Why Indian firm is exiting refinery after only five years

India’s energy conglomerate Essar’s announcement that it is selling its 50 per cent stake in Mombasa-based Kenya Petroleum Refineries Limited (KPRL) was the culmination of sustained pressure from key figures in the Jubilee government who have identified alternative investors for the plant, people familiar with the matter said.

Essar, which bought a 50 per cent stake in the refinery in 2009 for $7 million, has in recent months come under a double-pronged assault aimed at kicking it out of the business.

Majority leader Aden Duale has spearheaded that war in Parliament, accusing Essar of having committed the government to 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 kicked out of KPRL.

In the letter, seen by the Business Daily, the Energy principal secretary Joseph Njoroge makes it clear that the government wants to approach another partner and investor who is ready to pump in money into the plant’s rehabilitation — revealing the roots of Essar’s troubles.

On Thursday, Essar said it plans to exercise the $5 million (Sh433 million) ‘put option’ that was written in its contract with the government and hopes to conclude the sale by mid next year. The Indian firm said it was no longer economically viable to invest in the Changamwe-based refinery.

(READ: Essar plans Sh433m exit from oil refinery)

The “put option” clause allows Essar to sell its stake to the Kenya government — which owns the remaining shares — and will earn Sh173 million less than it bought the stake.  This represents a value depreciation of 28.5 per cent.

“Under the terms of the shareholders’ agreement signed with the Government of Kenya at the time of the acquisition, Essar Energy has the right, under certain conditions, to exercise a ‘put option’ that offers the government a chance to buy Essar Energy’s 50 per cent stake for $5 million,” Essar said in a statement.

A ‘put option’ is a contractual phrase that gives the owner of a share or stake in a business the right, but not obligation, to sell it at a price agreed upon earlier. The other party in the agreement, similarly, has the right, but not 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 $450 million (Sh39 billion) upgrade of the facility before announcing plans to close it for ostensibly being moribund. Essar said it had planned to raise $1.2 billion for the upgrade but has since changed its mind after engaging consultants, and deciding instead to exit the investment altogether.

“The refinery currently requires significant modernisation 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 Energy believes it is not an economic proposition and would not deliver adequate returns on that investment hence the decision announced today. We expect it (the sale) to take nine months to complete, so July 2014.”

Essar entered into an agreement to acquire 50 per cent of KPRL in 2008 from Shell Petroleum Company Limited, Chevron Global Energy and BP Africa Limited, leaving the government with the other half. The acquisition was completed in July 2009.

The refinery’s impeding sale brings to an end a frosty four-year relationship between the energy company and the Kenyan government, in which the two shareholders differed on how to upgrade the refinery.

Energy Cabinet Secretary, Davis Chirchir, now says that government, through Treasury, will soon call for a shareholder meeting to discuss the latest developments.

“We are calling for a meeting of all shareholders so we can discuss the matter in an all-encompassing environment,” said Mr. Chirchir, in a telephone interview with Business Daily.

The sale means that 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 Sh1.6 trillion 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 per cent of their imports at the facility.

They have suggested that the facility be shut down, 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 need to look at the economic implications of such a move.

“The government is not a business that looks at the bottom line first but also the economic implications of a shutdown bearing in mind their responsibility to Kenyans,” said Mr. Nyang.

“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.”

KPRL chief executive officer Brij Barlal, however, said it was not feasible to upgrade and modernise the refinery.

Mr Barlal spoke in response to questions by parliament’s  Public Investments Committee (PIC) investigating the circumstances under which Indian firm acquired 50 per cent stake in KPRL.

MPs also asked the refinery management why the firm was never audited by the Auditor general.

“We know that KPRL is one of those state owned agencies that have never presented its accounts for audit and scrutiny by this House,” PIC Chairman Adan Keynan.

Mr. Shakombo said the reason they had not submitted their books for audit is that “KPRL is not like other parastatals: It is a private like company owned 50 per by government and 50 per cent private.”

But Mr Keynan reminded the refinery mangers that the Constitution was very clear with regards to audit of institutions that receive Exchequer financing.

Mr Keynan then directed chief finance officer Stephen Mbui to present KPRL books of accounts within two weeks to the Kenya National Audit Office for onward transmission to the committee.

MPs also raised questions on the relationship between the Indian firm, which negotiated the purchase of the 50 per cent from the oil marketers in 2009, and its subsidiary based in Mauritius, a location where income tax is only 15 per cent compared to Kenya’s 30 per cent.

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