State edges closer to cutting ‘difficult’ relationship with India’s Essar Energy

By James Anyanzwa

Kenya: The fate of trouble-ridden Kenya Petroleum Refineries Ltd (KPRL) could be known in the next 10 days when the Government officially parts ways with its co-shareholder, Essar Energy.

The Government has described its five-year relationship with the Indian firm as a “difficult one”, and is considering converting the Changamwe-based refinery into a storage facility.

This would mean KPRL will store refined products before they are released to local oil marketers, and is expected to ensure the market does not suffer severe shortages.

Energy and Petroleum Cabinet Secretary Davis Chirchir, however, said conversion of the 53-year-old refinery into a storage unit is “just one of the options”.

“We have now received the deed of termination document, which is being reviewed by our lawyers,” Mr Chirchir told Business Beat last week, but declined to elaborate on what the other options are.

However, industry analysts say the Government could also invite another strategic partner to come on board and take Essar’s place.

But this might not be high on its priority list as this option would drain a lot of money from public coffers, and could be tantamount to flogging a dead horse. 

Essar Energy, through its subsidiary Essar Energy Overseas Limited, acquired a 50 per cent stake in KPRL for a total consideration of $7 million (Sh602 million) from BP, Chevron and Royal Dutch Shell.

Troubled joint venture

But the joint venture between Essar and GoK has remained contentious since its inception in July 2009.

“We need a shareholders’ meeting to agree on the modalities of parting ways. It has been a difficult relationship,” said Mr Chirchir

“We have asked the National Treasury to organise for a meeting with our co-shareholders before the end of this month.”

Essar Energy had committed to undertaking a $450 million (Sh38.7 billion) upgrade of the facility before announcing plans to quit the partnership, saying the facility was not economically viable in the current refining environment.

It said it arrived at its decision to exit from KPRL following an extensive series of studies by international consultants into the technical, economic and funding elements of an upgrade of the refinery.

Transition

The company said it would continue to work closely with the Government to ensure a smooth transition of ownership.

Essar has exercised a put option under the shareholders’ agreement to sell its 50 per cent stake in KPRL to the Government at $5 million (Sh430 million).

By doing this, however, it will earn $2 million (Sh172 million) less than its purchase price of $7 million, but the Indian investors appear ready to cut their losses and move on.

KPRL, which is the only refinery in Eastern Africa, produces LPG, gasoline, diesel, kerosene and fuel oil.

“This refinery is not an asset that we can completely close. The option is to turn it into a tank to store more products,” Chirchir said.

Essar Energy, through its subsidiaries, owns one of India’s fastest-growing private sector oil and gas companies with a diverse portfolio of exploration and production assets.

[email protected]