Oil refinery seeks State protection

By John Njiraini and Macharia Kamau

A proposal by the Kenya Petroleum Refineries Ltd (KPRL) to seek Government protection as it converts to a merchant refinery has revived debate of supporting a facility that is perceived "obsolete."

For the better part of its more than 50 years existence, the Mombasa-based refinery has depended on government subsidies to remain afloat despite coming under repeated accusations of contributing to the fuel crises in the country due to inefficiencies.

Until last year when the Government, which controls a 50 per cent stake in the facility, announced it was getting weary of supporting the refinery and revealed it would convert to a merchant refinery, the facility was kept afloat by a Government decree that 70 per cent of crude oil entering the country must be processed at the refinery.

But with the facility expected to craft a new strategy with the switch to a merchant refinery, something that means it will be required to start buying, processing and selling refined fuel to local marketers, the management is concerned that unless the Government extends a helping hand, the refinery might close shop.

Late last month, KPRL Chief Executive Officer Bimal Mukhurjee wrote to the Energy Regulatory Commission (ERC) seeking a raft of protectionist measures to ensure the refinery does not become irrelevant when it converts in April.

Top on the list, the company argues that for the economy to benefit from the merchant mode, KPRL must be given the leeway to select the crude oil to be processed. This will enable the company to procure the crude that is most economical to process. "Since processing of different crudes has both the potential to make money and risks of losing money, KPRL will always ensure that it selects the crude oil or crude oil blends that best optimises the resulting product yield," said Mukhurjee in the letter.

Apart from that, KPRL is demanding a free hand to source and procure crude oil on the global market to ensure that its profit margin is not eroded.

If given the go ahead to source for crude from any market, it will erode progress made by the National Oil Corporation of Kenya (Nock), which has been working on long term agreements with oil producing countries to procure crude oil directly from them.

The refinery also wants to be allowed to publish a three-month rolling production plan that compels oil marketing companies to buy the bulk of their supplies from the facility, and import the deficit.

More critically, KPRL is asking for a margin protection subsidy of $6.47 per barrel processed or $6.88 per barrel of products produced by the refinery in order to cover additional costs and retain profitability at the same level as in 2010.

It is notable to note that KPRL recognises the fact that the margin protection it is requesting will impact on the prices of fuel but states that this will be a marginal Sh0.38 per litre.

MODERNISATION PLANS

Another pivotal request is that legal notices giving effect to the merchant refining exclude fuel oils from products that can be imported. This will guarantee that fuel produced by KPRL is taken by oil marketing companies before they can be allowed to import.

Though the proposals are intended to protect the refinery from becoming irrelevant at a time when it is investing in modernisation programmes, oil marketers and consumers lobby groups are opposed to them because the move to convertthe facility is to make it competitive.

"KPRL is requesting for protection without stating for how long it would want this to last. It can only mean the consumer may continue subsidising this refinery," said a letter by the Consumer Federation of Kenya Secretary General Stephen Mutoro addressed to the ERC.

When contacted, Mukhurjee declined to discuss the issue and stated the matter is now in the hands of the Energy Regulatory Commission (ERC).

"I don’t want to discuss the matter because we have given ERC our requests," he said.

ERC Director General Kaburu Mwirichia told Financial Journal that it received the proposals and was in the process of analysing them before coming up with recommendations that would be forwarded to the Energy minister.

"This is a policy issue and we are yet to finish analysing the proposals before we give recommendation to the minister who will decide on what to do," he said.

He added that ERC would be hesitant to suggest granting KPRL any protection that might increase the prices of fuel.

But even as KPRL, which has already fallen behind on the conversion dateline — it was originally supposed to start operating as a merchant refinery this month— awaits to see if the Government will infinitely grant the subsidies, oil marketers are up in arms.

The oil marketing companies have made it clear to the ERC their opposition to the proposals because they want to import products directly or procure from KPRL when they feel like.

"The whole idea of converting the refinery is to make it compete. So KPRL must find away to make us buy its product at competitive rates but we are opposed to the Government forcing us to buy from KPRL," said an oil marketing company manager.

Of importance to note is that KPRL, which is 50 per cent owned by Essar Energy of India, could be doomed if the government does not grant most of the proposals it has put on the table.

First, the facility is outdated. Commissioned in 1963, the refinery has a capacity of four million tons of crude per year or 80,000 barrels per day but only manages to process 1.6 million tonnes of crude per year or 32,000 barrels per day due to inefficiencies.

Although the refinery has embarked on a $1.2 billion modernisation programme, which includes building a 10 MW power plant to secure electricity supply, the process is only expected to be completed in 2015.

Besides, the facility is also gearing for a major onslaught from neighbouring Uganda and Tanzania, which have announced plans to build medium sized refineries.

Uganda, which has since discovered huge deposits of oil, has already rolled out plans for 150,000 barrels per day refinery.