Bankers to earn less from oil import deals

Crude oil tanker at the Mombasa port. file photo | nmg 

By NEVILLE OTUKI

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Summary

• A study by the ERC recommends a reduction in the fees charged by banks on their letters of credit from the current allowable maximum of 1.2 per cent of the cost of the petroleum cargo to 0.8 per cent.
• For guaranteeing the oil dealers, banks charge a fee currently capped at 1.2 per cent of the cargo’s total costs, including transport expenses, under Kenya’s petroleum price control regime.

Banks will earn lower fees from guaranteeing oil dealers in making global payments for imported petroleum stocks if the energy regulator adopts a proposal to cut costs attached to the lenders’ letters of credit.

A study by the Energy Regulatory Commission (ERC) recommends a reduction in the fees charged by banks on their letters of credit from the current allowable maximum of 1.2 per cent of the cost of the petroleum cargo to 0.8 per cent.

A letter of credit is a written commitment by a bank on behalf of the buyer indicating that payment to the international seller will be made on time.

For guaranteeing the oil dealers, banks charge a fee currently capped at 1.2 per cent of the cargo’s total costs, including transport expenses, under Kenya’s petroleum price control regime.

“It is recommended that a mid-way letter or credit allowance of 0.8 per cent be applied to all imports. This will allow importers to seek competitive letter or credit rates,” the report says.

The Energy ministry awards one oil marketer the right to import petroleum in bulk every month on behalf of the entire industry through the open tender system (OTS).

This bulk purchase by one oil dealer requires huge capital outlay, making it necessary for marketers to secure letters of credit to assure global petroleum firms. “The OTS allows a ‘maximum’ of 1.2 per cent, which is what is applied all the times in the price formula,” the study says.

READ: Mombasa motorists to pay more in petrol price plan

Upon arrival at the Mombasa port, dealers are allotted oil share based on their market size and storage facilities they have. Bigger traders such as Total Kenya and Shell get more.

Industry data shows that banks that issued letters of credit for last month’s cargo made about Sh250 million, based on the landed costs for super petrol, diesel and kerosene procured last month. This excludes jet fuel.

Currently, there are 2,316 petrol stations in Kenya, out of which 36 per cent belong to oil marketing companies such as Total Kenya

, Shell and KenolKobil

and operated by dealers.

The remaining 64 per cent are owned by private investors and operated by independent dealers.