Essar Energy bought a 50 per cent stake in KPRL in July 2009 from BP, Chevron and Royal Dutch Shell at $7 million.
Essar committed to undertake a $450 million upgrade of the refinery.
In October 2013, the firm announced it was quitting the joint venture and arranged a quick exit, saying the facility was not economically viable in the current refining environment.
$222m - The amount of money Kenya allegedly lost in the joint venture deal with Essar Energy, according to MPs.
The Kenyan government has agreed to pay $1.7 million (KSh150 million) for the 50 per cent stake held by Essar Energy in the Kenya Petroleum Refineries Ltd (KPRL) as the Indian oil giant exits a soured oil refining joint venture in the coastal city of Mombasa.
Essar, which is listed on the London Stock Exchange, had planned to quit the business venture by exercising a put option under the shareholders’ agreement, which would have seen it cede its shareholding to the Kenyan government at $5 million.
But after more than a year of protracted negotiations over the share purchase agreement — including the refinery’s huge portfolio of liabilities — the shareholders have finally settled on an offer price that just one-third of what is spelt out in the put contract.
The move paves the way for the final disengagement of the two anchor shareholders, after more than five years of a troubled relationship, leaving the Kenyan government with the task of deciding what to do with the 54-year-old refinery whose inefficiency has seen oil marketers call for its closure.
Energy Cabinet Secretary Davis Chirchir said the offer price had been mutually agreed upon and the negotiated figure had been built into a deed of settlement that is currently under consideration.
“We have agreed to pay them $1.7 million. That is a negotiated figure after taking into consideration the indebtedness of the two shareholders. Once we pay them, the asset will return to the government and we shall follow due process in deciding what to do with it,” Mr Chirchir told The EastAfrican.
The delayed conclusion of the deal has weighed on the finances of KPRL, prompting the National Treasury to extend support. The operations at KPRL were stopped on September 4, 2013 and since then the plant has been been in disuse awaiting a decision on the way forward.
Essar Energy, through its subsidiaries, owns one of India’s fastest-growing private sector oil and gas companies with a diverse portfolio of exploration and production assets.
KPRL, which is the only refinery in East Africa, produces liquefied petroleum gas, petrol, diesel, kerosene and fuel oil. The Kenyan government faces tough choices over whether to upgrade the refinery or convert it into a storage facility and build a new refinery that is more efficient.
“We are looking at these options, including upgrading. Upgrading the refinery will not cost us more than $2 billion, but it will take $5 billion to build a new one,” said Mr Chirchir, adding that the country also needs to hold more oil reserves to ensure security of supply of petroleum products.
“At the moment, we have stocks that can last four to seven days. We want to have stocks that can take us even 40 days,” he said. Uganda also plans to put up an oil refinery in Hoima district that will be owned 60 per cent by private investors and 40 per cent by the East African Community member states.
Oil products from KPRL serve customers in Kenya, Uganda, Rwanda, Burundi, Tanzania and parts of the Democratic Republic of Congo. But international traders are looking to gain market share and are also interested in a range of new refinery projects in the region.
Under the offtake agreement designed to protect KPRL from collapse, Kenyan oil marketers are required by law to buy at least 40 per cent of all their fuel from the refinery. The refinery has, however, come under intense criticism from fuel distributors over the quality of its products. They want it shut down so that they can buy cheaper and better imports from suppliers of their choice.
Essar bought its 50 per cent stake in July 2009 from BP, Chevron and Royal Dutch Shell at $7 million, leaving the Kenyan government with a 50 per cent stake. But in October 2013, the firm announced it was quitting the joint venture and arranged a quick exit.
Essar, through its subsidiary Essar Energy Overseas Ltd, announced plans to exercise a put option under the shareholders’ agreement to sell its stake in KPRL to the government at $5 million.
Essar Energy had committed to undertake a $450 million upgrade of the refinery before announcing plans to quit the partnership, saying the facility was not economically viable in the current refining environment. It said it arrived at its decision to exit from KPRL following extensive studies by international consultants of the technical, economic and funding elements of an upgrade of the refinery.
But, even before the sale was concluded, Essar started blaming Kenya for the part shutdown of the refinery, saying the government did not enforce a deal to make local suppliers buy fuel from the plant.
The joint venture between Essar and the Kenyan government has remained contentious throughout, with lawmakers claiming the government had lost an estimated $222 million in the deal.
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