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Economy

Essar faces Sh430 million hit in Kenya oil refinery exit

The Kenya Petroleum Refinery Limited plant in Mombasa. The government and Essar Energy Overseas are engaged in compensation talks following the Indian firm’s decision to exit the refinery. FILE
The Kenya Petroleum Refinery Limited plant in Mombasa. The government and Essar Energy Overseas are engaged in compensation talks following the Indian firm’s decision to exit the refinery. FILE 

Essar Energy Overseas could take a $5 million (Sh430 million) hit for pulling out of the Kenya Petroleum Refineries Limited (KPRL) with the government accusing the Indian firm of imprudent investment decisions.

Energy secretary Davis Chirchir told the Public Investments Committee that Essar’s decision to invest in a power plant was one of the questionable projects.

“The costs have moved from $11 million (Sh946 million) to $17 million (Sh1.5 billion). The power plant has not been commissioned and it requires an additional $2 million (Sh172 million) to complete,” Mr Chirchir said.

Essar invested in the power plant that would use fuel oil in 2011 in order to reduce dependence on the unreliable national grid and cut power costs.

Mr Chirchir said the government had instructed its lawyers to draft a deed of termination agreement that would spell out who owes the other what.

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“We are making significant claims as government because of costs accruing due to technology upgrade that may not have happened,” Mr Chirchir told the Public Investment Committee (PIC), which is investigating how Essar acquired the refinery for Sh630 million ($7.3 million) in 2009.

Mr Chirchir said the power plant would produce power that is significantly more expensive than that from the national grid.

Essar, Mr Chirchir added, was now asking to sell the power from the captive plant to the national grid and then continue drawing cheaper power from the grid.

“There is a cost which somebody has to pick that should not be left to the government. We have to do a check-off and see if we will pay them anything as they walk out,” Mr Chichir said.

Shareholders

He said the amount due for payment would be crystalised at a shareholders’ meeting.

The minister added that Essar Energy was agreeable to a quick exit from KPRL for a compensation of $5 million (Sh430 million) as stipulated in the joint venture agreement.

The company was also ready to convert $2 million (Sh172 million) in debt into equity and to pick up the termination dues of the KPRL chief executive officer.

“They cannot walk away without a hit of $2 million in capital covenant that they didn’t pay. They may only get $3 million,” Mr Chirchir.

He said other considerations, including the cost of environmental clean-up, would be taken on board in the ongoing negotiations for disengagement.

The Indian firm, which owns 50 per cent of KPRL after buying out equity from Shell, BP and Chevron in 2009, was to be a strategic partner in the refinery and facilitate its upgrade.

Mr Chirchir said a feasibility study that was completed in 2011 shows that the cost of upgrading KPRL is estimated at $1.13 billion.

However, the Internal Rate of Return based on an analysis by Standard Chartered Bank would be 7.2 per cent making it difficult to finance with the prevailing high interest rates.

Without an upgrade, he said, the refinery would cost the economy Sh5.7 billion annually because its products would be more expensive than imported white oils.

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