By JEVANS NYABIAGE and MACHARIA KAMAU
When then Prime Minister Jomo Kenyatta inaugurated the £6 million East African Oil Refinery at Changamwe on February 21, 1964, the mood in Kenya was hopeful. It symbolised the beginning of a new era of industrialisation.
“The complexity of such a facility, unknown before in East Africa, was to provide not only the fuel for turning wheels but also an industry in which East Africans would work with some of the most modern techniques in the world,” wrote Spear, the then journal of the East African Railways and Harbours, in its April 1964 issue.
For Kenyatta, the refinery would give East Africa its own supply of refined products and lead to the manufacture of by-products that would develop related secondary industries.
“We may therefore be seeing the birth of a whole new range of secondary industries beyond our grasp,” he said, just a year after Kenya had gained independence. “The refinery is an expression of confidence in Kenya’s future and will help pave the way to attract other new industries, which will provide new jobs and income for Kenyans.”
Discontent
Fast forward to 2013, and Kenyatta’s son Uhuru is President. But this time round, the mood is different — it is that of discontent.
When the refinery was unveiled in 1964, it was expected to process approximately two million tonnes of crude oil a year.
But five decades later, the region’s only refinery relies on protection from the State to stay afloat. The refinery, managed by the Kenya Petroleum Refinery Limited (KPRL), has a capacity of 70,000 barrels per day but it currently produces 35,000 bpd.
In 2009, when Essar Energy of India acquired a 50 per cent stake in KPRL from a consortium of BP, Shell and Chevron, three foreign investors who were reluctant to pump any money into the upgrade, there were high expectations.
Essar promised to pump in between $400 million and $450 million (Sh34.6 billion to Sh38.9 billion) for the modernisation of the facility. But, four years later, the project appears to have stalled.
The delays besetting the expansion project have seen the cost rise six times since 2005, when the modernisation was estimated to require only $200 million (Sh17.3 billion).
It currently processes 1.6 million tonnes a year against a regional demand of 5.7 million tonnes.
It also produces 30,000 tonnes of LPG annually against an estimated regional demand of 62,000 tonnes.
The facility cannot handle the newly discovered oil deposits in the country and its neighbours Uganda and South Sudan.
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It is estimated that the Kenyan economy loses more than Sh7 billion annually from the inefficiencies associated with the refinery that was almost shut down early this year.
It performed dismally last year, with the uptake of crude oil declining by about 50 per cent to 992,000 tonnes from 1.6 million tonnes in 2011.
KPRL Chief Executive Brijmohal Bansal attributed this to a silent boycott by some oil marketers.
But even as the crisis deepens, the fact that the refinery was not mentioned in a joint communiqué issued by the presidents of Kenya, Uganda and Rwanda after an infrastructure summit held in Mombasa on August 28 could be a pointer that the facility may be fast falling off the East African Community infrastructure radar.
The three presidents’ — Uhuru Kenyatta, Yoweri Museveni and Paul Kagame — instead focused on the planned Uganda refinery among the key projects in the region being looked at in the short term.
The presidents’ communiqué noted that partner states are to confirm their participation in the development of the Uganda oil refinery by October 15.
According to the proposal by the participating states, the refinery will be developed in a modular manner under a public private partnership.
The Ugandan government will procure a transaction advisor to guide the states in the sourcing of a lead investor and funding for the refinery. The Tanzanian government was not represented at the summit.
Joint facility
In an interview with Business Beat, Uganda Energy Minister Simon D’Ujanga said the Ugandan government has already embarked on preparations for a 29 square kilometre piece of land where a joint refinery will be constructed. The Uganda government recently acquired the land in Koima, Western Uganda, near the oil fields.
D’Ujanga said the refinery will be 40 per cent owned by the East African governments and the other 60 per cent owned by investors. The governments that are collaborating on the project will do the tendering together.
He added that the governments are working with a date of 2017 for the refinery to be operational.
“We are looking at different investors, but this is still being discussed.”
D’Ujanga noted that the collaborating countries are not oblivious to the fact that there is already a refinery in Kenya.
“East Africa can have more than one refinery… many oil producing countries have several refineries,” he said.
Mwendia Nyaga, the chief executive officer of Oil & Energy Services Ltd, a boutique technical consultancy that focuses on upstream aspects of the oil and gas industry, said given the current state of the Mombasa-based refinery, a second one in the region would be welcome.
He said a second refinery is in line with the East African Refineries Development strategy that was adopted by the EAC partner states in 2008. This was after discoveries of oil in Uganda a couple of years earlier.
The report recommended that a refinery be put up in Uganda and the one in Mombasa be upgraded.
“At about 35,000 barrels per day while the regional demand is more than 120,000 barrels per day, there is room for another refinery,” Nyaga said. “A second refinery should not affect the commerciality of the Kenya refinery.”
In 2011, a study commissioned by the government of Kenya on the infrastructure for the Lamu corridor (Lapsset) recommended the establishment of a 120,000 bpd export processing refinery at Lamu to process mainly crude from South Sudan. Last year, Kenya announced discoveries of commercially viable oil deposits near Lake Turkana.
The modernisation of the Mombasa refinery involves chiefly the upgrade of processing units, and is not planned to increase crude distilling capacity beyond the designed 70,000 bpd.
A financial crisis at the ageing plant is fuelling calls by the oil industry to modernise or shutter East Africa’s only refinery, a move that could lead to acute fuel shortages across the region.
Oil marketers have since last year threatened to boycott buying products from the refinery for producing low quality products.
Oil marketers such as Total, KenolKobil, Libya Oil, Kenya’s National Oil and Vivo Energy have long complained about the inefficiencies at the 50-year-old refinery. They say products processed at the refinery are more expensive than imports and cost the economy at least Sh1.6 billion a month.
Two months ago, Standard Chartered threatened to suspend a Sh29 billion financing arrangement with the Kenya refinery over rising defaults by oil marketers.
A senior National Treasury official who asked not to be named said the future of the refinery would be decided next month.
“With regard to the KPRL, we shall be having an internal meeting as well as a shareholders’ meeting next month to deliberate over its status. The outcome of these two meetings will determine the way forward.”
Debate has been raging in Kenya over whether the nearly moribund refinery should be closed, even though the Kenyan government has insisted that it plans to upgrade it at an estimated cost of $450 million.
The arrangement
Under an arrangement rolled out mid last year, the refinery imports crude oil, refines it and then sells it to the marketers. Nyaga faults this policy, terming it the cause of the industry’s woes. “It has been very expensive to run the refinery since the yield has been low — which means the products are expensive,” he said. He added that consumers have been paying more at the pump due to KPRL inefficiencies.
“The best thing to do is to remove the subsidy that guarantees KPRL protection. The refinery should be left to find its own commercial course.”
The government has put in place protectionist policies that have for a while enabled the refinery to keep running. Initially, it was a toll refinery, with oil marketing firms required to import crude oil, which KPRL then processed at a fee.
Last year, it was made a merchant refinery and has been importing, processing and selling oil products. The change was meant to help the refinery become self-sustaining and kick start the modernisation process, but this has not worked.
Critics have said the government is playing into the hands of oil marketers who had threatened to boycott the refinery, saying they are losing billions.
Some government officials say the proposed modernisation of the refinery is untenable and they are considering recommending that KPRL be converted into a storage facility that will handle refined products imported into the country.