Government Creates Fuel Import Monopoly
The Ugandan government has decided to directly engage in oil importation, sidelining middle players and injecting uncertainty into the $2 billion fuel industry that plays a crucial role in the country’s economy.
President Museveni’s Vision
President Yoweri Museveni, through a formal letter posted on Twitter, announced the decision on Nov. 05, aiming to eliminate middlemen and reduce pump prices in Uganda. He questioned the practice of Ugandan oil marketing companies purchasing petroleum products from middlemen in Kenya and proposed direct imports from refineries abroad.
According to Museveni, Uganda has been paying substantial sums to middlemen, with $35 more on every imported ton of diesel, $36 on petrol, and $35 on kerosene. He suggested that the move is a temporary measure until the completion of a new petroleum refinery in the coming years.
UNOC’s New Role and Vitol’s Involvement
Energy Minister Ruth Nankabirwa confirmed the government’s enhanced involvement in oil supply security, designating the Uganda National Oil Company (UNOC) as the sole source, importer, and supplier of petroleum products. UNOC has signed a five-year contract with Vitol Bahrain E.C., an affiliate of the world’s largest independent oil trader, Vitol, creating a double monopoly in the country’s fuel supply chain.
Industry Reaction and Concerns
The sudden change has raised concerns among industry players, including HEK International and E3 Energy, opposing the contract award to Vitol, citing potential monopoly risks. Critics caution that consolidating the supply chain might put the country at risk if issues arise with the selected supplier.
Attorney General Kiryowa Kiwanuka defended the move, emphasizing the financial guarantee provided by Vitol for petroleum product purchases. However, skepticism remains about the hastiness of implementation without parliamentary involvement.
Global Context and Kenya’s Influence
Vitol’s entry into Uganda appears to be a response to Kenya’s alteration of petroleum import arrangements, moving from an Open Tender System to a government-to-government arrangement with the United Arab Emirates and Saudi Arabia.
Energy Minister Nankabirwa highlighted Kenya’s decision, stating it exposed Uganda to supply vulnerabilities and resulted in higher fuel prices due to disruptions in supply chains.
Legislative Changes and Future Plans
To support this strategic shift, the government aims to amend the Petroleum Supply Act through the Petroleum Supply (Amendment) Bill, 2023, currently under parliamentary review. The amendment mandates UNOC to import petroleum products for the Ugandan market, emphasizing improved security of supply and potential reduction in pump prices.
Expert Opinions and Skepticism
Economist Dr. Fred Muhumuza expressed doubt about the direct impact on consumer pump prices, suggesting that Uganda might struggle to secure cost advantages enjoyed by Kenya and Tanzania through bulk purchases. Trade policy analyst Peninah Mbabazi questioned the move, stating it contradicts the government’s liberalization agenda and may lead to market challenges.
Consumer advocacy organization manager Henry Kimera raised concerns about potential benefits and the competence of new managers, questioning if they can mitigate corruption and steer the sector effectively.
The Challenge of National Oil Companies (NOCs)
The government’s move aligns Uganda with countries that have National Oil Companies (NOCs), some of which have faced challenges. The International Monetary Fund notes that NOCs, present in about 42 African countries, vary in efficiency, debt burden, and business focus.
Assessment and Alternative Suggestions
Trade policy analyst Mbabazi suggests a comprehensive assessment of the existing regulatory framework before implementing a monopoly. She proposes establishing a regulatory body, similar to the Uganda Electricity Regulatory Authority, through market assessment and stakeholder consultation to ensure a balanced policy and regulatory framework.
Current Fuel Market Situation and Concerns
Currently, over 90% of petroleum products in Uganda are imported through Kenyan and Tanzanian structures. Concerns about the government joining a potentially failing model of NOCs are raised, citing examples from Nigeria, Kenya, Angola, and South Africa.