Kenya buys Essar Energy out of troubled refinery for Sh500m

They came and saw but failed to conquer. And after seven years with a 50 per cent stake in barely an idle asset, Essar Energy Overseas Limited has abandoned Kenya Petroleum Refinery (KPR).

Finance cabinet secretary Henry Rotich share light moments with Esser energy oversees limited Directors Sushil Baid(left) and Narendra Vachharajani(center) signing ceremony for the completion of a transaction that saw Esser energy oversees limited exit the Kenya petroleum refineries limited through selling their entire 50% shareholding to the government of Kenya. 24/06/2016. Photo by WILLIS AWANDU

Friday, the company, a subsidiary of Essar Oil Limited, pocketed $5 million (Sh508.9 million) from the National Treasury to bring to an end the deal once hyped as its first refinery acquisition outside of India.

The decision means the Kenyan government now wholly owns the refinery whose future hangs in the balance.

In a press briefing, Essar Director Narendra Vachharajani was economical with his words when asked why the firm decided to pack and leave the refinery in the hands of the Government.

“In business, some projects work out, others do not. I do not want to go into details,” said Vachharajani clearly alluding to the fact that the July 2009 decision to acquire half of East African’s only oil refinery did not work.

That year, it acquired the stake at a total consideration of $7 million (Sh712.5 million using current exchange rate) from the then shareholders –Shell Petroleum Company Limited, Chevron Global Energy Inc and BP Africa Limited.

“In future, if there’s an opportunity, we would like to look at it and come back. We have had good relationship,” said Vachharajani.

During yesterday’s signing ceremony, Treasury CS Henry Rotich admitted that the Government is at the moment clueless on what to do with the refinery.

“I believe in the near future, we will be announcing what we are going to do with the refinery. We are going to review whether the need for the refinery will be there or not,” said Rotich.

He however disclosed that there is a committee reviewing the refinery operations and it will come up with options. The refinery became idle in in September 2013 as Kenyan opted to start importing processed oil.

While responding to the question on what informed the Government and Essar to settle for $5 million buyout,Rotich said that the price considered “so many factors” among them the liabilities that have been incurred, the potential valuation of the refinery and conditions in the 2009 deal.

On October 2013, just less than two years after acquiring its stake in the Mombasa-based refinery, Essar made U-turn on the deal and announced intentions to pack and leave.

According to the company, the decision was founded on a basis of extensive series of studies by international consultants into the technical, economic and funding elements of an upgrade of the refinery.

Following these studies, the company concluded that the upgrade was not economically viable. Therefore, it chickened out on its initial plan to upgrade the refinery by adding secondary units. That would have cost it up to $450 million (Sh45.8 billion).

It had also expressed intention to raise the refinery’s processing capacity to 4 million tonnes of crude per year by 2018, up from 1.6 million, but oil marketers said the facility was inefficient.

Despite having done so little to improve the state of the refinery, Essar may have walked out with head high. This is because during the 2009 deal, the terms of the shareholders’ agreement allowed it to exercise a put option. Under the deal, Kenya was under obligation to buy Essar’s stake at $5 million (Sh500 million). Put option allows parties to agree on a price than an asset will be sold on or before a particular date.

While it exits the scene, Treasury boss said that it was welcome to consider other investments in the country given that it has spread wings into other sectors like steel, infrastructure and services.