Another privatisation deal gone sour.” This is how Kwame Owino, CEO of the Institute of Economic Affairs, describes the impending exit of India’s giant Essar Energy from Kenya Petroleum Refinery Limited (KPRL).

After five turbulent years during which Essar co-owned the facility with the Kenya government, the Indian conglomerate is opting out of KPRL. It paid $7-million in July 2009 for a 50% stake in the Mombasa-based facility.

The Indian company believes KPRL is not economically viable in the prevailing environment. “This decision by Essar Energy follows an extensive series of studies by inter-national consultants into the technical, eco-nomic and funding elements of an upgrade of the Mombasa refinery,” Essar says, adding that it intends to exercise an option under the shareholders’ agreement to sell its stake to the Kenya government for $5-million, less than the amount it forked out in 2009.

KPRL joins the likes Telkom Kenya and Kenya Railways Company (KRC), whose pri- vatisation has failed to transform the com-panies and has instead turned them into liab-ilities to the exchequer.

“The common dominator in these privatis-ations is that Kenyans are the losers because the companies have sunk deeper into prob-lems,” notes Owino.

In the case of Telkom Kenya, government has been forced to inject close to $500-million since it sold a 51% stake to France Telecom, while KRC, which was rebranded as Rift Valley Railways, is struggling to remain on track.

It is, however, the case of KPRL that has given the authorities a major headache as they try to figure out how to transform the archaic facility, which was constructed in the early 1960s, into a modern refinery.

At the time Essar Energy bought 50% of KPRL from BP, Chevron and Royal Dutch Shell, it had become evident the refinery was not only a bottleneck to the smooth operations of the petroleum subsector but was also a major cause of the high fuel prices in the East African nation.

Efforts by the government to force BP, Chevron and Shell to inject funds to upgrade the refinery failed as the three multinationals maintained it did not make economic sense to upgrade the facility, arguing that investing in a new facility was a better option.

The entry of Essar Energy in 2009 was hailed as a new beginning for the refinery as the Indian giant committed to investing $400-million in its upgrade to double refining capacity from 40 000 bbl/d to 80 000 bbl/d. Production of liquefied petroleum gas was also expected to increase from 30 000 t/y to 120 000 t/y.

The Kenyan government then crafted an upgrade programme with a price tag of $900-million that was to be financed by Essar, government and a consortium of commercial banks.

The upgrade programme failed to material-ise owing to several reasons. Firstly, oil mar-keters and petroleum experts did not believe implementing it would be a good idea, which prompted the commercial banks, led by the UK’s Standard Chartered Bank, to develop cold feet.

Secondly, the discovery of huge reserves of oil in Uganda and later in Kenya significantly altered the dynamics in East Africa’s petroleum industry as both Uganda and Kenya decided to invest in new refineries, further making the future of KPRL untenable.

“The endgame for KPRL came when Uganda decided to invest in its own refinery,” explains Owino, adding that KPRL would have been saved if Uganda had opted to partner with Kenya in upgrading the Mombasa facility.
The Energy Regulation Commission (ERC) recently revealed that KPRL was a huge burden to the economy as a merchant refinery, compared to when it was a tolling facility.

The ERC found that, over the last 28 months, when KPRL operated as a merchant facility, the economy lost $168-million.

“While the motive to protect KPRL was noble, the effect of this policy has been a massive loss to the economy, resulting in higher consumer prices,” notes the ERC report.

Parliamentarians have now accused Essar of acquiring the refinery for song and failing to invest in its upgrade. “The committee has launched a probe on the sale of KPRL. We want to understand the agreement between Essar Energy and government,” says Jamleck Kamau, chairperson of Parliament’s Energy Committee.

For his part, Ministry of Energy principal secretary Joseph Njoroge says government wants to bring on board “a serious investor”.