KenolKobil is set to begin the construction of a lubricants plant in Mombasa in a joint venture with Castrol after the UK-based oil major approved its share of investment in the project.
Blended products from the Sh1.5 billion factory will be cheaper than imports from South Africa that the oil marketer has been relying on so far.
“Four weeks ago, we received notification that the head office of Castrol approved the budget for the project in Kenya,” David Ohana, KenolKobil’s chief executive, said during the release of the firm’s half-year results last Thursday.
“We still do not know when they will decide to launch the project. However, their go-ahead means we are now certain that we will are going to blend in Mombasa with Castrol.”
BP Southern Africa is the owner of the Castrol brand of lubes.
KenolKobil has in the past indicated that construction of the plant is expected to begin by mid-2017 and will cost the two partners between $10 million (Sh1.01 billion) and $15 million (Sh1.51 billion).
The oil marketer has another smaller lubricants plant in Kenya with a monthly production capacity of 600 tonnes producing its own brands.
The upcoming unit will have a monthly capacity of 1,000 tonnes of lubricants in what is set to intensify competition in the local petroleum sub-sector.
Lubricants are blended from base oils, a refinery product, and infused with additives. The oil by-products are used in reducing friction in machines, mostly in automotive, industrial, fishing, racing, mining and aviation industries.
KenolKobil currently imports the Castrol lubricants from South Africa, which attracts an import duty of 25 per cent. The oil marketer is seeking to import only inputs that attract 10 per cent duty for local blending, critical in cutting costs.
Unlike motor petrol and diesel, lubricant prices are not controlled by the Energy Regulatory Commission and analysts reckon that the products offer high profit margins.
In May 2015, BP Southern Africa and KenolKobil signed a deal giving the latter exclusive distribution rights for Castrol products, ending a tussle that had seen BP attempt to repossess the brand from Kenol and award it to former partner Shell.
KenolKobil last week announced that its half-year net profit for the six months to June rose 30 per cent growth to Sh1.2 billion on back of lower financing costs which stood at Sh97.9 million compared to last year’s Sh379.4 million.
The Nairobi Securities Exchange-listed firm recorded the jump in earnings despite booking an impairment of Sh400 million relating to a longstanding dispute with the defunct Kenya Petroleum Refineries Ltd.