Kenya smallholder tea farmers earn Sh63.6 billion from tea exports
Pressure to close Mombasa-based oil refinery intensifies
Written by Today Financial News Tuesday, 02 July 2013 07:40
By Ben Kinyanjui
Call them whatever you want Mr Suleiman Shakombo but they seem determined to have the Kenya Petroleum Refinery Limited (KPRL) closed down this time round. But they cannot just do it if you convince the new government that it is still a viable investment.
However, a walk done memory lane will tell you that time is running very fast for the only facility left in the East African region. A similar facility in Dar-es-Salaam closed shop some 15 years ago.
Kenol/Kobil was seen as the the biggest enemy of the refinery a decade ago. Managing director Jacob Segman could not understand why oil companies were forced to refine 70 per cent of their crude at the outdated facility.
Worse still, the profit would be shared between four shareholders among them his competitors, Shell, Bp and Caltex that later became Chavron. The latter three were the original owners before the government forcibly bought 50 per cent state for strategic reasons.
KPRL was incorporated in 1960 with Shell and BP being the original owners each holding 50 per cent of the equity. The shareholding structure has changed over the years with the entry and exit of some shareholders.
The situation later changed with the Government of Kenya acquiring 50 per cent of the shareholding while the balance is held by three multinational companies namely Shell, BP and Chevron.
In 2011, Essar acquired 50 per cent stake after the three multinationals sold their stake.
To the oil industry, the refinery was inefficient and the associated costs were passed on to the consumer through high prices. After realizing that, the immediate former Energy minister Kiraitu Murungi reduced to 30 per cent crude oil companies could refine at the facility.
Pressure has been mounting on the government to abolish this requirement and allow the facility to compete with imported refined products and this makes a lot of business sense but this would ‘kill’ the facility.
Though Mr Segman seems to have toned down following the exit of the three competitors from the facility and some from the local oil industry all together, National Oil Corporation of Kenya (NOCK) managing director Ms Samarya Hassan-Athman seems to have taken over from him.
She may be part of the cartel Mr Shakombo, KPRL board chairman says are bent on ensuring that the Mombasa-based refinery is closed down and become an oil depot like that in Dar-es-salaam.
Mr Shakombo argues that it is the same cartel that forced the close of that facility so that they could manipulate the market and make supernormal profits at the expense of the consumers and the Tanzanian economy.
It is estimated that the economy looses over Sh8 billion from the inefficiencies associated with the facility, an issue that Mr Shakombo and his board have failed to address adequately.
Ms Hassan-Athman does not buy the argument that there is a cartel out to disable the facility saying the refinery is outdated and the losses to the economy runs into billions of shillings. Efforts by the shareholders to modernize the facility have not succeeded either.
“Sometimes, the refinery gives us fuel oil instead of the specific product that we request. Fuel oil is a fraction obtained from petroleum distillation; either as a distillate or a residue,” she says.
The CEO told the Parliamentary Investment Committee (PIC) that the proposed upgrading may not restore the efficiency arguing that the only alternative is to close down the facility that is a key economic driver at the coast.
“We are not given the right to ask any questions. This state of affairs is not sustainable because we are losing too much money in absorbing the losses,” she says.
However, it is not clear why the two shareholders who own 50 per cent apiece have not even tried to modernize the facility. Experts say it would require about Sh103 billion, a small figure to the government and Indian giant Essar.
The newly appointed Energy and Petroleum cabinet secretary Mr Davies Chirchir has tossed himself into the ring siding with the investors that want to protect the investment against strong market forces out to cripple its operations.
Besides providing employment mainly to the coastal population, the government earns revenue from the facility. It is therefore not in the interest of the government to shut down the refinery and he has said as much.
Instead, Mr Chirchir is assuring the workers and investors that the upgrading would start immediately and a ministerial committee has been formed to seek ways to raise the required funds.
Both the secretary and KPRL board have not given enough reasons why it has taken so long to upgrade the facility. And is there sufficient political will this time round to save the consumers and the economy such big losses?
The government blamed Shell, BP and Caltex for lack of commitment to upgrade the facility because they had modern refineries elsewhere that they could use to import refined products to service their petrol stations.
Shell and BP that was one of the biggest oil dealers in the country was indeed in the front line to push the government to allow the importation of refined products arguing that they were cheaper and of higher quality.
Large refining capacity
Now, Essar is the other major shareholder with deep pockets but there seems to be little commitment to fund the operations that would save the investment.
Sources say Essar have a 20 million tonnes per year refinery at Vadinar in Gujarat, India which started commercial production in 2008.
The facility that uses state-of-the-art technology has the capability to produce petrol and diesel that meets the latest Euro IV and Euro V emission standards.
The refinery produces LPG, Naphtha, light diesel oil, Aviation Turbine Fuel (ATF) and kerosene. It has been designed to handle a diverse range of crude — from sweet to sour and light to heavy.
It is supported by an end-to-end infrastructure setup, including SBM (Single Buoy Mooring), crude oil tanker facility, water intake facilities, a captive power plant, product jetty and dispatch facilities by both rail and road.
Last year, the refinery capacity was expanded to 20 million tonnes with an increase in its complexity from 6.1 currently to 11.8 on the Nelson index, making it India's second largest single-location refinery.
In 2011, Essar acquired the Stanlow Refinery from Shell, which is the second largest refinery in England.
The Stanlow Refinery, with a capacity of 296,000 barrels per day, lies near to Liverpool in northwest England, on the south bank of the Manchester ship canal. It supplies approximately 15 per cent of the country's transport fuel requirements.
Last week, President Uhuru Kenyatta committed the country to a proposal to jointly build a new and complex refinery in Uganda to refine recently discovered oil in Uganda and Kenya. It would also benefit South Sudan that is set to join the East African Community (EAC).
Though the immediate former KPRL general manager John Mruttu says the Mombasa refinery is now necessary than ever due to the new oil discoveries, the facility is classified as simple and so may not be able to handle the new found oil.
“This (building the plant) was an idea conceived when no one knew that oil would be discovered in the country and any attempt to close it when the dream has come true will be losing national development focus,” says Mruttu who is now Taita Taveta governor.