Imminent closure of Kenya’s oil refinery to shock region


Inevitable: Energy Ministry confirms modernising East Africa’s only crude oil processing facility is untenable and adds that it is currently costing the economy Sh5 billion a year

The Kenya Petroleum Refinery Ltd (KPRL) faces imminent closure in the course of this year, with the Government saying plans to modernise it are untenable.

The facility, which started operations 53 years ago, currently employs 250 people and is the only refinery in East Africa.

And as the region becomes a hotbed for oil and gas exploration, news that the strategic national asset cannot be saved is likely to create economic upheavals.

Kenya is the dominant oil supply route for landlocked neighbours Uganda, Rwanda, Burundi and eastern DRC.

Expressed interest

South Sudan had also expressed interest in using the Mombasa-based refinery when growing political differences with the north began hurting its oil business.  Already, construction of an oil pipeline linking Africa’s newest nation to the Lamu Port is at an advanced stage.

But the Energy ministry has said closure of the facility is inevitable.

Critics have said the Government is playing into the hands of oil marketers who had threatened to boycott the refinery from July, saying they are losing billions due to its inefficiencies.

However, Energy officials say a proposed Sh102 billion ($1.2 billion) modernisation of the refinery is untenable and it is considering converting KPRL into a storage facility that will handle refined products imported into the country.

The Government has put in place protectionist policies that have for a while enabled the refinery to continue running.

The facility is owned by the Government and Indian company Essar Energy on a 50/50 basis. Essar got its stake from BP, Royal Dutch Shell and Chevron in 2009. 

Initially, it was a toll refinery, with oil marketing firms required to import crude oil, which KPRL then processed at a fee.

Last year, the facility was made a merchant refinery and has been importing, processing and selling oil products to oil marketers.

A prior agreement reached before the change in its operational status required oil marketers to purchase KPRL products. The change was meant to help the refinery become self-sustaining and kick start the modernisation process, but this has not worked.

Statistics from the recently released Kenya Economic Survey 2013 show a significant reduction in the amount of petroleum products it handles since its transit from a toll to merchant refinery.

The Government also intends to abandon the policy that bars oil marketers from importing refined oil products and forces them to buy KPRL products.

Protection is not working

It has decided that the protection is not working and that the country would be better off importing 100 per cent refined products to save the country billions accrued due to inefficiencies in the facility, at least until it is ready to invest in a new facility.

The Government’s move is contrary to experience elsewhere that shows that it is cheaper to import crude oil and refine it locally.

Energy Permanent Secretary Patrick Nyoike told Business Beat that planned investments by Essar have not been forthcoming and a recent study on the facility showed that even with modernisation, the facility would still need a lot of hand holding.

Industry sources say officials in the ministries of Finance and Energy, worried about the commitment of Essar to the upgrade project, want the company to disclose the amount of money it is willing to invest.

The delays besetting the expansion project have seen the cost rise six times since 2005, when the modernisation was estimated to require only $200 million.

“Essar came in on a plan to quickly modernise the facility but a study undertaken on the refinery does not support modernisation. It is asking for continued protection of the facility and that is not attractive,” said Nyoike.

A report compiled by the industry regulator, the Energy Regulatory Commission (ERC), shows that the economy is losing billions annually, which the Government is using to push through plans to convert the refinery into a warehouse.

“The economy has been losing Sh5 billion every year ... for how long can the country afford this? The time has come to think of alternatives,” Nyoike added.

He confirmed that the ministry would initiate the process that would entail converting the facilities at the port that currently handle crude oil to store refined products as well as develop a plan on employee retrenchment.

He, however, did not give a definite date on when the conversion would take place.

“It is a long process as there are many issues to consider including the retrenchment process and what they will take home because they will need to be compensated for the job loss as well as the debts that KPRL owes the financiers,” he said.

“We will also need to work out modalities for importation of refined products as well as convert the facilities at the refinery that have been handling crude oil so that they are able to handle refined products.”

He added that the Government and Essar would need about four months to get things in order before commencing the process.

He said there would be no problem with LPG, which the refinery also produces, as there is a new privately run gas-handling facility that has been commissioned. It has a capacity of 300,000 metric tonnes, which is scalable and can go up to 500,000 metric tonnes. Frequent spikes in prices of cooking gas have been mostly attributed to stretched storage facilities in the country.

“Demand for LPG in the country at the moment stands at about 200,000 metric tonnes so we will be adequately covered,” said Nyoike.

A letter in our possession sent by the ERC dated April 29 to the Energy Ministry and Treasury notes that KPRL has been a strain on the Kenyan economy.

“While the motive to protect KPRL was noble, the effect of this policy has been a massive loss to the economy, resulting in  higher consumer prices. In the last 28 months ERC has been regulating (fuel) prices, the economy has lost about Sh13.05 billion being the price difference between product sourced from KPRL and product directly imported as refined products,” the regulator noted.

“In addition to the above losses, the country has also incurred losses amounting to Sh1.51 billion in form of demurrage over the same period. Demurrage could be saved in a situation where the KPRL facility is converted into a receipt terminal.

Level of losses

“The purpose of this letter is, therefore, to formally bring to your attention the level of losses being accrued to the economy and petroleum consumers as a result of the Government policy of protecting the refinery for your necessary action.”

In an interview, ERC Director-General Kaburu Mwirichia said the letter was sent after an analysis and that it was now up to KPRL investors to decide on the way forward.

“ERC has just pointed out the state of the refinery and the cost to the economy,” he said.

The refinery has a capacity to handle eight million metric tonnes of petroleum products per year, but it has been handling an average of 1.5 million metric tonnes.

This came down by almost half last year, following its change of status to a merchant refinery.

According to the Economic Survey 2013, last year, KPRL processed 992,000 tonnes of crude oil, down from 1.74 million tonnes in 2011.

“Crude oil intake declined by 43.1 per cent to 992,000 tonnes. This was occasioned by change over from a tolling/leasing to a merchant refinery. KPRL is now able to procure crude oil, process and sell refined petroleum products to oil marketing companies,” noted the survey.

“Murban crude intake fell from 1.73 million tonnes in 2011 to 998,400 tonnes in 2012. Murban has dominated intake at the refinery over the last five years. This is mainly due to its high yield of white products.”

Nyoike attributed the dismal performance to teething problems as well as the refinery now being accountable for every barrel of crude oil it received.

Previously, when it refined products brought in by oil marketing firms, it incurred heavy product losses during the refining process, which has put it at loggerheads with the oil marketing companies.

“They are now taking accountability for quality and quantity of the petroleum products, which had not been happening before.”

Oil marketing companies have been demanding that KPRL pays them a combined Sh7 billion lost in the refining process — referred to as product yield shift loss in industry lingo.

They also threatened to stop buying KPLR products.

“We regret to advise that the oil industry does not intend to extend the KPRL merchant arrangement beyond June 30,” said a letter to Head of Civil Service and Secretary to the Cabinet Francis Kimemia.

The letter dated April 19 this year by the oil industry supply coordination committee — an industry caucus — was signed by all leading marketers, including Government-owned National Oil Corporation.

“The oil industry is ready and committed in all aspects to put in place all necessary measures for refined product importation after June 30 to guarantee security of fuel supply in the country and the region’s requirements.”

The refinery acknowledged the inefficiencies, but disputed claims that the industry was in a total mess.

“In spite of the shifting of inventory cost from oil marketers to KPRL, the marketing margins for the marketers have actually been increased from Sh9 to Sh10 per litre,” said Mr Brij Bansal, the refinery’s chief executive officer, in a statement released in late April.

Current limitations

“It is noteworthy also that 100 per cent importation of refined products is not practical with the current limitations in handling logistics at the port, which has on many occasions led to demurrage costs of up to $1.5 million per month, which contribute to higher pump prices,” he continued.

But whereas the refinery admits there are inefficiencies at the plant, it argues that it is not legally liable for the yield losses, saying in its agreements with the marketers, any negative impact on product pattern by way of inefficiencies beyond the control of KPRL was to be borne by the marketers.

“It is, therefore, the company’s contention and the legal opinion of KPRL’s lawyers that no liability attaches to KPRL from the yield shift.

“It is inconceivable that oil marketers continued with their operations for more than 10 years without recovering the yield shift impact from pump prices during the free pricing era when they were well aware of the yield shift process which has been in existence since the refinery commenced its operations,” said Bansal.