Essar exiting Kenyan refinery five years after buying stake

India’s energy conglomerate Essar announced that it is selling its 50% stake in Mombasa-based Kenya Petroleum Refineries Limited (KPRL). The move comes as the culmination of sustained pressure from key figures in the Jubilee government who have identified alternative investors for the plant, sources familiar with the matter said.
Essar, which had bought a 50% stake in the refinery in July 2009 for USD7 million, has in recent months come under a two-pronged assault aimed at ending its presence.
Majority leader Aden Duale has spearheaded that war in Parliament, accusing Essar of having forced the government into a shady deal in which former Ministry of Energy officials pocketed millions of shillings.
Outside Parliament, the Ministry of Energy has written a letter to the attorney general asking for advice on how Essar can be legally removed from KPRL.
In the letter, the energy principal secretary Joseph Njoroge made it clear that the government wants to approach another partner and investor who is ready to pump money into the plant’s rehabilitation, a statement that reveals the roots of Essar’s troubles.
In response, Essar said it plans to exercise the USD5 million (KES432 million) put option that was written in its contract with the government and hopes to conclude the sale by mid-2014. The Indian firm said it was no longer economically viable to invest in the Changamwe-based refinery.
The put option clause allows Essar to sell its stake to the Kenyan government which owns the remaining shares and the company will earn KES173 million (USD2 million) less than it bought the stake for. This represents a value depreciation of 28.5%.
A put option is a contractual phrase that gives the owner of a share or stake in a business the right, but not the obligation, to sell it at a price agreed upon earlier. The other party in the agreement similarly has the right, but not the obligation, to buy the stake.
KPRL, the only refinery in eastern Africa, produces LPG, gasoline, diesel, kerosene and fuel oil.
Essar had committed to undertaking a USD450 million (KES39 billion) upgrade of the facility before announcing plans to close it.
“The refinery currently requires significant modernization if it is to operate viably. It is an old refinery and inefficient, does not recover its costs, and therefore does not make a return on operations,” said an Essar spokesman in a statement.
Essar entered into an agreement to acquire 50% of KPRL in 2008 from Shell Petroleum Company Limited, Chevron Global Energy and BP Africa Limited, leaving the government with the other half.
Energy Cabinet Secretary Davis Chirchir now says that the government will soon call for a shareholder meeting to discuss the latest developments.
The sale means that the government will have to factor in the required amount of money in next year’s budget, adding to the weight of public expenditure that hit an unprecedented KES1.6 trillion (USD18.5 billion) this year.
Fuel distributors have perennially complained that the refinery in the port city of Mombasa produces inferior products and is operating below capacity. Distributors say the plant is operating below its 35,000 barrels per day capacity but under Kenyan law, they are obliged to process 40% of their imports at the facility.
They have suggested that the facility be shut down and turned into a storage facility, and that they be allowed to buy cheaper and better imports from refineries of their choice.
Frederick Nyang, the Energy Regulatory Commission (ERC) director, said that while the government could still go ahead with the storage plans, there was a need to look at the economic implications of such a move.
“The refinery may not look like a viable investment right now but in the long run, given proper investments, it could be turned into a fully-fledged profitable facility.”
(October 3, 2013)