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Monday, October 30, 2006

Oil Majors getting a BUM rap - Its politics not economics!

The Oil Industry in Kenya has had enough BS from the Government. They have started fighting back but still act as wimps.

The Government is successfulyy scoring populist points with the voters by acting tough on Oil Marketers.

The Oil Majors contend they get a maximum of 10% as their margins but this includes all operating costs e.g. salaries, depreciation, maintenance, rent , etc.

Apparently the "cost" of oil is relatively low but the following adds to the cost of petrol.
  • Import Duties (bulk of the added cost)
  • VAT
  • Fuel/Road Levy (3/- per litre)
  • 3/- additional cost of local refining vs importing White Oils - Petrol, Jet Fuel - directly
  • Losses through forced local refining (inefficient process thus 15% lower production of White Oils). Black Oils (Fuel Oil) have a lower sale value
  • Interest costs on late refunds (Kenol & Total borrow at least 11% while they receive 0% on the late refunds)
  • Higher transport costs to Nairobi & Western Kenya - using lorries - since KPC spent KES 1 Billion building a HQ instead of upgrading the pipeline! The cost-benefit from an upgraded pipeline far outweighs savings on rent!
  • Demurrage costs as KPC favours certain players when the ullage (storage) is allocated
  • Pathetic roads means transporters charge "extra" which is then reflected in the price
  • The petrol stations sell petrol at break-even prices while using their convenience stores, garages & restaurants as the profit centers
  • Licenses, municipal taxes & administrative costs
  • Forced imports through OTS i.e. all importers have to buy from the same vendor
  • NEMA certification
Basically, the cost of petrol delivered to the customer costs 35/- per litre (or lower) based on $60 per barrel.

The "gross profit" is KES 3-8 per litre. From this the oil marketers have to pay salaries, rent, maintenance, utilities, etc from that slim profit margin. Safaricom's gross margins are a hefty 50%! Why? Its a duopoly that government turns a blind eye to!

The additional 45/- is skimmed off by the government through taxes, no payments of interest on late refunds, KPRL & KPC's inefficiency. The law does not allow Oil Marketers to sue for timely payment of refunds!

Why aren't NOCK stations selling petrol at larger discounts than the Oil Majors?

I think the Oil Marketers in Kenya are wimps. They need to take the government head on and ask:
  • Where the taxes are going?
  • Why are refunds delayed by 8-12 months (thus adding 11% to the landed cost)
  • Why is KPC not expanding the pipeline asap?
  • Why are the roads leading to & from all major oil depots atrocious?
  • Why do we need more MPs with HUGE perks while refunds are delayed?
Why do we pay taxes (as private firms, listed firms or individuals) without seeing the benefits?

15 comments:

Anonymous said...

LOL. So the govi makes a larger profit on petrol than kenol or total?

Taxes are too high in Kenya. No wonder people don't want to pay taxes.

Kudrinketh said...

Good analysis except you neglected to mention that the aforementioned costs are fixed. when oil prices decrease, these oil companies do not respond in kind,and that's a legitimate reason for everyone,including the govt, to be concerned about.

I know you'll say that they have to hold off reducing prices until they sell off the stock of crude oil they bought at the higher prices,well, that would be reasonable if when crude oil prices go up,they'd hold off increasing gas prices until they sell off the stock they bought at the cheaper price.they're quick to raise prices and very slow to reduce them,so they profit unfairly. That practice is called price gourging.

Kudrinketh said...

@CT

A suggestion:I know you and Banks have listed your positions before, but it would be better if you disclosed any positions held when you analyse an industry or stocks.

I just think it would be fair for readers to be aware so that they can read between objective analysis and stock pumping.

coldtusker said...

kudri - I do not discuss private matters... unless I want to. I could lie but I won't. I enjoy analysis. Period.

I insist folks do their research. If they don't shauri yao!

No pump and dumps here... If you want those there are other forums like www.stockskenya.com

If you PAY me then you can expect disclosure but not when its free... In any case, I prefer my privacy. Period.

coldtusker said...

kudri - there are variable & fixed costs BUT the oil firms have taken it on the chin since they were unable to pass on the FULL increases in price (elasticity of demand).

Nevertheless, the taxes remain too HIGH. Even worse, where are the benefits of those taxes?

Please dont tell me seeing your MPs new & huge SUV is reason enough to pay taxes!

Kudrinketh said...

cmon CT:

What's so private about disclosing positions held,you've already disclosed before.And what's the deal with disclosing on condition of payment.

I'm a long term member of yahoo's stocks message board(since 1999)and position disclosure is standard practice, no money exchanges hands. we're all small investors sharing ideas and opinions.

We just want to ensure that the opinions shared are objective be it by you or the visitors.

Hey, how about we vote on it, and since this is your blog you get VETO power.Just remember, from Spiderman; "with great power comes great responsibility"

coldtusker said...

kudri - LOL... nice argument... but I ain't spidey!

No dice. BTW, I hardly make buy/sell recommendations since that involved PRICE.

PRICE is set by emotions NOT by logic...

Sorry, but nope... Anyway, have you tried Motley Fool?

coldtusker said...

BTW, pump & dump can be used for small firms... To do that on KQ is nigh impossible for most folks (including myself)... Same for Kenol (75% owned by Petroholdings aka biwott)... or Total...

bankelele said...

Even though share listing is a personal matter, there are only about 40 shares to buy. It would be much more illlustrative to ask a kenyan business leader what his salary, real estate, vehicle, and business investements were, not just NSE portfolio.

Nguer (Total) said he did not see the government going back to setting fuel prices, just 12 years after they were de-regulated them(1994)

I agree that taxes, refinery and pipleine costs are high, but what are the alternatives? leaving oil companies to ship their product will have more, unnecessary ship and road traffic taxing our limited infrastructure (at ports and on the road).

Kudrinketh said...

CT:
I love Motley Fool,I got interested in investing after reading "The Motley Fool's Rule Breakers,Rule Makers".Once a year I subscribe to their website and download all the buy recommendations for the previous 12 months and then cancel subscription within the 30 day grace period..LOL.

coldtusker said...

Banks - Importing White Oils is cheaper since you can order smaller loads than Crude.

Also, firms like Kenol can order 1 shipload of White Oil & re-export. Remember White Oils are a group of multiple fractionals e.g. Jet Fuel which can be imported in the quantities desired with no waste.

Furthermore, the (Kenyan) pipeline does not carry crude.

If we plan to keep the refinery than we need to have other countries invest thus creating a REGIONAL refinery that is larger & efficient.

kenyanentrepreneur said...

CT:

your questions will be answered in 2030 - the year the "vision" will come to light.

wait and ye shall receive.

kenyanentrepreneur.com

coldtusker said...

I will probably be DEAD by 2030 at this rate!

Its an easy promise to make since most of the folks in the current government - who put together this vision - will be kaput by then!

Ssembonge said...

I'm not sure what the price of petrol is in Nairobi, but the oil companies have a 10 -20% profit margin.

In mainland USA, taxes average 21 cents per gallon compared to $4 per gallon in taxes in the UK.

A gallon is 3.something litres.

So it looks like the government collects almost $2 per gallon in Kenya.

kenyanentrepreneur said...

ssembonge:

Interesting analysis on the gasoline tax. You'd think that the roads would be much better given how much the government is getting!

what are they doing with the money? I know, I know...it's a loaded question, but

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