Essar's Kenya refinery upgrade plan faces closure threat

Next week, a meeting between the Kenyan Government and Essar Energy will decide the fate of the 50-year-old refinery.

* Essar Energy plans to pump in nearly $1 billion for upgrading KPRL

* Next week, a meeting between the shareholders, the government and Essar Energy will decide the fate of the 50-year-old refinery

* The Mombasa refinery is the only refinery in Eastern Africa

* It produces LPG, gasoline, diesel, kerosene, and fuel oil

* KPRL last week, reportedly warned that it may soon be unable to refine petroleum products owing to severe financial constraints

* Kenya's Energy Regulatory Commission (ERC) has said that operations of the refinery are hurting the ordinary consumer.

* Essar Energy said decisions on the next step will depend on the board of KPRL

Even as Essar Energy plans to pump in $1 billion for upgrading its Mombasa-based Kenya Petroleum Refineries Ltd (KPRL), the future of the refinery is said to be under threat. Next week, a meeting between the two shareholders, the Kenyan Government and Essar Energy, would decide the fate of the 50-year-old refinery, with a closure on the cards.

The Mombasa refinery is the only one in Eastern Africa and the first international one acquired by any Indian company. At present, it produces liquefied petroleum gas (LPG), petrol, diesel, kerosene, and fuel oil. The refinery is planned to be upgraded by adding secondary units at a project cost of $400-450 million.

Last week, KPRL reportedly warned it might soon be unable to refine petroleum products, owing to severe financial constraints. Kenya’s Energy Regulatory Commission said operations of the refinery were hurting the ordinary consumer.

“The KPRL refinery is continuing to operate as normal. We can’t comment on speculation appearing in the media,” Essar Energy said in a statement. Extensive studies had been carried out by external consultants into the technical, economic and funding elements of any potential upgrade. “The two shareholders, Essar Energy and the Kenyan Government, continue to work together and decisions on the next step will depend on the board of KPRL,” an Essar Energy spokesperson said.

As part of its global expansion plans, Essar Energy had, in 2009, acquired 50 per cent stake in KPRL from Royal Dutch Shell, BP and Chevron. The government of Kenya owns the rest.

The refinery processes crude oil imported from the Persian Gulf region for marketing companies. KPRL’s primary products include LPG, unleaded premium gasoline, regular petrol, automotive gas oil, industrial diesel, fuel oil and special products like bitumen and grease.

KPRL’s products are sold in the Kenyan market and exported to neighbouring countries, including Tanzania, Uganda, Burundi, Rwanda, South Sudan & Eastern DR Congo.

In June 2012, KPRL signed a financing agreement with Standard Chartered Bank to help the refinery roll out its business transformation plan. The agreement would enable KPRL to access $250 million and transform the toll refinery to a merchant refinery. “This facility would be utilised for our working capital requirements. We will now be able to procure oil, process it and sell the petroleum products to marketing companies,” Brij Mohan Bansal, chief executive, KPRL had said.

At present, KPRL gets crude oil from oil marketing companies. A merchant refinery would enable KPRL to purchase its own crude oil. The refinery processes 1.6 million tonnes of crude oil a year. After the transition, it would process Murban crude from the United Arab Emirates. It would also be able to handle crude oil from cheaper sources. The refinery would continue to focus on servicing the main Kenyan market, the most dominant in the region. Kenya has a demand of about four million cubic metres per year.

Closure of the refinery would be the best commercial decision according to industry analysts and insiders, but a very wrong geostrategic move for the Kenyan Government and East African region as a whole. I foresee a tug of war between the Kenyan government wanting the refinery to be kept running at all costs, while Essar insisting that it can only remain open under certain very tight terms and conditions. Terms off course in favour of Essar, considering they are the ones who will be putting money into the refinery..