Nairobi imposes a new obstacle on Uganda over the importation of fuel

Kenya has increased the bond charge for petroleum imports headed for Kampala, Uganda to $45 million, creating a new obstacle for Uganda’s direct fuel import system.

Ruth Nankabirwa, the Minister of Energy and Mineral Resources in Uganda, stated that Kenya has raised the amount of bond costs required at the Vitol Tank Terminal International (VTTI) storage facility in Mombasa from $15 million. This rise is causing a hindrance to Uganda’s efforts to reduce the cost of fuel.

VTTI is a privately owned terminal that connects to the pipeline network of the Kenya Pipeline Company in Mombasa. It provides access to the Ugandan market and other landlocked nations located to the west.

A bond fee is a form of bank guarantee utilized by oil companies when importing fuel for the transit market, typically duty-free fuel. Its purpose is to ensure that any duties and taxes owed to the appropriate revenue body are covered in the event that the commodities are sold locally.

The bond can be utilized to mitigate taxes in the event that the corporation chooses to dispose of the gasoline domestically, thereby assisting the Kenya Revenue Authority in avoiding substantial losses in tax revenue and fees.

Insiders report that the Ministry of Energy in Kenya sent a letter to the Kenya Revenue Authority (KRA) requesting an increase in the price. This adjustment is anticipated to be transferred to users in Uganda.

“We anticipate that prices will become more competitive as long as we are not compelled to bear additional expenses at the port. Currently, I am returning to Kenya to meet with my colleague, Mr. (Davis) Chirchir, due to a specific matter.” Mrs. Nankabirwa stated.

The banks that are issuing the bonds are expected to require additional time to adjust the amounts in order to account for the new bond fees. This would result in an increase in demurrage charges before the cargo is cleared by the Kenya Revenue Authority (KRA). Consumers in Kampala will bear the increased demurrage expenses.

“Kenya has raised the bond fee at the Vitol terminal where we unload our products. When the bond fee increases by $40 million, it puts pressure on the Uganda National Oil Company (UNOC) to also raise their fees. This means that Ugandans are unlikely to experience lower fuel prices,” she explained.

CS Chirchir had not replied to the allegations made by his colleague from Uganda as of the time of the press deadline.

Uganda and Kenya have the highest fuel prices in the East African area, with a cost of $1.46 per liter of super. In Kampala, the price of one liter of diesel is $1.37, while in Kenya it is $1.33.

Kampala’s reliance on direct fuel importation as a means to reduce pump costs has become a focal point, after President Yoweri Museveni’s previous attribution of expensive fuel on intermediaries within the Kenyan fuel importation system.

The recent disclosure of Kenya’s increased bond fee requirements once again highlights the disputes that are primarily linked to Kenya’s choice to engage in a government-to-government supported fuel imports.

This setback occurred several months after the issuance of a license to UNOC was delayed, which led Kampala to take Kenya to the regional court in late last year.

In September of last year, Kenya refused to provide UNOC a license, which led Uganda to take the matter to the East African Court of Justice. UNOC obtained the permission in March of that year, so resolving a diplomatic dispute between the two neighboring countries. Nairobi rejected UNOC’s application due to several grounds, one of which was the absence of a local presence consisting of at least five retail stations and five licensed retail stations.

Furthermore, UNOC was unable to provide evidence of achieving an annual turnover of $10 million for the past three years. This failure occurred despite Kampala’s assertion that Kenya was imposing impractical requirements.

Last week, UNOC’s initial shipments reached the port of Mombasa, marking a significant step towards reducing Kenya’s dependence on domestic oil businesses after many years.

The government-owned Ugandan corporation entered into a five-year agreement with Vitol Bahrain, following a dispute arising from Kenya’s abandonment of the Open Tender System in favor of a Government-to-Government arrangement with three large oil companies from the Gulf region.

Kenya signed an agreement with Saudi Aramco, Abu Dhabi National Oil Company, and Emirates National Oil Company to receive fuel on credit for a period of 180 days.

The purpose of the contract was to counteract the depreciation of the shilling by discontinuing the monthly requirement of approximately $500 million that oil companies had to pay for fuel.

President Museveni criticized Kenya for not engaging in sufficient consultations, which led Uganda to choose a comparable agreement with Vitol Bahrain.