Fuel pump prices at Shell Mulago in Kampala as of July 07, 2023. Analysts say the pump price of both petrol and diesel are widely expected to shoot up. PHOTO | MICHAEL KAKUMIRIZI
Uganda's decision to terminate its oil import deal with Kenya two months ago may lead to higher pump prices, despite a drop in global rates, experts say.
The Kampala government, however, insists that the takeover of the fuel import business from what President Museveni refers to as exploitative middlemen, is the right thing to do.
Uganda for while has been accusing Kenya of dotting the oil supply chain with middlemen, pushing up the cost of fuel in the country.
Documents seen by the Monitor show the landlocked country's recent policy shift to get into a government oil deal between the Uganda National Oil Company (UNOC) and Vitol will see it import a barrel of oil at $120 (about Shs 444,000) compared to $90 (about Shs333,000), with the extra cost likely to be passed to consumers.
This is could see fuel prices which slightly dropped in the June review rise by at least 30 per cent, adding more pain to the final consumer.
This then can introduce inefficiencies and escalate transport and import costs to mostly the industry players, directly impacting every Ugandan.
Previously, Uganda benefited from economies of scale by jointly importing oil with other regional players, enabling the use of larger and more economical vessels.
Currently, Uganda's imports amount to about 60 kilotonnes (kt) of oil, necessitating smaller vessels which increase freight costs.
The change has also strained smaller Ugandan importers. Before, with eight cargoes arriving monthly for the region and Uganda's share being about 22 per cent per cargo, Ugandan marketers managed their finances efficiently, recycling cash just in time for the next shipment.
Under the new dispensation, having to import their entire monthly requirement in one go—comprising separate cargoes of diesel and super—places significant upfront financial burdens on them. This shift not only increases financing costs but also complicates logistics.
Products arriving in Mombasa must now be stored or wait offshore, incurring either storage costs at private terminals or demurrage charges, as Kenya prioritises its products through its multi-product pipeline. These additional expenses are a further financial strain on Uganda.
Documents in our possession reveal that the first Ugandan cargoes sourced from these same Gulf national oil companies by VITOL, highlight the questionable economics of the decision to switch.
A cargo purchased from the Emirates National Oil Company at $65 per barrel from Jebel Ali port escalates to at least $80 before the shipping cost is incurred and other overheads shipping compared to the $90 all-inclusive cost of Kenya's government-to-government agreements.
This minimal difference raises questions about the economic rationale behind Uganda’s policy shift, especially given the slim margins and the pressures on VITOL and other middlemen to match Kenyan prices without incurring losses.
Gas and Oil expert David Kimei wonders why the Ugandan government was quick to dump the Kenyan plan which has proved effective over the years.
"Why punish consumers in the name of protecting sovereignty? The region must live beyond protectionism and embrace cooperation, especially on vital products like oil and gas. Although this is just an initial shipment, shipping costs do not change overnight,” he noted.
"UNOC promised the nation that the plan would streamline the supply chain, reduce costs, and improve efficiency, which is vital for economic growth and stability but we are seeing a reverse,'' Energy consultant Jamleck Mbiira told the Monitor on Monday.
As Ugandan oil marketers await detailed invoicing from UNOC, the broader consequences of abandoning collaborative regional procurement loom large, posing risks of supply gaps should the chosen trader, driven by unfavourable economics, decide to withdraw.
This precarious position showcases the challenges of relying on traders over government partnerships, a strategic decision that experts fear could jeopardise Uganda’s oil supply security.
In June this year, a survey by Business Insider ranked Uganda among the top 10 countries in the continent with the highest fuel prices at position five, behind Central Africa Republic, Senegal, Zimbabwe, and Sierra Leone.
According to the survey, a litre of fuel averages $1.468 in Uganda, way above a global average of $1.30. It was ranked at position 54 globally in terms of costly fuel
Sour grapes
Officials at UNOC in Kampala however describe this effort as baseless, saying the proof of the pudding is in the eating, and that consumers will experience reprieve on pump prices in a matter of days.
“Anyway, that claim is not backed with evidence and is defeatist. We would have settled for the previous arrangement, but we opted for this new arrangement hoping for better results,” Mr Tony Otoa, the UNOC spokesperson told this reporter.
