A row between Kenya’s sole oil refinery and oil marketers has plunged the Mombasa-based facility into a financial crisis that could trigger fuel shortages across the East African region.

The Kenya Petroleum Refineries Ltd (KPRL) on Friday warned that it could soon be unable to refine petroleum products owing to severe financial constraints. Such an eventuality would hurt Kenya’s geostrategic role as the hub of the oil trading business in East Africa. Kenya is the dominant oil supply route to landlocked neighbours Uganda, Rwanda, Burundi and eastern Congo.

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The financial shortfalls, the refinery said, were occasioned partly by a dispute between it and the oil marketers over the uplift of refined products. The refinery said marketers had boycotted its products, hurting operations and stoking a cash flow crisis.

The marketers — who argue that inefficiencies at the refinery had made processed oil products more costly than those imported directly — have threatened to fully boycott the facility from July, a development that will be watched keenly in Kenya and neighbouring countries that rely on the refinery for petroleum stocks.

Currently, oil companies are lifting only about 65,000 tonnes out of the plant’s monthly refining capacity of 130,000 tonnes of oil products, partly as a result of the inefficiencies and partly of the preference among oil marketers for importing refined oil products.

“We are finding it difficult to meet our obligations to stakeholders or even carry out medium-term investment plans,” Brij Bansal, the refinery’s chief executive officer, said in a statement without giving figures on the shortfall.

Under an arrangement rolled out mid last year, the refinery imports crude oil, refines it and then sells to oil marketers. This is a departure from the past where oil marketers imported fuel and processed it at the refinery at a fee.

Oil marketers, under their lobby Oil Industry Supply and Co-ordination Committee (SupplyCor), said that, owing to inefficiencies, products processed at the refinery were Ksh10 ($0.11) more expensive than imported refined oil, costing the economy at least Ksh1.6 billion ($18.8 million) a month.

The refinery acknowledged the inefficiencies but disputed the assertions.
“In spite of the shifting of inventory cost from oil marketers to KPRL, the marketing margins for the marketers have actually been increased from Ksh9 ($0.10) to Ksh10 ($0.11) per litre,” said Mr Bansal. “It is noteworthy also that 100 per cent importation of refined products is not practical with the current limitations in handling logistics at the port, which has on many occasions led to demurrage costs of up to $1.5 million per month, which contribute to higher pump prices,” he said.

The refinery now hopes to source $1.2 billion for its upgrade in July.
According to Mr Bansal, Standard Chartered, which was picked by the refinery as the financial adviser for the expansion, is expected to table a financing plan for the plant, which if approved by the board in the July shareholders’ meeting, will allow the bank to source funds from lenders.
The upgrade will see the plant’s processing capacity rise from 1.6 million tonnes of crude per day to 4 million. Industry sources said senior officials at the Ministry of Finance and Ministry of Energy, worried about the commitment of Essar Energy of India to the upgrade project, want the company to disclose the amount of money it is willing to invest.
The delays besetting the expansion project have seen the cost rise six times since 2005, when the modernisation was estimated to require only $200 million.
However, Mr Bansal said the Indian firm was awaiting the Standard Chartered report before disclosing the amount it would invest in the plant.
The IMF said last week Kenya could become an oil exporter in the next seven years, further highlighting the need to upgrade the refinery.
Kenya is also seeking at least $100 million to build a new oil jetty at the Mombasa port. Currently, the country has only one main oil jetty, at Kipevu, near the port, which offloads petroleum imports for the five countries. Investor appetite for the facility is predicted to be high, given the rapid growth in demand for petroleum products in East Africa and the inadequate petroleum offloading and storage facilities at Mombasa.

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Oil marketers said the 50-year old refinery was using outdated technology that had created operational inefficiencies at the plant, costing them about Ksh7 billion ($82.3 million) in yield losses — products lost in the refining process — a factor that has seen them threaten not to use the Mombasa-based company starting July.
“In the absence of a clear resolution on the way forward to effectively address the above concerns by the KPRL shareholders… we regret to advise that the oil industry does not intend to extend the KPRL merchant agreement beyond June 30, 2013,” said the oil marketers in a letter to Francis Kimemia, the Head of the Civil Service and Secretary to the Cabinet on April 19.
But whereas the refinery admits there are inefficiencies at the plant, it argues that it is not legally liable for the yield losses, saying in its agreements with the marketers any negative impact on product pattern by way of inefficiencies beyond the control of KPRL was to be borne by the marketers and that this was clear to the marketers.
“It is therefore the company’s contention and the legal opinion of KPRL’s lawyers that no liability attaches to KPRL from the yield shift. It is inconceivable that oil marketers continued with their operations for more than 10 years without recovering the yield shift impact from the pump prices during the free pricing era when they were well aware of the yield shift process which has been in existence since the refinery commenced its operations,” said Mr Bansal.

Losses
However, the oil marketers said the loss was captured in a recent forensic audit conducted by Deloitte Consulting Ltd after being commissioned by the industry and sanctioned by the Ministry of Energy.
This problem, they add, is compounded by products valued about Ksh9 billion ($108.4 million) owed to marketers withheld at KPRL pending resolution of the yield shift matter, which has financial implications and may lead to bankruptcy for some firms.
The industry is concerned that despite an agreement reached for KPRL to buy tolling arrangement stock crude oil that marketers had imported when merchant operations started; the refinery is yet to honour its obligation.
“The total dead stock at KPRL is approximately 46 kilo tonnes and is valued about Ksh3 billion ($36.1 million), which, continues to be financed by marketing companies,” said David Ohana, the chair of SupplyCor.
The marketers are seeking government intervention for release of withheld fuel stocks and clarification on the refinery’s future operations.

The refinery became a merchant plant, financing importation of crude oil for refining with products being sold at a profit, from July 1, 2012. It was previously charging a fee for processing raw materials imported by marketers. The conversion into a toll refinery was prompted by the need to address the yield loss problem.