State seeks to cut links with partner in refinery ownership

Workers at the Kenya Petroleum Refineries Limited.

In Summary

• ‘Move to allow government seek a serious investor to modernise the refinery’
• Essar Energy controls a 50 per cent stake in the Kenya Petroleum Refineries

By IMMACULATE KARAMBU More by this Author

The government wants to end its partnership with a firm that controls a 50 per cent stake in the Kenya Petroleum Refineries Limited.

In a letter dated September 12, 2013, Energy Principal Secretary Joseph Njoroge sought legal assistance from the Attorney General on how to terminate the agreement between the government and the firm Essar Energy Overseas Ltd.

LEGAL OPINION

“Essar Energy Holdings of India has not lived to the expectations of the government to upgrade KPRL as initially agreed. It will be prudent for the government to disengage Essar in equity participation in KPRL to allow GOK seek a serious investor to modernise the refinery,” read the letter.

“The purpose of this letter therefore is to seek your legal opinion on termination of the shareholders agreement between GOK and Essar Holdings of India.”

NIGERIAN INVESTORS

The letter, seen by the Nation, was copied to the Cabinet Secretary for Energy and Petroleum Davis Chirchir and National Treasury Principal Secretary Kamau Thugge.

Interestingly, the letter was written just days after an entourage of investors from Nigeria visited the country and expressed keen interest in investing in the local energy industry, specifically in the nascent oil and gas sector and electricity generation.

During the investment forum, Nigerian investors, including Africa’s richest man Mr Aliko Dangote, held discussions with Mr Chirchir on key investment opportunities in the local oil and gas sector.

Parliamentary committees on Public Investments and Energy have already opened probes into the affairs of KPRL, whose inefficiency due to reliance on old refining technology has resulted in huge losses for oil marketing companies and high fuel prices for consumers.

On Monday, the House committee on Energy, Communication and Information adjourned its hearing of the status of KPRL after it emerged that representatives from the Ministry of Energy and Petroleum, led by Mr Njoroge who appeared before it, were not adequately prepared with information regarding how Essar acquired half of KPRL’s shareholding.

According to a brief presented to the energy committee by the Energy ministry, until May 2003 when the Cabinet resolved that the ministers of Finance and Energy take on board interested investors to dilute existing shareholders while injecting the required capital needed for the upgrade, KPRL was owned by the government and international oil marketing companies.

The facility was a joint venture between the government (50 per cent), Shell Petroleum Company (17.1 per cent), BP Africa (17.1 per cent) and Chevron Global Energy Inc (15.8 per cent).

Essar Energy Overseas Ltd acquired the shareholding of the three oil marketers at a cost of $10 million.

According to the Energy ministry, Essar had offered a goodwill of $11 million in exchange of a waiver by the government to exercise its pre-emptive rights to acquire the 50 per cent shareholding, as was provided for in the company’s Articles of Association.

INITIAL COMMITMENT

“However, following Essar’s success in a competitive bid process floated by the private shareholders (oil marketing companies), the company changed the goodwill offer from the initial amount of $11 million to $2 million,” read a statement from the ministry of energy.

Essar has been faulted for failing to honour its initial commitment, which, according to the government, has created a shortage of cash to finance upgrade of the refinery.

The Energy Regulatory Commission, in a letter  dated April 26, 2013 to the former Energy Permanent Secretary Patrick Nyoike said the economy was losing billions annually as a result of inefficiencies at the refinery, hinting that a shutdown of the facility could be a solution to lowering the cost of fuel.

“While the motive to protect KPRL was noble, the effect of this policy has been massive loss to the economy resulting into higher consumer prices. In the last 28 months when ERC has been regulating prices, the economy has lost about Sh13.5 billion being the price difference between product sourced from KPRL and product directly imported as refined products,” read part of a letter signed by former ERC director-general Kaburu Mwirichia.

Oil marketing companies are demanding more than Sh7 billion from KPRL, which Deloitte Consulting estimates to be the product yield loss that the marketers have suffered at the hands of inefficient refining technology employed by KPRL.