The Way Forward

1
Developing Downstream Markets The Case of
Kenya By Ngeso Okolo
2
Introduction
Kenya Bio Data Location Eastern Africa,
bordering the Indian Ocean, between Somalia and
Tanzania Area Total 582,650 sq km Land
569,250 sq km Water 13,400 sq km Population
33,829,590 Population growth rate 2.56 (2005
est.)
3
Life expectancy at birth Total population 47.99
years Male 48.87 years, Female 47.09 years
(2005 est.) Religions Protestant 45, Roman
Catholic 33, indigenous beliefs 10, Muslim 10,
other 2 Languages English (official),
Kiswahili (official), numerous indigenous
languages Literacy Definition age 15 and over
can read and write Total population 85.1, Male
90.6 Female 79.7 (2003 est.) Source
www.cia.gov
4
Background Oil Industry

• The Kenyan oil sector was regulated prior to
  October 1994. During this period, the oil prices
  were set and monitored by the government.
• NOCK was a regulator and supplied 30 of
  industry requirements.
• Since October 1994 when the oil industry was
  deregulated, the mandate to import 30 of the
  country's crude oil requirements ceased and NOCK
  has since converted to become one of the
  competitors in the industry.
• Another notable change attributable to the
  liberalization of the industry has been the
  emergence of independent petroleum dealers.

5
Background Oil Industry contd

• Another change relates to legislation by the
  government in order to bring order in the
  industry, apart from heavily funding the
  exchequer.
• All the industry players are required by law to
  process at least 70 of requirements through the
  Kenya Petroleum Refineries Limited (KPRL).
• Taxation has also been another issue of
  contention. There is continued pressure on the
  government to rationalize taxation of oil
  products as increased costs of crude with exert
  inflationary pressure on the economy.

6
Downstream Market

• Scope
• Downstream mainly refers to refining, marketing,
  international trade, and shipping of petroleum
  products.
• Products
• Main focus is on
• a) Automotive (Diesel, Motor gasolines, Jet A1)
  and other fuels
• b) LPG, Aviation fuels and Lubricants
• Sectors
• Commercial
• Retail
• Reseller
• Export

7
Developing the Downstream

• Aviation
• One of the biggest challenges is the safety
  aspect
• One must consider investing heavily in systems
  and machinery that will be acceptable
  internationally and more specifically to IATA
• Kenyas strategic location amongst regional
  warring states has also provided an opportunity
  for this sector. For example, all relief supplies
  that are targeted for The Sudan, particularly
  Southern Sudan, are coordinated through the
  Northern parts of Kenya in Lokichoggio. Most
  Non-Governmental Organizations have set up their
  bases of operation in this area from where even
  refugee activities are coordinated.

8
Developing the Downstream

• Commercial
• Competition here, is normally very stiff and so
  the margins are quite depressed
• Driven by need for equipment, huge credit lines,
  heavy discounting, lube surveys and other
  incentives
• Coming to other products like LPG and lubricants,
  the companies that have their own brands are
  developing wholesalers. LPG is now readily
  available at supermarket chains. Lubricants are
  now also being channelled through wholesale and
  spare part shops.

9
Developing the Downstream

• Retail
• Being high margin by nature, this sector also
  requires huge investment in order to be able to
• Meet the minimum safety standards as set, and
• Obtain the desired customer impact.
• Also it is only in these areas that other
  services that are much sought-after can be
  availed and impact on the clientele as required.
  These include
• Tyre Care Centres
• Lubricant changing bays
• Car wash Centres
• Ration Stores (Marts)
• Full fledged food courts
• Entertainment / Social facilities
• Expansion of the retail network has been critical
  in spreading services like sale of bottled LPG,
  top-up lubricants and even complete service of
  vehicles.

10
Developing the Downstream

• Reseller
• Oil marketers compete, mainly to meet their
  volume objectives. As a result this sector is
  very unattractive in terms of margin, but is
  largely cash rich.
• To increase presence of LPG and lubricants, oil
  marketers are also developing resellers through
  use of containers and downtown spare part
  dealers. Again they bear the brunt of margin
  erosion, but gain on market penetration, and
  therefore market share.
• Export
• This sector is also facing very stiff competition
  owing to the fact that ports in neighbouring
  countries are beginning to open up.

11
Developing the Downstream
Export contd Availability of the scarce fuel oil
required to run industrial boilers in the region,
gives Kenya an edge. Bunkering activities of
diesel and fuel still thrive in Mombasa and the
same is transported by road all the way to Rwanda
and Burundi for the textile and cement factories
in those countries. White products are also
beginning to find their way into Sudan with
reconstruction work currently in high gear.
Kenyas participation in the peace initiatives
for Somalia and Sudan may just pay dividends as a
huge chunk of materials that may be required will
be sourced from it
12
Developing the Downstream

• Trading
• This arm of downstream has largely remained the
  preserve of the big companies because of the
  capital outlay that is required
• As a result of the fact that in Kenya petroleum
  is procured through the Open Tender System (OTS),
  the cash rich companies have found this a first
  step of making some money upon winning of these
  tenders.
• Hampered by new tax legislation following the
  recent budget speech by Minister for Finance
• Other Initiatives
• Fleet Management
• Environment, Health and Safety
• Corporate Social Responsibility

13
Developing the Downstream

• Conclusion
• It has been shown that the positive accommodation
  and stability enjoyed by the sector was rudely
  shaken by deregulation to result in an
  environment characterized by severe competition
  and generally low profitability.
• The competition has taken the form of effective
  positioning by region/market/products, by site
  location/products/service offerings and by
  product supplies/financing modes. The result of
  this competitive pressure has been poor company
  profitability, shakeouts, outright insolvencies,
  or deliberate withdrawal from the marketplace.
• The future competitive outlook appears headed for
  more of the same.

14
Thank you all for your patience and attention