How G-to-G fuel deal sullied relations with Uganda

A worker fills the tank of a vehicle at a petrol station in Nairobi. The Middle East war has exposed Kenyans to major fuel price shocks. [File, Standard]

Since Kenya started importing petroleum products under the government-to-government deal, the deal has been under great scrutiny locally, but also by Uganda that imports nearly all its petroleum products through Kenya’s fuel infrastructure.

Kenya started implementing the G-to-G deal in April 2023, in what the government has always maintained was aimed at stabilising the shilling that had weakened to historical lows.

From the onset, a section of local leaders opposed to the deal called for greater transparency, but the government at the time dismissed their concerns, arguing that there was a need to stabilise the local currency that had significantly weakened against the US dollar, hitting an all-time low of Sh160 to the dollar. The G-to-G deal has been credited for strengthening the local currency to Sh129 to the dollar, where it has stayed since August 25.

While the government insists the stability has been due to reduced dollar demand from OMCs, there have been concerns, including by the International Monetary Fund (IMF), that this has been due to artificial management, including Central Bank absorbing excess dollars in the market that helped the shillings defy factors such as appreciation of the US dollar and high commodity prices, including oil.

In the G-to-G deal, Kenya signed agreements with three international oil producers , Saudi Aramco (Saudi Arabia), Abu Dhabi National Oil Corporation (Adnoc) and Emirates National Oil Corporation (Enoc), for the supply of fuel to Kenya on a six month credit period.

The Ministry of Energy and Petroleum explained that under the deal, the IOCs were required to either establish local subsidiaries or appoint oil dealers licensed in Kenya to handle the local aspects of the agreement. They chose to work through local counterparties, some of which are reportedly owned by key political figures.

Initially, the IOCs worked with Gulf Energy, Galana Energies and Ory Energy to handle local logistics. This list has since increased to six with the inclusion of One Petroleum, Asharami Synergy and Be Energy.

“The objective of the arrangement was to cushion the country from the negative effects of US Dollar liquidity that had almost ground our economy to a halt in 2022,” said Opiyo Wandayi, Cabinet Secretary for Energy and Petroleum in a statement yesterday.

Local critics have, however, dismissed the framework as designed to line up the pockets of a few elite Kenyans.

It has also resulted in a major fallout with Kenya’s largest trading partner, Uganda. The differences between Kenya and Uganda started emerging in late 2023 after Kenya had started implementing G-to-G in April. President Yoweri Museveni first made the claims of Ugandans being extorted by Kenyan middlemen in November 2023 who, he argued,  inflated its fuel import bill by as much as 59 per cent, which saw the country restructure its national oil company (Unoc).

The company, which at the time had much smaller operations, has emerged as a key petroleum sector entity in East Africa and today owns a 22 per cent stake in the Kenya Pipeline Company (KPC). Unoc, which bought the stake during the recently concluded initial public offer, has powers to decide who is hired to run what is deemed as a strategic energy infrastructure asset for Kenya.

In a further bid to secure its security of fuel supply, Uganda on Thursday broke ground for a 320-million-litre petroleum storage terminal in Mpigi District, Uganda.

Museveni last week repeated his earlier assertions that Kenyan middlemen have been fleecing Ugandans at the pump.

“No, it was not a government-to-government agreement. It was government to middlemen,” he said, while correcting a statement made by a senior official that Kenya’s framework was government-to-government during the groundbreaking of the storage terminal last Thursday.

In implementing the G-to-G system, the government said it reduced demand on the dollar to the tune of $500 million every month, which is what the oil marketing companies previously needed to import fuel. This accounted for more than a third of Kenya’s total import bill, which resulted in dollar shortages and hoarding, hurting other sectors that import both raw materials and finished products.

“At the time, all imports of refined petroleum products were paid for in US Dollars within a short period of five days after cargo receipt. The total import bill on account of refined petroleum products amounted to $500 million, being about 35 per cent of the total import bill,” said Wandayi yesterday, adding that oil marketers were forced to take expensive short-term loans to finance the purchase of dollars that were also not available.

“OMCs were forced to source US dollars from multiple banks, creating artificial demand, and this led to rapid depreciation of the US Dollar-Kenya Shilling exchange rate, recording a three per cent depreciation on a day-to-day basis.”

Before G-to-G, oil importers were previously competitively selected through the Open Tender System (OTS)). The system, which was run by the industry but supervised by the Ministry, was suspended in early 2023 to pave the way for the G-to-G framework. Under the deal, international oil companies (IOCs) would supply fuel to Kenya on a six month credit period, during which the local representatives of the IOCs in Kenya would buy the dollars in the local market incrementally over the 180 day period.

The deal was initially supposed to run for a six-month period but was extended to run till December 2024 but has since gone through several extensions to the end of next year.

Kenya’s opposition leaders throughout the implementation of the G-to-G deal criticised it, terming it variously as a grand scum that has, from time to time, plunged the country into turmoil and also noted that it is characterised by discrepancies, failures and corruption.

They have also questioned the reference of Government-to-Government, noting that Kenya did not sign any contract with Saudi Arabia or the United Arab Emirates (UAE) and that the country instead signed deals with state-owned petroleum companies in the Middle East, which does not qualify as state to state.

Critics also note that Kenya agreed on fixed premiums with the IOCs. This partly contributes to Kenyans paying more for fuel. Premiums are charges loaded to the cost of petroleum to cover suppliers’ costs, freight and insurance. Thus, while Kenya’s premiums are locked at about $84 per metric tonne of fuel, importers into Tanzania can pay significantly below this when the international oil market is stable, but they have also paid upwards of $135 during volatile times. Due to this and a higher tax regime, Kenyans pay the highest pump prices in the region at Sh214.25 per litre of petrol compared to Sh179 in Uganda and Sh205 in Tanzania.

Wandayi noted that the fixed premium for Kenya has over time come down, from an initial $97 per metric tonne of super petrol to the current $84 per tonne. The premiums for diesel, he said, has reduced $78 per metric tonne from $118and that of jet fuel dropped to $97 from $114 per tonne when the deal was initially signed.

“These premiums have remained fixed even during the height of the Middle East crisis when the spot market offers went up to as high as $400 per metric tonne,” he said.

Uganda said it is paying significantly lower premiums compared to what Kenya pays. According to figures presented during the ground breaking ceremony for the Mpigi District storage facility, government officials said Uganda was paying a premium of $118 per metric tonne for diesel under the previous arrangement, compared with $83 under its current arrangement with Vitol and Uganda National Oil Company (UNOC).

For petrol, the premium fell from $97.50 to $61.50 per metric tonne, while that of aviation fuel fell from $114.25 to $79.25.

Kenya’s G-to-G appears to have jolted Uganda into taking charge of its fuel supply chain.

In addition to the planned storage facility, the country has been restructuring its fuel sector, with among the most visible outcomes being the empowerment of the Uganda National Oil Company (Unoc) to be able to exclusively import fuel. It also signed a deal with Vitol Bahrain EC as the sole supplier of petroleum products to Unoc.

This started in November 2023, a few months after Kenya started importing petroleum products through G-to-G, when Museveni in a statement, said Uganda’s fuel bill was inflated by as much as 59 per cent due to the reliance on Kenyan middlemen and directed a relook into the sector.

“Without my knowledge, our wonderful people were buying this huge quantity of petroleum products from middlemen in Kenya. A whole country buying from middlemen in Kenya or anywhere else!! Amazing but true," Museveni said in November 2023, a few months after Kenya started importing fuel under the G-to-G deal.

He added that of the $2 billion that Uganda paid for the importation of petroleum, a significant portion was due to the involvement of middlemen.

“These intermediaries have driven costs up by as much as 59 per cent, resulting in avoidable financial strain on consumers. Why not buy from the Refineries abroad and transport through Kenya and Tanzania, cutting out the cost created by middlemen? Those involved were not bothered by these issues,” said Museveni.

Uganda is Kenya’s largest trading partner, accounting for 11.1 per cent of Kenya’s total exports. The country imports more than 90 per cent of its fuel through Kenyan systems and is susceptible to hiccups in the country’s fuel supply.

It now imports exclusively through Unoc, which then sells to OMCs with operations in Uganda. Unoc had faced difficulties in securing an import licence that would allow it to use Kenyan infrastructure. At the time, Kenyan authorities cited the law that requires players to have retail operations in the country to be issued with import licences.

The dispute escalated to the East African Court of Justice (EACJ) in December 2023. After months of push and pull between Kenya and Uganda, including threats by Uganda to ship its products through Tanzania, the issue was resolved in April 2024 following talks between Presidents Ruto and Museveni, leading to UNOC finally securing its licence and commencing direct imports through KPC’s infrastructure.

Unoc has in the recent past, appeared to be the stronger national oil company in East Africa after it acquired a 22 per cent stake in Kenya Pipeline Company.