Refinery gets lifeline in Iran crude oil imports plan

Saturday January 30 2016

Kenya pulled the plug on the 80,000 barrels a

Kenya pulled the plug on the 80,000 barrels a year deal in 2012 for fear of breaching US sanctions on Iran over its nuclear ambitions. PHOTO | TEA GRAPHIC 

By Scola Kamau and Kennedy Senelwa

Iran is looking to revive a stalled crude oil deal with Kenya, and is courting other East Africa countries to import its refined products, plans that could cause discomfort in the West even though economic sanctions against the Middle Eastern country were lifted two weeks ago.

Iranian ambassador to Kenya Hadi Farajvand said exporting oil would be the first step towards the country becoming a major player in East Africa’s oil and gas industry where recent discoveries in Kenya, Tanzania, Uganda and Mozambique have whetted the appetite of Western multinationals.

“We intend to renew memoranda signed by Kenya for importation of crude oil, and enter into new agreements in oil and gas exploration and extraction with EAC members,” said Dr Farajvand.

The Iranian Embassy in Nairobi has been seeking meetings with key government ministries since the sanctions by the US and the EU were lifted on January 16.

Dr Farajvand said Tehran was ready to export refined products to EAC member states, and to sign agreements for exploration and extraction of crude oil and natural gas.

Discoveries of natural gas have been made in Tanzania; Kenya has found both oil and natural gas; and Uganda has large quantities of oil. Rwanda and Burundi have not yet found either oil or gas, but are preparing for exploration.

Sanctions lifted

Sanctions against Tehran were lifted after Iran committed to the regulated use of its nuclear facilities under the Joint Comprehensive Plan of Action (JCPOA) agreed on in July 2015.

Kenya signed a memorandum of understanding with Iran in May 2012 to import 80,000 tonnes of crude oil, but cancelled the deal two months later to avert US financial sanctions against the countries that bought oil from Iran.

Kenya’s Petroleum Principal Secretary Andrew Kamau said the government would review the MoU to address any outstanding issues.

“INOC (Iran National Oil Corporation) wanted NOCK (National Oil Company of Kenya) which is a state corporation, to execute a letter of credit of $50 million that would have been noticed by US financial regulators and Kenya sanctioned,” said an official who was involved in negotiating the MoU.

Iran is a member of the Organisation of Petroleum and Exporting Countries (OPEC), and has been at the forefront in opposing oil output restrictions, saying it needed to make the most of its resources.

Free flow of oil, coupled with increased fracking in the US, has seen oil prices tumble from above $120 per barrel last year to about $30 per barrel currently. The low prices have put at risk financing for new developments in East Africa as oil companies are reducing field commitments until the market prices pick up.

Iran is also promising heavy investment in petroleum infrastructure. Kenya could use the partnership to upgrade the Kenya Petroleum Refineries Ltd (KPRL), which was shut down in September 2013.

“KPRL’s upgrade will require about $2 billion. The government will consider partnering with Iran if requested, depending on how much they want to invest,” said Mr Kamau.

Iranian government regulations require INOC to declare which refinery the crude oil will be separated at before a tanker is loaded.

The Nairobi-based Hydrocarbon Management Consultancy however said Kenya could swap crude oil obtained on concessional terms for refined products with one of the major trading firms with a refinery that would then be designated as the recipient by INOC.

“INOC terms of engagement require a tanker loaded with crude to sail to a destination with a refinery instead of sitting in the high seas while a buyer is sought,” said Robert Shisoka, a lead consultant at Hydrocarbon Management Consultancy.

The deal for crude oil and gas concentrates was to be handled by NOCK, which would have enjoyed a 90-day credit facility from INOC, saving Kenya millions of shillings in financing crude imports through overdraft facilities. Kenya was also going to get the crude at a discount of 10 per cent on the market price.

Kenya’s search for cheaper oil sources has taken it to Libya, Nigeria, Sudan and Venezuela, but logistics made the ventures too expensive.

Use of refined oil products in the region averaged 6 per cent over the past five years, and is projected to reach 8 per cent in 2016 due to rapid urbanisation, population growth and demand for transport.

East Africa imported 8.2 million tonnes of oil products in 2014, a 6 per cent increase over the 2013 imports of 7.8 million tonnes. The region consumed petroleum products worth $7.9 billion in 2014.

“This translated into a 14 per cent decline in value from the level in 2013, but was largely reflective of the decline in crude oil prices and by extension the cost of petroleum product imports,” said Ecobank Research.