Uganda recently announced that it would source and fund upfront its oil requirements directly from offshore suppliers and transit the oil through Kenyan infrastructure. Indeed, this is one of several workable transit options that have been used by the two countries at varying times in the past.
In 1982, when Kenya faced the severest ever forex challenges, it required that Uganda take responsibility for direct forex payments to their offshore suppliers, with Kenya’s responsibility reduced to providing transit capacity.
This time around, Kenya has been facing challenges in forex funding for oil imports, which include transit demands, necessitating government-to-government (G-t-G) oil supply arrangements.
I see no compelling reason Uganda cannot make a similar deal, as this will directionally ease Kenya’s dollar pressure. However, the timing of the transition has to coincide with the expiry of the current G-t-G arrangement, which includes Uganda’s needs.
Ideally, Kenya is obligated to facilitate efficient and secure transit of imports by landlocked countries. This is why Kenya continues to invest in ports and transit infrastructure from which it expects economic returns.
How each country sources and funds its offshore imports is in principle an individual country’s prerogative.
Kenyan companies that directly export oil products to Uganda and countries beyond may have to forgo margins associated with transit re-exports.
The important focus is that Kenya fully recovers capital and operating costs associated with the petroleum infrastructure, funding of the permanent line fills and tank-bottoms, and reasonable product loss allowances.
The two nations should constitute mutual forums for regular reviews of supply arrangements for mutual benefits, preferably with a Ugandan coordinating office based in Nairobi.
Indeed, such a consultative platform was attempted by Kenya, Uganda and Rwanda in 2013, but lack of follow-through and political support collapsed the efforts, with Rwanda essentially shifting most of its oil transit business to Dar es Salaam.
Oil is an internationally traded commodity subject to global price volatility and disruptive geopolitical events. This makes product landed costs, capacity to fund imports, and security of supply critical considerations for Kenya and Uganda. And this calls for carefully crafted collaboration.
The two nations should strive for joint shipments, preferably from the same loading port to achieve economies of scale and lower freight costs. Here I am venturing into a sensitive subject we call “trading”, often not as transparent as open tender systems, and which may ultimately deny both countries the least import costs.
George Wachira, petroleum consultant, wachira@petroleumfocus.com
Credit: Business Daily
