State in dilemma over fresh capital injection into refinery

State in dilemma over fresh capital injection into refinery

By Joseph Bonyo

The Kenya Petroleum Refinery Limited is up for grabs. At least this is what sources within the petroleum industry are indicating.

With the Essar Energy, the current co-owner with the government of Kenya, indicating that it wants out, the government is expected to offer the shares for sale.  “To continue operating like a refinery, the government must have a partner. This is because of the complexities of managing such a facility,” says Mwendia Nyagah a petroleum industry expert. Treasury Cabinet Secretary Henry Rotich said his office is still consulting with the ministry of energy for the way forward.

“For Essar we have not concluded discussions and I would not like to comment at this stage,” Rotich told reporters in Nairobi yesterday adding that, “We are awaiting for advice from the Ministry of Energy for the way forward.” But even as decision on the future of the refinery is being awaited, a section of industry observers argue that the facility is outdated, inefficient and has no place in Kenya’s current phase of economic history.

Built 53 years ago, the Changamwe based facility has seen the best of its years. Since January to date, little has been happening at the facility with observers urging for a complete sale of it. This move has, however, been opposed by the Ministry of Energy and Petroleum, as well as the National Assembly committee on energy and communication. Originally, the refinery was owned by the government, holding 50 per cent, together with Shell Petroleum Company (17.1%), BP Africa (17.1%) and Chevron Global Energy (15.8%).  Essar Energy came on board when the industry shareholders opted out in 2007, with the sale of the shares being concluded in 2009.

Before then, Libya Oil was one of the suitors, with the government at one point settling down for a 25 per cent shareholding each for it and Essar.

“The Government realised that dealing jointly with Essar and Libya Oil was worse than dealing with each party separately,” reads a ministry document on why it chose to deal with the India-based group. Additionally, Essar had committed themselves to supporting KPRL obtain funding from both local and international financiers at favourable terms, adds the ministry.

Four years down the line, Essar wants out, opting to sell its 50 per cent stake back to the government.

“It’s a good deal for Essar but a bad one for the Government of Kenya,” says Bob Patterson a petroleum industry analyst. Although no immediate signs of a suitor to the facility are in the offing, word in the industry indicates to a potential deal with Nigerian businessman, Aliko Dangote.

The businessman, one of the richest men in the continent has expressed his desire to expand his footprints in Kenya. He already has committed Sh34 billion to invest in a cement firm.

“Any smart businessman should know what to invest in and this refinery is not one of them. Unless he has been promised protection by the government against competition from imported refined products. This will not be a smart move,” says Patterson on suggestions that Mr Dangote is interested in the refinery.

In his home country, Nigeria, Dangote just signed a multi-billion dollar facility with several banks to build Nigeria’s largest oil refinery.

In its current state, the government — once Essar successfully moves out — will be left with a near obsolete facility. Worse off, the decision to turn into merchant facility complicates matters for the refinery, as local oil marketing companies prefer to import refined products into the market.