By Macharia Kamau

Local oil marketing companies have threatened to boycott buying petroleum products from the Kenya Petroleum Refineries Ltd (KPRL) beginning July this year.

They instead want to import all refined petroleum products they sell in Kenya to cut costs. Currently, the marketers are required by a binding agreement to buy a fraction of their refined products from KPRL. The refinery imports crude oil, refines it and sells to marketers.

The marketers however say the inefficiencies at the refinery are too costly for them. They warned that they will not renew the agreement that ends mid this year, unless there is a radical shift in KPRL operations.

Huge compensation

The marketers further want KPRL – which is owned by the Government and Essar on a 50-50 basis – to compensate them Sh7 billion. This, they argue is the value of petroleum products lost over the years due to inefficiencies at the refinery during the refining processes.

In a letter to the Head of Civil Francis Kimemia (now secretary to the cabinet) last week Friday, the Oil Industry Supply Coordination Committee (SupplyCor) said the inefficiencies have been costing them an extra Sh1.6 billion monthly, which is passed on to consumers. The amount translates to pump prices being higher by as much as Sh10, according to the oil firms.

“In the absence of a clear resolution on the way forward to effectively address the above concerns by KPRL shareholders, and considering the burden to the consumer and the economy due to additional cost from the KPRL products, we regret to advise that the oil industry does not intent to extend the KPRL merchant agreement beyond June 30, 2013,” said the letter signed by major oil marketing firms, including State owned National Oil Corporation.

“The oil industry is ready to put in place all the necessary measures for refined products importation into the country after June 30 to guarantee security of fuel supply in the country and region.” The letter by Supply or further wants the Government to ensure compensation of the Sh7 billion that it says KPRL owes the industry due to product yield shift loss – products lost in the refining process.  It also wants KPRL to release products valued at over Sh9 billion it has been holding pending resolution of the yield shift matter.

Merchant refinery

KPRL previously operated as a toll refinery where marketers imported crude that would be processed by KPRL for a fee. The change in operating status was among the first steps in the refinery’s $1.2-billion modernisation plan. Little has however changed and KPRL and still runns on archaic equipment. “The refinery is still using old and obsolete technology despite the continued reassurance from KPRL shareholders of planned investment for upgrading the refinery. This is responsible for KPRL’s inferior product quality and operational inefficiencies,” said the Statement.

 “Due to this, some of the yields produced by KPRL have no local market use and have to be re-exported at significant loss for further processing.”