Kenya’s crude oil refinery is facing a new financial crisis after debts owed to it by oil marketers rose to over Ksh2 billion ($22.9 million) last month.

The cash-flow problems, caused by oil marketers’ failure to lift products processed by the Kenya Petroleum Refineries Ltd (KPRL), means it may soon be unable to continue operations, hurting Kenya’s position as the hub of the oil trading business in East Africa.

READ: Refinery’s inefficiency, possible closure bad for regional business

At stake are supplies to Uganda, Rwanda, Burundi and the Democratic Republic of Congo, which rely on the refinery for processed petroleum products.

Debate has been raging in Kenya on whether the nearly moribund refinery should be closed, even though the Kenyan government has insisted that it plans to upgrade it at an estimated cost of $450 million (Ksh40 billion).

READ: Kenya’s $1.2bn oil refinery plan shelved

But even as the cash crisis deepens, the fact that the refinery was not mentioned in a joint communiqué issued by the presidents of Kenya, Uganda and Rwanda at an infrastructure summit held in Mombasa on August 28, could be a pointer that the facility may be fast falling off the East African Community infrastructure radar.

Presidents snub refinery

The three presidents’ — Uhuru Kenyatta, Yoweri Museveni and Paul Kagame — instead focused on the planned Uganda refinery as among the key projects in the region that are being looked at in the short term.

The presidents communiqué noted that partner states are to confirm their participation in the development of the Uganda oil refinery by October 14.

The presidents said measures should be taken to ensure that the South Sudan-Lokichar-Hoima crude oil pipeline is integrated into the LAPSSET corridor — from Lamu in Kenya’s coast through South Sudan to Ethiopia — which was commissioned last year. The trio gave the end of December as the deadline.

Suspensions

Documents seen by The EastAfrican on the operational status of the troubled KPRL show that a failure by oil marketers to lift products processed at the facility could see some 18 firms suspended from participating in the open tender system (OTS).

But oil marketers argue that the 50-year-old refinery is using outdated technology that had created operational inefficiencies at the plant. This has in turn made its processed oil products more costly than those imported directly.

Under an arrangement rolled out mid last year, the refinery imports crude oil, refines it and then sells it to the marketers. Previously, oil marketers imported the crude oil then processed it at the refinery for a fee.

Now the Ministry of Energy has informed CEOs of marketing firms to raise uptake of local refined fuel in line with legal notice No. 24 of April 10, 2012, and agreements signed with KPRL, or face punitive measures.

Energy Principal Secretary Joseph Njoroge said in the letter dated August 19, that marketers’ failure to lift their allocation of refined fuel from the Mombasa- based plant had impacted negatively on KPRL’s cash flow.

“By a copy of this letter, KPRL is asked to update this Ministry on uplift status for each marketing company to enable us to take appropriate action against the defaulters,” he wrote.

KPRL’s storage tanks, as at August 1, had 48,363 metric tonnes (MT) of crude oil and 182,650MT of refined products. In over three months, Kenya has not floated a tender for importation of crude oil for processing locally.

The refinery resumed operations on August 14, after a two weeks shutdown due to lack of storage space for dual purpose kerosene (DPK) and liquefied petroleum gas (LPG) as the tanks were full.

“Without crude procurement from June to date, the refinery stands to be in shutdown mode for over two months,” said KPRL’s commercial manager Abigail Mwangi in a letter sent to the Ministry of Energy on August 19.

Delayed payments

In the same letter, the refinery notified the Ministry of Energy that delayed payments had severely affected its cashflows.

Ms Mwangi said some 36.6 kilo tonnes of fuel worth Ksh2.7 billion ($32.2 million) that was allocated to various marketing companies in May this year had not been paid for by August 19.

Among the large defaulters are KenolKobil, Total Kenya and Gulf Energy.

Apart from being forced to buy products at a higher price in the wholesale market, defaulters also risk being deducted their allocation of storage space (ullage) at Kipevu Oil Storage Facility equivalent to the quantity of fuel not lifted at the refinery in Mombasa.

Consumers in the region will have to pay more for fuel in coming months, following Kenya’s decision to raise money through a special fund to repay Ksh7 billion ($82.3 million) the refinery owes oil marketers.

Prices of imported petrol and diesel are expected to rise by at least Ksh1.30 ($0.015) per litre.

Two weeks ago, the Ministry of Energy sent out a notice to oil marketers seeking to amend the terms and conditions of the agreements signed on June 1, 2011 under the merchant refinery scheme to create the fund that will help raise the outstanding funds.

The dispute in the oil marketing business comes at a time the industry is facing shake-ups in new market share rivalry.

The latest market share data compiled by the Petroleum Institute of East Africa (PIEA) shows that Total Kenya accounted for 21.2 per cent of total petroleum sales (including exports) as at June this year, up from 17.5 per cent in June 2012.

The biggest loser this time was KenolKobil, whose market share dropped to 16.5 per cent as at end of June, from 22.4 per cent a year ago.

READ: KenolKobil assets up for sale to offset debts