The Effect of Petroleum Price Regulation on the Financial Performance of Oil Firms in Kenya

Abstract

Petroleum price regulation was introduced in Kenya in December 2010 the mandate of which was granted to the Energy Regulatory Commission. The study‟s objective was to assess the effect that government regulation of petroleum prices has had on the overall financial performance of oil firms in Kenya. The study covered 10 years from 2006 to 2015 and secondary data for four oil firms in Kenya (Total Kenya Limited, Kenol Kobil Limited, National Oil Corporation of Kenya and Hass Petroleum Kenya Limited) was collected. It was analyzed using multiple Regression model and descriptive statistics. The independent variables were fixed assets weight, efficiency of capital, operational costs efficiency and petroleum price regulation and the dependent variable was financial performance represented by Return on Assets. The study findings revealed that the introduction of petroleum price regulation has had a negative effect on the financial performance of oil firms in Kenya. The general financial performance of the oil firms as measured by ROA was better/higher in the period preceding petroleum price regulation period than in the period after introduction of the regulation. Thus the study recommends refinement of the ERC pricing formula to ensure that it accommodates and addresses the concerns raised thus far by the major stakeholders in the industry to ensure protection of the oil sector‟s margins and subsequently enhance financial and overall operational performance which is bound to have a trickle-down effect to the whole Kenyan economy.