The entry of Indian conglomerate Essar into Kenya’s oil refining business in 2008 was widely welcomed by East African consumers.

The objective of the deal — which saw Essar acquire a 50 per cent stake in Kenya Petroleum Refineries Ltd (KPRL), leaving the government with an equal shareholding — was to finance the modernisation of the Mombasa-based facility and improve its efficiency.

Five years later, it has emerged that Kenya is considering closing the refinery in the wake of growing inefficiency. New data compiled by the Energy Regulatory Commission (ERC) shows that Kenya is losing at least Ksh5.7 billion ($68.6 million) due to inefficiencies in refining its own fuel.

READ: Financial crisis at refinery as fuel shortage looms in Kenya

This is the price difference between products sourced by oil marketers from KPRL and ready processed fuel imported directly from outside markets. As a result, consumers are being forced to pay at least Ksh10 more per litre of fuel.

Kenya is considering abandoning the policy that bars oil marketers from importing refined oil products and forces them to buy the products from KPRL.

In order to accord KPRL protection, the Ministry of Energy 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 put KPRL at a great disadvantage in terms of economies of scale, freight rates and quality specifications.

The complete closure of the refinery, which is a strategic national asset, directly employing about 250 people and supporting over 1,000 families will have far reaching economic ramifications for the region.

“The continued reliance on KPRL with its outdated refining technology means the country is unable to take advantage of the new diesel engine technologies available in the market, with adverse consequences on air quality and consequent health care costs,” said fuel marketing firms in a joint statement.

“Loss of jobs has been put forth as an argument against the refinery’s closure, but this was bound to happen with any upgrade due to implementation of advanced stock management technologies that are less reliant on manpower. Neighbouring countries have lost confidence in KPRL,” they argued.

Uganda refinery

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.

Last month, the Ugandan government and companies exploring oil in the country agreed to construct a refinery to cater for the country’s domestic fuel needs and, later, a pipeline to cater for the international crude market.

READ: Challenges ahead for Uganda’s pipeline, refinery

According to the Permanent Secretary in Uganda’s Ministry of Energy, Kabagambe-Kaliisa, Uganda’s decision to construct a refinery is in line with Object Four of the National Oil and Gas Policy 2008, which seeks to promote value addition to the country’s oil and gas resources.

The plan is to construct a refinery with a midterm (three to six years) refining target of 60,000 barrels per day and expand it in six years. For Uganda, a refinery would improve the country’s balance of payment by reducing the petroleum import Bill, which stands at $2 billion.

As for Tanzania, its plans to put up an oil refinery have been stalled for several years as the country struggles to find an investor to take up the huge project. Building a refinery in Tanzania would give landlocked countries like Uganda, Rwanda, Burundi and the DR Congo an alternative to Mombasa. 

“In the past, there were some business people who said that they were willing and ready to build a refinery but, after the ministry gave them conditions to fulfil, they went away and never came back,” said a source at Tanzania’s Ministry of Energy and Minerals. 

Revisiting refinery plans

Last year Tanzania said it would revisit its plans to construct an oil refinery, after Noor Oil and Industry Technology (NOIT) failed to adhere to contractual agreements.

In the absence of a refinery, Tanzania imports all its petroleum products under a bulk procurement system that was introduced in the country by the government through the Energy and Water Utilities Regulatory Authority (Ewura).

With 80 per cent of Rwanda’s oil imports handled at the Dar es Salaam port, the troubles at the Mombasa refinery will have little impact on supplies to the country. Rwanda buys the bulk of its fuel from the Middle East and Europe, which comes already refined. Official statistics show that Rwanda imports 154,000 cubic metres of oil annually and only 20 per cent transits through Mombasa while 80 per cent is imported through Dar es Salaam.

However, Hannington Namara, CEO of Rwanda Private Sector Federation, said Kenya’s troubled oil refinery will have a negative impact on businesses in Rwanda, describing the facility as strategic.

“It is a shame that the refinery is facing operational problems. The Kenya government should step in to help the rest of the community, which depends on fuel supplies from Mombasa,” said Mr Namara. Part of the fuel into Rwanda is re-exported to DR Congo and Burundi.

By Kennedy Senelwa, Joseph Mwamunyange and Kabona Esiara