Kenya refinery sale hits snag

Nairobi – The future of East Africa’s only refinery hangs in the balance after the Kenyan government said it was weighing the options in the face of a planned exit by India’s Essar Energy.

Nairobi – The future of East Africa’s only refinery hangs in the balance after the Kenyan government said it was weighing the options in the face of a planned exit by India’s Essar Energy.

The firm holding 50 per cent of Kenya Petroleum Refineries Limited announced recently it would invoke an exit clause to leave the refinery by July next year.

The government has a first right of refusal for the stake that would cost $5m, but Treasury secretary Henry Rotich said on Friday the deal was far from done.

“We have not made a decision on the direction that the refinery will take. So we cannot talk of committing resources. It is too early to say what will happen. The Ministry of Energy is also involved in this,” said Rotich.

However, he said negotiations were going on between the government and Essar Energy, which bought the stake from BP, Chevron and Royal Dutch Shell for $7m in 2009.

The Treasury’s balking at the purchase appears to arise from the hefty investments required to upgrade the refinery (pictured) and to clear toxic waste.

It is estimated that the upgrade would cost sh103b and the cleanup of the refinery’s 300-acre land another sh5.3b.

Essar can only sell the stake to other parties if the government waives its pre-emptive rights, but the proposition to potential buyers would be a hard sell.

Essar said it was pulling out of the operation because a consultant had advised it against raising money for the upgrade. The company said it had planned to raise $1.2b for the upgrade before deciding to exit altogether.

“Essar Energy believes it is not an economic proposition and would not deliver adequate returns on that investment,” the company said in the statement, setting July 2014 as the sale completion date.

Public Investment Committee chairman Adan Keynan has claimed that BP and Shell used to dump the waste on the land before they sold their interests.

However the 300-acre land in the prime Changamwe area of Mombasa, which is valued at sh13b, would still be of interest to investors together with its storage and associated pipeline network estimated to be worth sh16.3b.

Anyone buying the facility would also need to contend with an ownership maze involving Essar India, which negotiated for the stake and Essar Mauritius, which actually owns the shares in the refinery.

The ownership of Essar Mauritius has been difficult for even PIC to untangle amid suspicions that senior officials during the Kibaki administration hold beneficial interests in the company. Some industry players have proposed that the refinery be shut down because it makes refined petroleum products more expensive than imported white oils.

Vivo Energy chief executive officer Polycarp Igathe said last month petroleum products would be sh9 per litre cheaper if markets were allowed to import all their requirements.

Others have proposed that the refinery be turned into a storage facility that would help Kenya buy oil in bulk, cushioning consumers from wild swings in international oil prices.

Closing the refinery, however, would be a politically sensitive decision given that it would render 1,000 workers jobless. Plans to turn the refinery from a toll refinery, which processed products owned by marketing companies, into a merchant one processing products for sale floundered in July last year.

Although the facility did not have the huge capital outlay required, its inefficiencies meant it could not secure buyers without the protection that requires oil marketers to process 40 per cent of their supplies at the plant.

The refinery also faces market uncertainties with Uganda, the main buyer of refined oil re-exports from Kenya, planning a cleaner of its own after discovering commercial volumes of oil expected to be brought to the surface in 2017.

This would open competition for other oil re-export markets like the DR Congo, Rwanda and Burundi. Another refinery is to be put up in Isiolo or Lamu under the Lamu Port South Sudan Ethiopia (LAPSSET) corridor projects, this time to separate oil from Turkana in Kenya.

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