Kenya’s troubled oil refinery has petitioned parliament to sanction the upgrade of the facility ahead of the proposed exit of Indian conglomerate Essar from the Mombasa-based plant.

The Kenya Petroleum Refineries Ltd (KPRL) said an upgrade of the refinery — estimated to cost at least $1.2 billion — was more feasible than the planned building of a new refinery at Lamu.

In a proposal to the Public Investment Committee (PIC), KPRL said oil discovered in northwestern Kenya, expected to be produced in the next three to four years, can be processed with comparative low investment if upgrading is done.

The politics around the upgrade or closure of the refinery as well as the exit of Essar have set East Africa talking, with the region desperate to have a strategic refinery following oil finds in Kenya and Uganda.

READ: Kenya says no to $1.3m refinery bailout

KPRL in a petition dated March 28 this year, projects that building a new refinery would cost more than $5 billion and take at least five years to complete.

KPRL said upgrading the refinery would boost Kenya’s geostrategic importance as the only country with a refinery strategically located at the Mombasa port, which could serve the region’s oil refining needs. 

Kenya is the dominant oil supply route to landlocked neighbours Uganda, Rwanda, Burundi and eastern Congo.

“Uganda discovered commercially viable oil in 2006 and since then, construction of the refinery is yet to be started. Oil refining at Uganda will possibly not be realised before 2020. The Lamu refinery may not be in operation either before 2020, when being too optimistic,” said KPRL in the petition signed by its human resource manager Martin Wahome.

Essar said late last year it would sell its 50 per cent stake in the Mombasa plant after its plans for a $1.2 billion upgrade were abandoned on the advice of consultants, who said it was not economically viable. Kenya government owns the remaining 50 per cent.

READ: Essar lays out costly exit terms for Kenya

The upgrade is one of the three options the government has been toying with. The other two are closing down the refinery and converting it into a storage facility to be managed by Kenya Pipeline Company.

“From our computations, using KPRL as a storage capacity is not a feasible option and may not even generate enough revenue to meet its fixed expenses,” said KPRL in the petition.

In order to accord KPRL protection, the Ministry of Energy two years ago introduced a rule requiring that all oil companies involved in importation of petroleum products purchase them from the facility in accordance with market share.

Surplus refining capacity and planned large-scale export oriented refineries in the Middle East and India have however put KPRL at a great disadvantage in terms of economies of scale, freight rates and quality specifications.

Oil marketers are, by law, required to meet 40 per cent of Kenya’s fuel needs by processing crude oil at KPRL in Mombasa; the balance is through imports of refined fuel under the competitive open tender system (OTS) co-ordinated by the Ministry of Energy.

Opinion is divided on whether plans by Uganda to construct a refinery to process the estimated 2.5 billion barrels of hydrocarbons discovered in 2006 threatens Kenya’s geostrategic importance as the only country with a refinery in the region.

ALSO READ: MoU clears obstacles for Uganda oil programme

“KPRL is designed to process 80,000 barrels of crude oil per day, whereas Uganda is building a smaller capacity refinery of 30,000 barrels per day, yet the Ugandan refinery has been found feasible,” said Mr Wahome in the petition.

The recommendations made to the parliamentary committee include KPRL having a free hand to buy crude oil, continued government support to the plant through fiscal and legal measures to attract investment in refining sector.

“In three to four years, local crude oil production is likely to start. If the modernisation project is allowed, the refinery will be online in time to process Kenyan crude rather than exporting it at a lower price,” said the petition.

PIC is investigating how Essar Energy acquired 50 per cent share in KPRL in July 2009 for $7.3 million from BP, Chevron and Royal Dutch Shell. BP and Shell had held 17.1 per cent each and Chevron 15.8 per cent equity.

Energy Principal Secretary Joseph Njoroge said a shareholders meeting is expected towards the end of this month on the way forward for KPRL as certain legal issues are currently being dealt with.

Essar planned to use KPRL’s installed capacity of processing of four million tonnes of crude oil per annum (MPTA) upon finishing the upgrade. KPRL handled 1.6 MPTA of crude before shutting down on September 4, 2013.

The modernisation requires KPRL to install a desulphurisation unit to produce environmental friendly low sulphur diesel. A hydrocracker is required to convert cheap heavy fuel oil to high value petrol and diesel.

“The current equipment is revived and sometimes replaced after every five years during a planned turnaround exercise, effectively meaning that the refinery equipment is as good as new,” said the petition.

In the Lamu Port South Sudan Ethiopia Transport corridor project, Kenya had factored in a refinery in Lamu as well as a pipeline capable of transporting 500,000 barrels per day from South Sudan to Lamu, projected to cost $3.5 billion.

A shared petroleum infrastructure is vital for Kenya and Uganda as Tullow Oil Plc has confirmed the presence of commercial oil near the shores of Lake Albert in Uganda and discovered crude oil in Turkana County in Kenya.

Tullow, with joint venture partners China National Offshore Oil Corporation and Total of France, is expected to start commercial oil production in the Albertine basin Uganda by 2017.

KPRL expects to land crude oil in Mombasa at lower prices due to volume discounts if the plant is allowed to buy its own raw material.  It will negotiate term supply contracts with oil producing countries and major international suppliers like Total, BP, Chevron and Trafigura.

The petition said the current practice encourages spot pricing, leading to uncontrolled fluctuation in costs of fuel because the winner of OTS tenders cannot be predetermined to facilitate long term supply contracts.

“Also there are few players under the current OTS because international bidders are not allowed to participate unless they are registered in Kenya,” said the refinery.