Kenya is yet to make a final investment decision on upgrading its Mombasa-based crude oil refinery due to the huge capital outlay required. This will further delay plans to boost capacity to meet rising demand for refined oil products in the East African region.

At a meeting on November 16, the board of directors of Kenya Petroleum Refineries Ltd (KPRL) requested the management to re-examine the economics of the Ksh100 billion ($1.2 billion) face-lift, before approving the decision.

Currently, the dilapidated plant cannot meet the growing demand for refined oil products in Kenya, Uganda, Rwanda and Burundi that rely on the facility for their petroleum product needs.

It is expected that once it is upgraded, the plant will produce environmentally friendly fuel products.

Critical review

“In view of the size of the project and the corresponding high capital expenditure required, the board requested the management to carry out a critical review of the project’s economics and then resubmit for the board’s consideration,” said John Mruttu, KPRL general manager.

Specifically, the directors want the management to review the project’s internal rate of return, cost of capital and projected cash flow, with the board expecting a detailed report early next year.

The delays besetting the project have seen the cost rise six times since 2005, when the modernisation was estimated to require $200 million.

A feasibility report done by KBC Technologies from the UK last year put the cost at $1 billion, with a variance of plus or minus 40 per cent.

The huge variance saw the board appoint another consultant early this year — Engineers India Ltd — which put the cost at $1.2 billion.

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The board failed to adopt the recommendations at their last meeting.

“To reduce the wide variance, Engineers India Ltd was hired to prepare a detailed feasibility study and cost estimate having an accuracy of plus or minus 15 per cent to enable the board of directors to make the final investment decision,” said Patrick Nyoike Energy Permanent Secretary.

The latest twist in the project could push the expected completion time beyond 2017, especially as it means that Standard Chartered Bank, the project financier, will have to wait till the board approves the upgrading for it to start raising funds. Raising the capital could take as much as a year.

In June, the refinery, which processes 1.6 million tonnes of crude a year, signed a $250 million credit line with Standard Chartered Bank to finance crude imports.

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The government wants to renovate the refinery to lower the cost of refining oil products in the country. Currently, KPRL charges about Ksh3 ($3.5 cents) per litre, which is much higher than what refineries in Asia and the Middle East charge. This results in higher oil prices in the country.

Patrick Obath, a consultant with Eduardo Associates, said the upgrade is not economically viable today, arguing that the period between 1993 and 2000 was the most opportune.

“It is not economically viable now to upgrade a small refinery like KPRL. The country has to invest in more storage facilities and raise the capacity of Kenya Pipeline Company to handle cheaper imported refined fuel.”

East Africa’s refining capacity is expected to increase given Uganda’s plans to build a refinery at Kabale, with another one expected to be set up at Isiolo in Kenya under the Lamu Port-Southern Sudan-Ethiopia Transport Corridor (Lapsset) project.

It is not known when the building of the Kabale refinery will start as the Uganda government is yet to agree with Tullow Oil Plc, Total of France and China National Offshore Oil Corporation (CNOOC) on how to progress with the work.

As part of the $23 billion Lapsset infrastructure plan comprising a port, railway, highway, airports and pipeline, the partners initially planned to build a refinery in Lamu to process crude oil from South Sudan.

“The initial plan was to build a refinery in Lamu but dynamics changed due to the discovery of oil in Turkana County in northwestern Kenya. The refinery will now be in Isiolo,” said Mr Nyoike.

He said the plant at Isiolo in northern Kenya will be configured to process oil from South Sudan and Turkana County. The refinery’s cost and processing capacity will be determined after Kenya quantifies the oil discovered in Turkana.

Kenya and South Sudan’s crude oil is waxy, making it expensive to transport due to the need to install heating facilities along the pipeline. Refined products will be transported through a pipeline to Ethiopia and Lamu port.

KPRL chief executive officer Brij Bansal said upgrading the refinery in Mombasa will have a positive impact on regional economies as the plant will then offer products that are competitive with imports.

“Debt and equity financing will be used to fund the upgrade to increase operational efficiency, with an installed capacity of four million metric tonnes per annum being fully utilised when the work is completed in 2017,” said Mr Bansal.

A thermal conversion unit will be installed for KPRL to convert fuel oil to high value liquefied petroleum gas (LPG), petrol and diesel. Annual LPG output will increase to 140,000 metric tonnes from the current 30,000 metric tonnes.

KPRL will install a desulphurisation unit to produce environmentally friendly diesel of low sulphur content of 50 parts per million (PPM) in line with global trends. KPRL currently produces high sulphur diesel of 5,000 PPM.

Reported by Kennedy Senelwa and Peterson Thiong’o