INDENI OFFLINE SINCE DEC…as Nkhuwa says OMCs holding fuel to trigger price hike

ENERGY sector sources have said Indeni has been offline since December 18 after exhausting a shipment of crude oil that was delivered towards the end of last year.

Indeni managing director David Lungu did not respond to The Mast query over the matter.

However, energy minister Matthew Nkhuwa told Hot FM that Oil Marketing Companies were holding back fuel to push for price hike.

“The last time, if you remember, when we increased the price of fuel, the dollar was at K16.50. And today the dollar is at K21.50. And also, the international oil market price per barrel was going at $30. And today, the barrel is about 53, 54 dollars. So, obviously it means that the Oil Marketing Companies are holding back this fuel which they should sell… and then they were pushing for a price hike,” he said. “And they are saying that they’ve stopped ordering and some of them are holding on to the stock that they have so that the price can be adjusted [upwards].

But then looking at the situation at hand of Covid, people are not working and we wouldn’t like to hike the price. So, we looked at the prices…and then removed the VAT so that we cushion members of the public on fuel…because you realise that if fuel goes up it will spark the price of everything going up. So, we don’t want to push inflation by increasing the price of fuel.”

He said the government was finalising a letter of credit with the banks to guaranteed the payment adding that Indeni would have crude stock in a few weeks’ time.

“We have a debt we are clearing week-by-week. It’s not a fixed debt. It’s evolving as they are clearing it. From the last time we checked, we were owing about just under $500 million,” said Nkhuwa. “We are clearing it. We are paying very week. So you know, it’s going down. And maybe this time, I don’t know what it is, but I know that it is going down…. By end of year, yeah, by end of 2021 we should be able to, yeah, finish.”

According to the Economic Recovery Programme 2020-2023, “government policy is that fuel pricing should be cost reflective. In the recent past, however, arrears have arisen which is not consistent with the Policy stance. As at end-June 2020, government had a debt of US$727.3 million owed to suppliers which has accumulated since 2016. The debt has accumulated as a result of the price differential between the purchase price and the landed cost of petroleum products. The debt is further exacerbated by the exchange rate losses due to the depreciation of the Kwacha to the United States dollar”.

To prevent the exposure of the fuel suppliers from growing, during the ERP government planned to implement among others, direct sales of outstanding contract import balance to Oil Marketing Companies, standardisation of suppliers’ contract prices, and price adjustments. 

But energy sector sources explained that importation of fuel [finished products] caters for about 50 per cent of national consumption.

They said the balance is supplied by Indeni.

“But you may wish to know that Indeni Petroleum Refinery has been offline since December 18, 2020 and this is a key reason for the product outages being experienced. This scenario means that even if oil marketing companies were given free-reign to import, these imports may not be enough to meet demand so outages would persist,” sources said. “One other issue is that OMCs are not very keen to import because of exchange rate issues. The main fear is the product would be landed at a loss. It is in response to this concern that the government waived VAT on imports of petrol and diesel. Much as the focus has been on diesel and petrol, there are other products that are produced at Indeni and are not imported. For example, Heavy Fuel Oil (HFO). This is used in industry to fire boilers and furnaces. Besides, Ndola Energy Company uses HFO to produce electricity, which is fed into the national grid through a power purchase agreement with Zesco Limited.”

Sources feared the continued outage of Indeni would ultimately force NEC to shutdown, taking about 100 megawatts off a national grid that is already constrained – whose consequence would be extended load management by Zesco.

“Let us also look at liquefied petroleum gas (LPG). This is also produced at Indeni and is not imported. In fact, Indeni’s production of this product outstrips national consumption and a good quantity is exported – complimenting earnings from non-traditional exports,” another source explained. “As you may be aware, the local supplies of gas are already, with stockouts being reported in several places including Lusaka [Laura Miti tweeted about this over the weekend, I think]. The SI (Statutory Instrument) waiving VAT on fuel doesn’t include LPG, unless I’m mistaken. This means companies like Afrox, Mine Gases, Oryx, Lake Group and others dealing in LPG may have constraints importing this product due to exchange rate issues. Outages of this product may affect other aspects as LPG is not only used as gas for cooking but has other applications…. So instead of just focusing on imports, why is the government not talking about the critical missing link of Indeni? Mind you, Indeni is quite critical to the maintenance of strategic national fuel reserves. As you may be aware, compelling OMCs to keep a minimum of 15 days’ stock as part of the national strategic reserve would be problematic; but this can be achieved through a government-owned company – Indeni in this case.”

Sources wondered why the government was silent about Indeni.

“You may recall that last October, the Minister of Energy, Mr Matthew Nkhuwa, announced that the government had procured 10 shipments of feedstock. One shipment was delivered towards the end of last year [upon the exhaustion of which Indeni went offline]. When is the next shipment coming? If, as announced, 10 shipments were procured, why is there a problem with delivery? These are areas that Ministry of Energy/GRZ needs to address,” sources said.

And Patriots for Economic Progress leader Sean Tembo noted that the ongoing fuel shortages which initially started on the Copperbelt have now spread to Southern, Muchinga and North-Western provinces.

He said there is no question that the current shortages would further adversely affect the already ailing economy.

“As Patriots for Economic Progress, we strongly believe that the main cause of these fuel shortages is the foreign exchange controls that are currently being implemented by the Bank of Zambia (BoZ) which are aimed at maintaining an artificial exchange rate of the kwacha against major convertible currencies by restricting how much forex someone can purchase from their banks,” said Tembo. “We understand and commiserate with the government regarding the situation in which they have found themselves whereby on one hand they want to maintain an artificial exchange rate for the kwacha for purposes of keeping up appearances for purposes of the August 12th elections, that the economy is fine, while on the other hand these foreign exchange controls are bringing about shortages of key commodities. It must be noted that even though the current foreign exchange controls might appear successful in terms of preventing a further deterioration of the exchange rate, they will definitely undermine the productive capacity of the economy. In other words, the medicine is worse than the disease.”

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