Petroleum Act 1972 was effective (essentially regulated safety) • 1994 Petroleum Market was liberalized . • Prices de-controlled • Market opened up to competition (numerous local entrants) • Petroleum Act 1972 remained unchanged. No new regulations introduced. No additional regulatory capacity was put in place • Refinery profitability protection enshrined • 2003 a series of ‘reactive’ regulations introduced to harmonize petroleum market that had become disorderly and ‘free for all’ • 2006 Energy Act passed (petroleum ,electricity,other energy) to harmonize regulation of energy sector under one roof • July 2007 Energy Regulatory Commission (ERC) to be set up under the Energy Act 2006 Petroleum Institute Of East Africa

  6. Post 1994 Petroleum Liberalization Experiences • Liberalization was effected without introducing new supporting laws or capacity to monitor the market • Numerous players entered the market in all segments of petroleum business and licensing criteria was not fully thought through • Sub-standard and unsafe constructions sprung up all over the country especially in retail business • Unfair trading mal-practices emerged in the market • products adulteration with cheaper kerosene • exports dumping into local market • imports tax under-declaration • Government tax revenue dwindled • Unfair competition forced a number of ‘fair playing’ companies to withdraw from some markets Petroleum Institute Of East Africa

  7. Reactions to Post-1994 Liberalization Experiences • The oil industry stakeholders formed an Association (PIEA) in 1999 to champion creation of effective regulations and standards , and to foster self regulation among members. • In 2003 a series of ‘reactive ‘ regulations were introduced to correct market irregularities and inequities. • Criteria and conditions for business licensing was defined • Open Tender System for imports introduced • More common user facilities introduced (NOCK Nairobi) • Product doping introduced to curtail adulteration and exports dumping • Inter-government committee created to enforce rules and regulations • In 2004 Government developed a National Energy Policy and commenced development of comprehensive petroleum law and regulation involving all stakeholders • Energy Act 2006 was enacted but will be effected in July 2007. Petroleum Institute Of East Africa

  8. Energy Act 2006 • Enacted in Dec 2006 but will become operational in July 2006 • Regulation of all energy( petroleum, electricity, alternative energy ) under one commission . • The act brings all previous laws and regulations governing petroleum under one Act . • Creates Energy Regulatory Commission (ERC) with sufficient capacity to • License petroleum businesses • Issue petroleum facilities construction permits • Monitor and enforce standards and practices • Ensure fair and competitive market • Provides for future strategic stocks. • The Act has no price controls but gives Minister emergency powers to introduce price controls if deemed necessary. • The Act creates Energy Tribunal for appeals • Upstream E&P is not under the Energy Act 2006 Petroleum Institute Of East Africa

  9. LPG Reforms • 2004 Government policy • LPG usage to increase to reduce use of bio-mass to conserve forests • LPG to be made available and affordable • Increase domestic consumption from 40,000Mt to 200,000 Mt in 10 years(2006 usage is now 60,000Mt) • New LPG regulation effective 2006/08 • LPG cylinders and regulators to be standardized to permit flexibility and accessibility to customers • LPG transition committee formed to manage transition • Increased LPG supply chain infrastructure (all common user) • Construct a new common user LPG import jetty at Mombasa • Construct LPG import storage facility(6000Mt) in Mombasa • Construct LPG storage and filling facilities (2,000 Mt) for Nairobi • Construct LPG storage and filling plants for 4 upcountry towns • Upgraded refinery to increase production from 30 Kt to 115 Kt Petroleum Institute Of East Africa

  10. Pending Infrastructure Enhancements • Insufficient infrastructure is interfering with smooth downstream regulation and impacting on final unit cost of product to consumer . • Refinery upgrade will add value to crude oil processing and reduce unit cost of products • Improve flexibility to process different,heavier and cheaper crude oils • Improve white oil yields from crude oils by 15% • Improve on fuel quality ( diesel sulphur reduction to 50 ppm) • Improve gasoline octane levels • Increase LPG yields four times ( from 30 Kt to 115 Kt ) • Pipeline capacity expansion is already in progress and will • Reduce unit cost of distribution in the region • Increase safety by removing trucks from our roads • Larger LPG import facilities will reduce cost of imported LPG • Revamped rail system will increase efficiency and safety in black oils and LPG distribution Petroleum Institute Of East Africa

  11. Lessons Learned ! • Before any market liberalization always create sound laws and regulations and capacity to enforce. • Involve stakeholders sufficiently in creating new laws and regulations • Capacity ( budgetary , expertise ) to enforce regulations is what finally determines success and effectiveness of an orderly and competitive petroleum industry . • Full liberalization cannot be achieved until petroleum infrastructures (refinery , pipeline, rail, LPG facilities etc ) are adequate , flexible and competitive. • The government and private oil industry have a shared interest and responsibility to maintain a sound , orderly and competitive oil business • Regional transit interests have to be taken into account when restructuring the country’s regulations and infrastructure. Petroleum Institute Of East Africa

  12. Final Steps to complete re-structuring • The Energy Regulatory Commission to fast-track building of necessary capacity (organization , expertise, regulations etc ) to regulate petroleum. . • Urgent investment is required in petroleum infrastructure upgrade..refinery , pipeline, railways , lake barging, LPG facilities • Regional harmonization of cross-cutting petroleum standards and practices should be fostered through EAC • Develop policy,strategy and regulations for Bio-fuels Petroleum Institute Of East Africa

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