Unoc monopoly leaves $270m oil logistics company on knife edge

All oil marketing firms will now be buying from the state supplier. They say they should have been given a chance to compete because Unoc effectively creates a monopoly.

With the passing of the Petroleum Supply (Amendment) Bill 2023 this week, Kampala inched closer to sealing the deal that gives a monopoly to the state-owned Uganda National Oil Company (Unoc) as the sole importer and supplier of fuel products into the country via a multimillion partnership with Swiss-based Dutch energy and commodity trading giant Vitol.

As the falling-out between Uganda and Kenya over the fuel supply deal unravels, uncertainty has gripped new investors in the industry as well as old players who fear that the new arrangement gives advantage to some oil marketing companies (OMCs) over others.

Among these is Mahathi Infra Uganda Ltd, a $270 million oil logistics investment and recent entrant in the industry, operating fuel storage facilities near Kampala. Its management is on knife-edge as directors wonder how, if at all, they fit in the new arrangement.

“It’s not yet very clear how we fit,” said Mike Mukula, chairman of Mahathi Infra.

The company also operates four barges on Lake Victoria, which move petroleum products from Kisumu Port to its reserves in Kawuku on the shores of Lake Victoria, 18km from Kampala.

“All oil marketing companies, including us, will now be buying from one supplier, Unoc. We should have been given a chance to compete [because] buying from one supplier is a shift and creates a monopoly. We would wish to sit down with Unoc on the logistics framework,” Mr Mukula told The EastAfrican.

Legislator Nathan Nandala Mafabi, who is also a businessman with a string of fuelling stations across the country, fears that the Vitol-Unoc partnership gives some players advantage over others, citing Vitol’s interest in of one of Uganda’s largest dealers Vivo Energy.

“It would have been better if we gave Unoc money to trade directly. When we bring in Vitol, the shareholder of Vivo Energy that trades as Shell, I can tell you we might be helping them to make more money instead of benefiting Ugandans,” he told Parliament, as the Bill was passed.

Final pump price

While presenting the committee’s report that informed the vote on the Bill, Emmanuel Otaala, who chairs Parliament’s Committee on Natural Resources, said that Uganda imports 90 percent of its petroleum products through Kenya and 10 percent through Tanzania.

The system currently imposes three layers of middlemen from overseas refineries, where the fuel is sourced, to the Ugandan oil marketing companies, with each of the Kenyan middlemen infusing a profit margin that is ultimately fed into the final pump price.

A simple majority of the committee justified its support for the Bill, stating that Uganda’s inability to purchase oil directly from the refineries in the Gulf states – Aramco, Adnoc, and Enoc – leads to an extra mark-up on Uganda’s fuel from Kenyan companies and uncertainty in supply of petroleum products which comes down to high and unpredictable pump price.

Under the Vitol-Unoc arrangement, Vitol will finance the supply of the petroleum products up to delivery points in Kenya, on a non-immediate cash payment basis, to enable Ugandan monopoly pay after supplying the oil marketing companies in the country, the Committee’s report said.

But critics say that this deal comes with its own implications for the end-user. “Vitol will now source money all over the world to supply oil, but there will be interest, so the moment we approve this monopoly, fuel prices will be high,” Mr Nandala argued in Parliament.

There are also fears that the Vitol is another foreign-owned company coming to play at the top of a sector that has 170 OMCs, a majority of which are not owned by nationals – hence this deal further shrinks Ugandans’ market share and participation.

For instance, the top three OMCs in Uganda – TotalEnergies, Vivo Energy and Stabex International – are all foreign-owned, controlling 46 percent of the market share.

But also coming into scrutiny is Unoc’s reserves capacity, at 30 million litres; the company’s fuel storage facilities are located in Jinja, 80km from Kampala, but market analysis shows that the biggest volume of fuel imports into Uganda is consumed within a 65km radius from the capital city.

The EastAfrican has learnt that even before the law was passed, wheeler-dealers in Kampala were already circling in and scheming for logistics deals to deliver the fuel to the oil marketing companies, as it emerges that Unoc will pick private firms to transport fuel imports.

Kenyan middlemen

“We do not plan to get into transportation business at all,” says Peter Muliisa, chief legal and corporate affairs officer at Unoc. “That will remain with private sector and we will work with all transporters.”

“We are however looking at all transportation systems (road, rail and water) and engaging players in all. Our overarching objective is ensuring that Ugandans get fuel in the most efficient manner possible,” he added.

With both the Kenya and Tanzania routes to be used, this opens a window for Mahathi Infra, whose four ships carry 4.5 million litres each, making 10 movements in a month, delivering 180 million litres of fuel – or three-quarters of the fuel volume that Uganda consumes in a month.

Uganda President Yoweri Museveni championed his government’s protestations and the move to cut off Kenyan middlemen from the fuel supply deals, which elicited response from Nairobi, by going to court and also threatening to block Uganda-bound imports from Kenya Pipeline infrastructure.

Kenyan authorities also said that Unoc would be required to be locally registered in Kenya before it can operate in Mombasa and receive petroleum products from the refineries in the Gulf countries, for onward transportation into Uganda, and this left Tanzania as the option, despite fears over its infrastructure.

But Unoc says this is not an issue anymore.

“Our plan is to use both with Kenyan route bringing in the bigger percentage. Access to Kenyan infrastructure isn’t an issue and we are perfectly finalising that process. Registering Unoc by continuation in Kenya isn’t a problem and we have already finished that part so we do not see any challenge,” explained Mr Muliisa.

He added that the Central Corridor route requirements are also being worked on and the company is in discussions with the government of Tanzania on how to optimise infrastructure there.

Legislator Dicksons Kateshumbwa, a former commissioner of customs at Uganda Revenue Authority, argues that Tanzania has made significant investment in expansion of Dar Port infrastructure, to facilitate regional trade.

Fuel demand

He also argues that for fuel imports to Uganda, Dar is not a sole option but a supplementary one, citing the distance from Dar es Salaam to Mutukula, which is about 1,500km, and the cost of transportation per cubic metre to Uganda being about $120-$130.

“There is no pipeline from Dar to Uganda for now, so transportation is by road and partly through the lake via Mwanza,” he said on X.

However, road transport has ruled the fuel transport business for Uganda-bound products for decades, and logistics experts say that 90-95 percent of trucks delivering cargo into Uganda are owned by foreigners who have powerful lobbies that keep them on top in the Northern Corridor and the interior.

With transporters scheming for contracts, it is not clear what Unoc’s preferred choice will be, but transport economists warn that in the absence of rail – currently due to renovations on the track – the choices are limited to road and water for delivery of fuel cargo.

Uganda needs between 210-225 trailers per day to feed its fuel demand adequately, but each litre of fuel carried by road comes with a cost of Ush161 (0.042 US cents) compared to Ush64 (0.016 US cents) on fuel delivered by water transport, economists say.

According to Mukula, one fuel Mahathi Infra barge carries the equivalent of what 170 fuel trucks deliver, and former URA customs boss Kateshumbwa agrees that lower transport costs would translate into cheaper fuel for motorists as pump prices are a function of product cost, transportation and taxes.

Mahathi went into operation in 2020, mainly picking up fuel imports from Kisumu supplied off the Kenya Open Tender System (OTS), but also operating 70 million litres capacity fuel reserves to serve product shortages in Uganda.

In ditching Kenya’s OTS and later G2G [government-to-government] oil purchase arrangement from the refineries, Uganda has taken a move that ends what the market players have called political and business cartels, although it now creates its own monopoly.

But this greatly impacts the operationalisation of Kisumu Port and oil jetty in Kenya will lose up to $100 million.