DRAFT 01

COMMISSION PAPER ON PETROLEUM PRICING REGULATIONS STAKEHOLDERS FORUM

Background

1.0 The Kenyan economy underwent major structural reforms since early 1990s with a view to
improving the overall macro-economic efficiency, increase incomes, create employment
opportunities and improve the performance and productivity of public investments. These
reforms included abolition of price controls allowing the market forces of demand and supply
to determine prices and resource allocation, liberalization of foreign exchange and interest
rate regimes, privatization of Government stakes in non-strategic public institutions and
divesture of Government interests in activities of a commercial nature.

2.0 In line with these public sector reforms, the Kenya Government deregulated the downstream
Petroleum Market operations on October 27 th 1994. These reforms included liberalization of
distribution and pricing of petroleum products and partial liberalization of product supply.
Some of the reforms included abolition of the white oil rule, abolition of NOCKs 30% crude
oil supply quota, liberalization of transportation modes and attendant tariffs, legalization of
minimum operational stocks and introduction of suspended duty on refined products
imported directly into the country to cushion the refinery from competition from efficient
refineries in the gulf region.

3.0 In seeming to build a case for petroleum industry deregulation in Kenya, Arthur D. Little, in a
study undertaken in 1993 posited that the petroleum end-use prices would go down in a
competitive market environment free of exogenous factors as long as the country was not
going through an inflationary period. Since liberalization, the oil industry has attracted a
number of operators engaged in importation, exportation, distribution and wholesaling of
petroleum products.

Situational Analysis

4.0 However, it has been observed that the post deregulation retail prices of petroleum products
have not closely followed the changes in international oil prices. It has been argued variously
that oil companies are quick to adjust retail petroleum prices upwards when international oil
prices are rising and slow to lower prices when oil prices are falling. This implies that retail
petroleum prices are sticky downwards which generates non trivial economic efficiency and
asymmetrical costs concerns on the downstream gasoline market.

5.0 In particular, when the international crude oil prices were rising during 2007 and 2008 Oil
Marketing Companies quickly passed on these increased costs to consumers, but took
inordinately long to pass on cost reduction benefits to consumers when international oil
prices were on a downward spiral in the last quarter of 2008. The load port price of Murban
crude oil dropped from a record high of U$ 137.35 per barrel in July 2008 to US$ 42.10 per
barrel in December 2008 while the pump price of super petrol dropped from Ksh. 110.00 per
litre to Ksh.78.00 per litre over the same period
6.0 This behaviour by the Oil Marketing Companies generated a lot of public concerns on the
overall economic efficiency and rationale of unfettered market mechanisms in the retail
petroleum market in Kenya and literally re-kindled agitations for re-introduction of price
controls.

7.0 In October 2008, the Honourable Minister for Energy asked the Energy Regulatory
Commission (ERC) to develop a formula for regulation downstream petroleum prices for his
consideration. Consequently, on 14 th November 2008, ERC published Draft Retail Price of
Petroleum Products Regulations in the Kenya Gazette and invited comments from the public
and other interested parties. In addition, the Energy Regulatory Commission has developed
a concept paper enumerating the petroleum supply chain logistics and their cost implications
on downstream retail prices. The ERC concept paper is attached hereto at ANNEX I. In
addition a summary matrix on issues raised by stakeholders is attached as ANNEX II.

8.0 Upon review of the comments by the stakeholders, the areas of most concern were recovery
of actual incurred costs, return on investments, margins, financing costs and inventory days.

Proposed Way Forward.

9.0 Cost Drivers

ERC is of the opinion that there is consensus for recovery of the cost drivers actually incurred in
the supply chain for retail petroleum into the pricing formulae. These cost drivers are explained in
detail in Annex 1.

10.0 Wholesale Margin

10.1 The initial ERC position was to provide the operators a gross margin (wholesale
and retail) of 10%. Based on submissions from the stakeholders and further
consultations within the Commission, a percentage margin for the petroleum
business has been found to be unsustainable. It was therefore decided that the
margins should be based on actual numbers as shown below.

10.2 Based on Oil Industry Information, the Wholesale Margin for Oil Companies
operating in the Country currently is about Ksh.5.00/Litre for companies with
retail network. However, inclusive of the average wholesale margins for other
business segments namely, re-selling to non-affiliated re-sellers and consumer
customers reduces the wholesale margin for the Oil Industry in Kenya to an
average of about Ksh.3.60/Litre. This is because the latter two business
channels are highly competitive and the margins thin which reduce the global
average wholesale margin for a company. This information is collaborated by
financial information from published accounts of two Oil Companies currently
listed in the Nairobi Stock Exchange whose Gross Margins range from 3.32 to
3.87Ksh/Litre in their 2006/2007 accounts.

10.3 Calculation based on a 40/60 split between the retail and other market
segments and a maximum margin of ksh 2.00 per litre for the other segments
give a maximum gross margin for the retail business of ksh 6.00 per litre.

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 Considering that the oil industry operators are not homogeneous and the pricing
regulations are primarily targeted on the network business of the operators, it is
proposed that the Commission recommend a MAXIMUM WHOLESALE
MARGIN OF KSH.6.00/LITRE.

11.0 Retail Margin

11.1 Oil Industry statistics indicate that petroleum dealers are currently enjoying
Retail Margins ranging from Ksh.2.30/Litre to Ksh.2.50/Litre for Premium Motor
Gasoline (PMS) and Regular Motor Gasoline (RMS); and Ksh.2.15/Litre for
Automotive Gas Oil (AGO) and Illuminating Kerosene (IK). The submissions
made to the Commission by Station Dealers indicate these margins have been
fixed by the suppliers for the last four years and therefore insufficient due to
erosion by inflation. This information is also collaborated by the high turnover of
Petrol Station Dealers in the country.

11.2 To ensure that the retail business is whole, it is proposed that ERC recommend
a 20% escalation of the existing retail margin to a maximum Ksh.3.00/Litre for
super and regular petrol and ksh 2.80per litre for kerosene and diesel. These
retail margins will also include station operational losses of about 0.5%.

12.0 Inventory/Stocks and Trigger Dates

To resolve the issue of inventory/stock holding days and trigger dates for new prices, the
Commission recommends that prices for a given period should be based on the average
rolling product costs for the previous three months. This will cushion consumers from
sudden price changes while allowing the marketing companies to recover their costs.
The Commission further recommends that new whole and retail prices announced by
the Commission will take effect on the 21 st Day of every month or the next working day
where the 21st Day of the Month is a public holiday or a week end.

13.0 The Commission has therefore revised the Draft Petroleum Pricing Formulae to address
the issues raised by stakeholders. The revised formula is attached hereto as ANNEX III.

14.0 Recommendations

The Commission is invited to note the content of this paper and to:

Approve its presentation together with the attachments to the stakeholders for
discussion; and

Provide further guidance as necessary.

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 ANNEX I

PETROLEUM SUPPLY CHAIN LOGISTICS FOR KENYA

1. INTRODUCTION

The demand for petroleum products in Kenya is met through two ways:

a) Importation of crude oil and refining the same at the Kenya Petroleum Refineries Limited (KPRL).
This supplies about 50% of the total demand.

b) Importation of refined petroleum products to meet the balance 50% of the demand.

2. IMPORTATION MECHANISMS.

2.1. Crude is imported through an Open Tender System (OTS), which is coordinated by the Ministry of
Energy. All the licensed importers of petroleum products are required by law to participate in the crude
processing through Legal Notice No. 197 of 2 nd December 2003. Through this arrangement KPRL is
protected through a minimum base load processing of 1.6 million tonnes of crude per year, which meets
about 50% of the total petroleum demand. The licensed importers share this base load prorated to their
market shares.

2.2. The balance 50% of the demand is met through importation of refined products. The Ministry of
Energy coordinates another OTS for the importation of 35% of refined products in which all licensed
companies are entitled to participate. The companies are allowed to import the balance 15% on their own
outside the tender requirements.

3. COSTING OF CRUDE OIL .

3.1. Crude oils are traded openly in the international markets. Kenyas crude imports are made up of
about 90% Murban crude oil from Abu Dhabi, marketed by the Abu Dhabi National Oil Company
(ADNOC). Early each month ADNOC sets the Official Selling Price (OSP) of Murban crude oil lifted during
the previous month. This becomes the Free On Board (FOB) loading port price applicable to the tenders
called in Kenya.

3.2 The balance 10% of crude imports is Arab Medium crude from Saudi Arabia.

3.2. For the purpose of the OTS, tenderers quote a fixed Freight and Premium figure to bring the crude
from the loading port to Mombasa. Crude oil is imported in large ships (80,000 Metric tons) and therefore
freight on crude is not a major component of local prices.

3.3 The following are all the components in the landed cost of crude delivered to the refinery:

Free On Board ( FOB) cost

Freight and Premium.
0.105% for both marine and war insurances.

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 2.75% Import Declaration Form (IDF) fee.
0.85% Letter of credit charges.
0.5% Ocean Loss allowance (for loss not covered by insurance) .
US$ 3.82 /MT Port Handling charges.
0.5 CIF importer administration fees.
Ksh.1.50 /MT +VAT Discharge Inspection fee.
Potential demurrage.
Cargo clearing charges.

Annex 1(A) shows the landed cost build up of crude oil excluding the last two items.

4. COSTING OF IMPORTED REFINED PRODUCTS

4.1 International prices for refined petroleum products are available on daily basis in such publications as
Platts and Reuters for the major trading markets. For imports into Kenya the relevant prices are those in
the Arabian Gulf (AG) and the Mediterranean Sea (MED). Quotations for trading are based on the mean
prices for 3-5 days around the bill lading (B/L) day as FOB price plus a freight and premium component.

4.2. For the purpose of the OTS, tenderers quote a fixed Freight and Premium figure to bring the specific
product from the loading port to Mombasa. The tender document specifies the vessel arrival date and
therefore indirectly fixes the loading date range.

4.3 The following elements are the components to obtain a final landed cost of refined petroleum
products.
Free on Board (FOB).
Freight and Premium.
0.0998% for marine and war insurances.
2.25% Import Declaration Form (IDF) fee.
1.2% Letter of Credit charges.
0.5% Ocean Loss allowance.
US$ 3.82/MT Port handling charges.
0.5% CIF Importer Admin. fees
Ksh.9.50/MT +VAT Discharge inspection fee.
Potential demurrage.
Cargo clearing charges.

Annex 1( C) shows the landed cost build up for refined products.

4.4 For both crude and products the dollar exchange rate used has an impact on the final landed costs.
The OTS agreements specify the rate to be used as importers commercial bank selling rate on the bill of
lading date.

5.0 REFINERY PROCESSING.

5.1 After the crude is landed, the importer has to pay a refining fee to KPRL for processing the crude to
final products. The current average processing fee is US$2.4/bbl (approx. ksh 1.20 per litre).

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5.2 The refinery also uses 5% of the crude as fuel and loss in its operations. This is a loss which has to
be recovered in the pricing mechanism.

5.3 Because of its old technology KPRL ability to add value on crude is very limited. For a light crude like
Murban, 33% of the crude is produced as residue (fuel oil) whose value is almost half that of crude. This
loss of value is recovered in the prices of the higher value products.

5.4 To assign costs to the products from the refinery, a cost allocation method is applied. The proposed
method prorates the crude cost plus refining fees to the cost of importing similar products.

Attachment 1(B) is a sample cost allocation calculation.

6.0 KIPEVU OIL STORAGE FACILITY.

This is the government owned import tank farm for refined products. It is managed/operated by Kenya
Pipeline Company.
The charge for using KOSF is US$3.0/M3 plus VAT (ksh 0.28 per litre.)

7.0 KENYA PIPELINE COMPANY (KPC)

KPC owns and operates the white petroleum products pipeline from Mombasa to Nairobi and onwards to
Nakuru, Kisumu and Eldoret. The charge for transportation from Mombasa to Nairobi is Ksh.1.53 per litre
plus VAT. The Transport and Storage agreement between KPC and oil marketing companies provides for
a maximum operational loss allowance of 0.25% volume. The losses are reconciled every six months and
the actual losses are used for stock reconciliations.

8.0 ROAD BRIDGING FROM MOMBASA TO UPCOUNTRY DEPOTS

8.1 KPC is currently unable to meet market demand. This has resulted to use of road transport from
Mombasa to Nairobi, Western Kenya and the neighbouring countries.

8.2 The Mombasa Nairobi pipeline is undergoing capacity expansion from the current 440,000 litres per
hour to 880,000 litres per hour. This is expected to be achieved by August 2009.

8.3 Plans are at an advanced stage to build a new 10 inch line parallel with the existing 8inch diameter
Nairobi Eldoret pipeline.

9.0 DISTRIBUTION DEPOTS

In Nairobi and Mombasa, KPC and KPRL do not have depot facilities for loading delivery trucks.
Therefore in these area products are pumped into oil depots belonging to the oil marketing companies.

The marketing companies incur overhead costs and operational losses (maximum allowed is 0.5%) in
these depots.

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In Kisumu, Eldoret and Nakuru, KPC has depots which are used by all oil companies.

10.0 DELIVERY FROM DISTRIBUTION DEPOTS TO STATIONS/ CUSTOMER SITES

From the distribution/wholesale depots products are delivered by independently owned small/medium
tankers to both customer sites and retail outlets.

11.0 RETAIL DISPENSING SITES

There are three types of retail sites:

Company Owned/ Company operated sites. These are few but the oil companies sometimes
run their stations when they cannot find independent dealers.

Company Owned/ Dealer operated. In this case the oil company owns the station and signs a
dealership agreement with an independent business person

Dealer owned/Dealer operated. These are the independent stations which developed after
deregulation in 1994. They are of varying standards and sizes.

Dealer owned/company leased. Sometimes oil companies lease stations which have been
constructed by either dealers or individual businessmen.

Stations incur normal operational losses of product with a maximum allowed level of 0.5%

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 ANNEX 1 (A)
SAMPLE CALCULATION FOR LANDED COST OF CRUDE

CRUDE OIL MURBAN LZAKUM

LOAD PORT Jebel Dhana Das Island
Arabian Gulf from Quon Island 1.07 0.92
Quion Island to Mombasa 7.00
BBLS/MT 7.626 7.643
WS100, 2008 rates, USD/MT 8.070 7.920

AFRA Rate (WS 118.9 ; 01/Dec/2008) 118.9% 118.9%

$/Bbl
FOB,Dec' 2008 42.100 41.900
Premium (Item 16/08 & 20/08) (0.962) (0.962)
Freight 1.258 1.232
CNF 42.396 42.170
MAR INS (1.003*CNF*0.0770%) 0.033 0.033
WAR RISK (1.003*CNF*0.0275%) 0.012 0.012
CIF 42.440 42.214
CBK TAXES (2.75% CIF) 0.955 0.950
LC CHARGES (0.85% CNF) 0.360 0.358
Shore Handling (@2.0Usd/mt)+VAT 0.304 0.228
Stevedoring Charges @ $1.5/MT 0.1967 0.1963
CIFLW 44.257 43.946
Ocean Loss(0.5%*CIFLW) 0.221 0.220
Port Landed (US$/Bbl) 44.478 44.166
Exchange Rate (Month average) 78.045 78.045
Ksh/mt
Port Landed (KShs/Mton) 26,471.855 26,344.797
Inspection Charges (SGS/ITS)
ITS -( KSH 1.50 /MT )+Sampler 1.656 1.656
SGS - KS 1.70/1.60 for 50kt/30kt

LANDED KPRL (KShs/Mton) 26,471.855 26,344.797

LANDED KPRL (US$/Mton) 339.189 337.561

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 ANNEX 1(B)
SAMPLE COST ALLOCATION CALCULATION

DEC. 08 COST ALLOCATION FOR PRODUCTS EX KPRL.

1.CRUDE + PROCESSING.

QUANTITY PRICE
A.CRUDE (MT) (USD/MT) COST (USD)
MURBAN 108433 339.19 36779281
ARAB MEDIUM 22062 308.12 6797766
SLOPS 0 0 0
TOTAL 130495 43577046

B.PROCESSING FEES 2680897

TOTAL COST OF CRUDE + PROCESSING FEES 46257943

2.COST OF REFINERY GENERATED PRODUCTS(CIF+LANDING COSTS)

allocated
cost
QUANTITY COST
PRODUCT MT (USD/MT) COST(USD) $ $/mt sh/lt
LPG 2563 799.89 2050110 1799089.79 701.95
RMS 1831 426.93 781700 685986.43 374.65 20.86
PMS 15729 433.11 6812403 5978275.43 380.08 21.59
TOPS 2596 365.34 948430 832302.26 320.61
DPK 23472 546.13 12818693 11249140.43 479.26 29.59
AGO 29539 479.11 14152548 12419675.36 420.45 27.81
IDO 2008 470.48 944716 829042.46 412.87
FO 125 13528 308.35 4171332 3660583.55 270.59
FO 180LS 15241 303.12 4619837 4054172.43 266.00
FO 180 17155 303.12 5200006 4563304.78 266.00
BITUMEN 924 229.84 212374 186370.41 201.70
FUEL/LOSS 5909 0 0
TOTAL 130495 52712149 46257943

Cost
allocation
Factor 0.8775575

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 ANNEX 2
SUMMARY MATRIX OF PETROLEUM PRICE REGULATION ISSUES
RAISED BY STAKEHOLDERS

Item Issue Original ERC position Comments/ Suggestions Recommendation

1. Cost of Actual crude Companies have different Use KPRL deemed
products tender cost. allocation methods. refining programme
from Allocate crude Allocation formula should be for all companies.
crude cost and refining defined in the regulations. Use both industry
processin fees pro-rata Use global refinery calculated product
g import parity of import parities and
programmes.
same refinery crude import costs for
Murban crude is imported
yield. same month.
monthly but Arab Medium
Refinery loss Sample cost allocation
crude is imported quarterly.
included calculation to be
Therefore cost of Arab Medium
Allocation should be based on last cargo included in the
benchmarked to imported. regulations.
cost of importing
Crp should be deemed as
same refinery
refinery may not meet
products
programmed yields.
(hydrocarbon
values) Irpwhat if there is no loading
in a month.
Use Hydrocarbon values for
allocation for the month of
pricing.
2. Cost of Use actual Include demurrage cost. KOSF charges be
imported industry tender Include KOSF charges. included in costs of
product costs for each imported products--
Include clearing and inspection
parcel. charges. (Currently
Include KOSF (3*1.16*80)/1000 ie
charges. ksh 0.293 per liter
Inspection charges
already included in
the OTS calculation.
OTS imports do not
incur demurrage
charges since berth
and storage are
assured.
Private imports incur
demurrage (average
indicated at $5 - 10
per ton).

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3. Cost of Not considered Usually higher than tender Cost of these imports
products will not be considered
purchase as they will be
d outside unnecessary with the
the upgraded KPC
tender pumping capacity.
system
4. Exchang CBK mean Companies buy dollars from Use OTS importers
e rate selling rate for commercial banks not CBK commercial bank
month of mean rate on bill of
importation. lading date.
5. Depot Not considered Should be taken into This is an
operatio separately as consideration. operational expense
n costs. this was taken as Suggested at ksh 0.13 per to be taken care of
part of liter. in the margin.
overheads to be It is not easy to
recovered in the quantify since some
gross margin marketers have no
depots and rely on
hospitality.
KPC tariff is
inclusive of depot
costs in Nakuru,
Kisumu and Eldoret.
6. Hospitali Not considered Should be taken into This is an
ty separately as consideration operational expense
Charges. this was taken as to be taken care of
part of in the margin.
overheads to be It is not easy to
recovered in the quantify since some
gross margin marketers have no
depots and rely on
hospitality.
KPC tariff is
inclusive of depot
costs in Nakuru,
Kisumu and Eldoret.
7. Bridging Pipeline tariff Use combined road rate at For super, regular
costs 15% and pipeline at 85% and kerosene use
from due to KPC breakdowns. 100% KPC.
Mombas (currently ksh 1.53
a to per litre plus VAT).
upcountr For diesel, to use
y depots 15% road and 85%
to take care of
pipeline pumping
constraints
resulting in use of
road.(Mombasa-
Nairobi road rate is

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 currently shs. 4..50
per litre plus vat)
8. Transpor Would be Clarify if controlled, fixed or To be controlled.
t rates regulated. regulated. Current delivery
Used current Basis of setting rates. rates for 40km
NOCK rates. Triggers for changes. radius is ksh 0.42
Suggested figures are low. litre
Consider town zone radius Current delivery
as 35 km. rate outside town is
ksh 12.00 kilometre
per litre.

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9. Product KPC losses to be KPRL, KPC, depot and KPC losses at 0.25%
Losses captured in the station losses should all be of weighted average
tariff included. product cost.
KPRL losses Suggested station loss of Depot losses at
captured in the 0.5% translated to ksh 0.5% for Mombasa
refinery cost 0.3947 per liter. and Nairobi of costs
allocation at the respective
Station and localities.
depot losses not Losses for other
considered depots captured in
separately as the KPC losses.
this was taken as Station losses
part of included in the
overheads to be margin.
recovered in the
gross margin
10. Margins Integrated 10% Proposed margin is low and Percentage margin
on cost plus does not cover operational not sustainable.
taxes to cover costs and create sufficient
wholesale and ROI. 1. Maximum
retail margins. Margin should be Wholesale
benchmarked. Margin of
Percentage margin is not ksh.6.00 per
beneficial to stakeholders. It litre.
is volatile and cumbersome.
Fix margin per liter or 2. Maximum retail
minimum and maximum margins at ksh
margin per liter. 3.00 per litre for
10% is too low. super and
Separate wholesale and regular petrol
retail margins to avoid and ksh 2.80 per
marginalization of dealers litre for kerosene
and entrepreneurship. and diesel.
Should create incentive to
invest.
Low margin can cause
closures of outlets.
Low margin can cause
contracting many retail
stations to a single
management company
resulting in loss of jobs.
Set threshold for maximum
and minimum gross profit.
Current four year old retail
margins at ksh per liter 2.15
2.50 are too low.
Suggest 4.5% of pump price
subject to a minimum of sh.
3.90 per liter.

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 Margin should not include
taxes.

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11 Differentia Not considered Such products should be Differentiated products
ted exempted from the to be capped at the
products(e regulation maximum determined
.g. Shell V) priced.
12 Inventory Draft implies Affected by KPRL
Holding. one month. inefficiencies.
and One month not Three month rolling
Trigger representative. average costs and
dates Pipeline fill and dead stocks volumes to be used and
should be considered. implemented on the
Minimum operational stocks 21st Day of every
(22days), pipeline fill (5 month or the next
days), KPRL (45days). Total working day where
est.72 days. the 21st Day of the
Use average weighted costs Month is a public
of products (crude and holiday or a week
refined for prior three end.
months.
Usual inventory is 60
90days.
Set firm dates for
determination, inspection,
announcement and
implementation.
Set firm triggers
Use average weighted costs
of products (crude and
refined for prior there
months.
Establish forward curve

13 Finance Not considered Duty prepayments,

cost separately as Recoverable VAT
this was taken Part of acquisition cost and Included in the
as part of should be included. maximum gross margin
overheads to Suggested figures based on
be recovered each product:
in the gross Ksh per liter PMS 1.0323,
margin AGO 0.9535, IK 0.7633
14 Return on Not considered Will be key issue to
Investment separately as determine continued Included in the
(ROI) this was taken operations. maximum gross margin
as part of Suggested ksh 0.33 per
overheads to liter.
be recovered
in the gross
margin
15 Transpare Formula should be subject Formula application
ncy to scrutiny. will be transparent

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16 Auditing Independent auditor to Industry can appoint
verify announced prices. auditor to verify
application of formula.
17 General Actual costs to Proposed structure does not Formula will cover all
be fully allow for full recovery of determinable cost
recovered costs and inefficiencies. imputs.
recovered.
18 Definition Super petrol, Not easy to split dual Formula will be
of regular petrol, purpose kerosene into jet a1 applicable to
petroleum kerosene , and illuminating kerosene. illuminating
products automotive Formula should be kerosene and not Jet
diesel expanded to cover all Fuel.
products. Pricing of Furnace
oil and Industrial
diesel will not be
regulated
19 Others Consider improvements in
the efficiency and costs
reduction in the supply
chain. Noted
Exclude the current 20%
own imports from the
regulation
Govt/ERC should consider
wider consequencesjob
losses, EHS concerns,
reduced investments etc
Set up team to come up
with comprehensive
regulation.
Allow industry to self
regulate.
20 Administra Not specified Independent body ERC will implement the
tor/ but ERC regulation
Regulating implied.
body
21 Volumes to Global volumes Company have different To use Global industry
be used to be used product mixes volumes.
22 Level All companies All companies must process Regulations will be
playing will be treated crude applied equitably to all
ground equally licensees
23 Current Not considered Documents to be reviewed Separate
OTS in line with this regulation. regulations will be
agreement Govt should import crude developed for other
s and products. industry activities.
Enforcement of OTS will
lower the cost of products
although it is subject to KPC
pumping capacity.
24 Penalty Applicable to Apply to the retailer. Penalty will apply to
operator of the operator of the

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 retail site Penalty should be increased retail site found
to three million. contravening the
regulation.
25 Taxes Actual taxes to Include different taxes for Remissions for
be used products from KPRL and products obtained from
from imports. refining at KPRL to be
included (ksh 0.45 per
liter for super, regular
and kerosene and ksh
0.30 per liter for diesel)
26 Compensat Not considered Consider possible Not required as
ion for as formula mechanics. formula will be
under/over would be implemented on
recovery implemented agreed trigger date
on agreed due
date
27 Cross Not Current costing methods
subsidizati considered. result is motor fuels Regulation will apply
on subsidizing furnace oil and only to products in
thus industrial activities. retail outlets.
28 Public Not mentioned Make it an agenda for ERC. ERC undertakes to do
Education but part of so.
ERC role
29 Parties in Importing/ Consider role of There will be different
the supply distributing independent station owners. allowed wholesale and
chain companies and retail margins,
dealers of
retail outlets
30 Supply/ Not considered Demand of petroleum Price to be determined
Demand inelastic which results in will recover cost and
interplay price determined by the give a margin to cover
formula high. ROI and overhead
expenses.
31 Environme Not considered Equation does not consider
ntal cost environmental cost for Difficult to
using petroleum. This incorporate in
should be considered. formula.
Other regulations
can be used to
handle this.

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 ANNEX 111
REVISED DRAFT REGULATIONS.

THE ENERGY ACT, 2006

(No. 12 of 2006)

THE RETAIL PUMP PRICE OF PETROLEUM PRODUCTS REGULATIONS, 2008

1. These Regulations may be cited as the Retail Pump Price of Petroleum Products
Regulations, 2008.
2. In these Regulations, unless the context otherwise requires-
Act means the Energy Act, No. 12 of 2006.
Commission means the Energy Regulatory Commission established under section 4 of
the Act;
wholesale depot means the petroleum receipt, storage and truck loading facilities
owned by companies carrying on petroleum business in Mombasa and Nairobi and by
the Kenya Pipeline Company in Nakuru, Eldoret and Kisumu;
Minister means the minister for the time being responsible for energy;

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 petroleum includes petroleum crude, natural gas and any liquid or gas made from
petroleum crude, natural gas, coal, schist, shale, peat or any other bituminous substance
or from any product of petroleum crude, natural gas and includes condensate;
petroleum business means a concern carrying on the importation, refining, storage,
transportation or sale of petroleum;
petroleum products means Super petrol, Regular petrol, Kerosene and Automotive
Diesel;
retail dispensing site means premises where petroleum is stored in bulk in one or more
tanks and dispensed to consumers for their own use and includes filling and service
stations;
refined petroleum products means the products yielded from the refining of petroleum;
retail pump price means the maximum prices of petroleum products at a retail
dispensing site.
maximum wholesale price means the maximum prices of petroleum products at a
wholesale depot.
3.(1) There is established a formula for determining the maximum wholesale and retail pump
price of petroleum products at a wholesale depot and a retail dispensing site.
(2) The formula shall consist of the factors described in Regulation 4 of these Regulations.
(3) The prices determined using the formula set out in Regulation 4 of these Regulations shall
be the maximum wholesale and retail pump price of petroleum products which a person
carrying on petroleum business shall sell at a wholesale depot and at a retail dispensing
site.
(4) A person convicted of an offence under this Regulation shall be liable to a fine not
exceeding one million shillings or the withdrawal of the operating licence or both.
4. The maximum wholesale and retail pump prices of petroleum products in shillings per litre
shall be determined as follows-

a) Wholesale Prices

i) For Super Petrol, Regular Petrol and Kerosene

Pwa Pu K pt L p Ld mw

ii) For Automotive Diesel

Pwb Pu K ptd L p Ld mw

b) Retail Pump Prices

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 For a retail dispensing site
i) For Super Petrol, Regular Petrol and Kerosene
Pra Pwa mr z

ii) For Automotive Diesel

Prb Pwb mr z

Where,
Pwa = Maximum Wholesale price for Super Petrol, Regular Petrol and
Kerosene.
Pwb = Maximum Wholesale price for Automotive Diesel

Pra = Maximum retail pump price of Super Petrol, Regular Petrol and Kerosene
applicable in shillings per litre.
Prb = Maximum retail pump price of Automotive Diesel applicable in shillings
per litre.
Pu = weighted average cost in shillings per litre in the Kenya Petroleum
Refineries Limited (KPRL) and in Kipevu Oil Storage Facility (KOSF).

Virp Cirp T F Vcrp Ccrp T S d

Pu
Virp Vcrp

Virp = average volume of the refined petroleum products imported through the
open tender system in the previous three months in litres.
C irp = average unit cost of the refined petroleum products imported through the
open tender system in the previous three calendar months in shillings per litre.
Vcrp = average volume of the petroleum products obtained from crude refined
at KPRL in the previous three calendar months in litres.
C crp = average unit cost of petroleum products obtained from crude refined at
KPRL in the previous three calendar months in shillings per litre.
T = total taxes and levies for petroleum products in shillings per litre
= ( t ed t rml t pdl t prl ).
t ed =Excise Duty.

t rml =Road Maintenance Levy.

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 t pdl =Petroleum Development Levy.
t prl =Petroleum Regulation Levy.

F = KOSF Charges which shall be $3 / M 3 VAT

S d =Suspended Duty which shall be Kshs 0.45/litre for PMS and RMS, Kshs
0.30/litre IK and AGO at
K pt= pipeline tariff from Mombasa to the nearest wholesale depot as per the
Schedule hereto.
K ptd= transportation charge from Mombasa to the nearest wholesale depot
made up of 85% K pt and 15% road bridging costs.
L p =Allowed pipeline losses = 0.25% Pu

Ld =Allowed losses in the depot for PMS and RMS = 0.5% Pu K pt , IK=

0.3% Pu K pt , AGO= 0.3% Pu K ptd
mw = Allowed oil marketing companys gross wholesale margin which shall be
Kshs 6.00 per litre.
mr = Allowed retail dealers gross margin which shall be Kshs 3.20 per litre
inclusive of station losses.
z = delivery rate from the nearest wholesale depot to a retail dispensing site in
shillings per litre which shall be as set out in the schedule hereto.
5. The unit cost of imported refined petroleum products Cirp shall be determined in
accordance with the calculation used in the open tender system for importation of petroleum
products.
6. The unit cost of refined petroleum products Ccrp shall be the actual landed cost of crude
plus refinery fees for the months crude imports allocated to the refinery products yields
benchmarked to the cost of importation of the same refined products.
7. The importers commercial bank mean rate on bill of lading date shall be used for converting
the imported refined petroleum products and crude oil costs determined under Regulations 5
and 6 of these Regulations from United States dollars to Kenya shillings.
8. The factors, K pt , K ptd , L p , Ld , m w , mr , z mentioned under Regulation 4 of these
Regulations, the refinery fees and KOSF storage charges shall be determined by the
Commission.
9. The Commission may review the calculation of the maximum wholesaleretail pump price of
petroleum products determined under Regulation 4 of these Regulations as and when it may
deem fit for purposes of monitoring compliance.
10. The Minister may review the formula mentioned under Regulation 4 of these Regulations
as and when he may deem fit.

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 Schedule
(Regulation 4)
Pipeline tariff and delivery rate
Location Rate
Shs/litre
1. Pipeline Tariff Mombasa 0.000
K pt

Nairobi 1.530 plus VAT

Nakuru 2.105 plus VAT
Eldoret 2.706 plus VAT
Kisumu 2.703 plus VAT
2. Delivery rate Within Town 0.42 plus VAT
(40km radius)
z
Outside Town Ksh 12.00 per
kilometre per
1000 Litres plus
VAT
3. Bridging rates Mombasa to Ksh 6.5 per km
Nairobi, Nakuru, per 1000 liters

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Kisumu and plus VAT.
Eldoret

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