Ministers Ruth Nankabirwa (Energy) and Matia Kasaija (Finance) tour the Jinja Storage Terminal (JST) on January 20, 2024. PHOTO/FILE
The Uganda National Oil Company (UNOC) announced last week that Uganda’s oil consignment had docked at the Kenyan seaport of Mombasa.
The 58,000 metric tonnes is the first direct shipment of refined petroleum products by UNOC following last year’s passing of the Petroleum Supply (Amendment) Act,2023 (“the Act”). The Act effectively mandates UNOC as Uganda’s sole importer and domestic supplier of petroleum products.
As such, all licensed oil marketing companies are required to purchase their petroleum products from UNOC or any other person nominated by the Minister of Energy and Mineral Development to import and supply them in Uganda.
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This situation raises several concerns about whether establishing a statutory monopoly with UNOC is a setback or a solution for ensuring that Ugandans receive the highest quality petroleum products at the lowest possible prices.
A solution?
The government asserts that establishing the monopoly was aimed at resolving persistent problems like fuel overpricing by Kenyan intermediaries and supply instability, which have caused frequent fuel price hikes in Uganda.
As a single entity managing the supply of fuel, the UNOC can streamline operations and reduce inefficiencies, ensuring a more stable and reliable supply chain.
UNOC could also set prices that reflect actual costs and prevent overpricing usually done by some overzealous private companies. By eliminating intermediaries who may add markup costs, UNOC claims that it can offer more competitive and consistent pricing.
UNOC could also address supply and pricing issues by maintaining strategic reserves to buffer against supply shocks and stabilise prices during periods of high demand or external disruptions.
As the sole supplier, UNOC can achieve economies of scale, reducing the per-unit cost of fuel by leveraging large-scale operations. These savings can then be passed on to consumers in the form of lower prices.
These saved costs can also help UNOC re-invest in the necessary infrastructure to enhance storage, distribution, and supply networks, reducing the risk of supply disruptions and ensuring a steady flow of fuel.
Additionally, as a statutory monopoly, UNOC can engage in long-term planning and secure long-term contracts, reducing vulnerability to short-term market fluctuations and geopolitical issues that could impact supply and prices.
The sole guarantee of achieving these goals is that the populace would have to trust UNOC to prioritise public interest over profit maximisation. This trust is also backed by government oversight ensuring UNOC is held accountable for fair prices and a stable supply.
The Act provides for some mechanisms to ensure a secure and affordable supply of petroleum products including the Minister of Energy and Mineral Development initiating legislation to support continuous and competitive petroleum supply, the Commissioner of Petroleum Supply enforcing free market principles and fair competition, and allowing petroleum product prices to be governed by supply and demand in a free market, except during declared supply emergencies.
In a highly volatile market, these promises seem comforting. Last month, the International Energy Agency (IEA), a global energy watchdog based in Paris, released a report forecasting that oil supply will reach 114 million barrels per day by 2030, approximately eight million barrels per day more than the projected demand.
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The IEA noted that this would create spare capacity not seen since the peak of the Covid-19 lockdowns in 2020. Consequently, while this surplus could lead to lower prices for consumers, it would also reduce profit margins for oil companies.
Such an environment could then prompt market consolidation, with larger companies acquiring smaller ones, and strategic production cuts all of which may distort fuel prices.
A strong UNOC may potentially stave off the effects of such geopolitical challenges from affecting the country.
A setback?
The Competition Act that was recently passed calls for the promotion of fair competition by prohibiting anti-competitive agreements that adversely affect the market.
When assessing such agreements, factors considered include whether they force existing competitors out of the market, create barriers to entry or result in any consumer benefit or pro-competitive impact.
For these reasons, some have argued that the UNOC monopoly goes against the spirit of the Competition Act. However, these critics often overlook section 9(6)(d) of the Competition Act which allows some anticompetitive conduct if the consumers are allowed a fair share of the resulting benefit.
This implies that UNOC must operate in a manner that fosters efficiency and progress while providing tangible benefits to consumers, despite its monopoly status. So the big competition question then is, are their tangible benefits for Uganda flowing from this monopoly?
As earlier mentioned, UNOC’s monopolistic status enables the company to exert control over the pricing and supply of refined petroleum products and excludes other competitors who desire to import refined petroleum or who own modular refineries.
A single supplier however well-intentioned they may be, cannot always stave off some complications that a diverse group of suppliers could have done.
A case in point is the recent move by Kenya to increase the bond fee on UNOC’s consignment to which the Minister of Energy and Mineral Development, Ruth Nankabirwa, replied, “Increasing the bond fee to 40 million US dollars means that UNOC will also have to raise its prices, making it unlikely for Ugandans to see a reduction in pump prices.”
A diversified pool of suppliers could have avoided this issue since they are not heavily dependent on one single source or country for petroleum products. Kenya knowing this can maintain such fee levels unless there is some high-level diplomatic intervention again.
Secondly, UNOC can leverage its monopolistic position to extend its dominance into other areas of the petroleum supply chain. This includes securing a leading role in both the midstream sector (transporting and supplying crude oil to refineries and transporting refined products) and the downstream sector (retailing refined petroleum products to consumers).
In the midstream sector, UNOC can dictate terms and conditions for transportation and distribution service providers, given its monopolistic influence. If UNOC ventures into the downstream sector, it could gain control over both midstream and downstream activities.
This would allow UNOC to set prices for refined products, potentially supplying its network of petrol stations at monopolistic prices. The efficiency of this vertical integration would impact UNOC’s product and service pricing and the profitability of other midstream and downstream service providers.
To avoid this, UNOC must be aware of engaging in cross-subsidisation, refusal to deal, tying arrangements, and unjustifiable discrimination among customers or suppliers.
In conclusion, while the establishment of UNOC as a statutory monopoly aims to address critical issues like fuel overpricing and supply instability, it brings both potential benefits and significant concerns.
The government’s intention to streamline operations and achieve economies of scale could indeed lead to lower prices and a more reliable fuel supply for Ugandans. However, the monopoly’s impact on fair competition, market dynamics, and pricing must be carefully monitored to prevent abuses of market power.
Ensuring transparency, accountability, and adherence to fair competition principles will be crucial in realising the intended benefits for consumers. Ultimately, the success of this approach will depend on UNOC’s ability to balance public interest with operational efficiency while fostering an environment that encourages innovation and progress within Uganda’s petroleum sector.
Simon M. Mutungi (PhD) is a Legal Consultant / Attorney-At-Law and has pursued advanced postgraduate studies in competition law and economics from Yale and Cape Town. [email protected] / @shakamara on Twitter/X.
