Kenyan taxpayers likely to shoulder oil refinery’s debts

Thursday April 06 2017

The Kenya Petroleum Refineries Ltd plant in Changamwe, Mombasa. A takeover deal with the Kenya Pipeline Company failed to sail through. PHOTO | FILE

Kenyan taxpayers may have to bear the burden of repaying debts and compensation owed by Kenya Petroleum Refineries Ltd after a takeover deal with the Kenya Pipeline Company fell through.

Less than three years after the Kenya government paid $1.7 million for the 50 per cent stake held by Essar Energy in 2014, taxpayers yet again face the burden of taking over KPRL’s financial obligations with various commercial banks.

Worse still, taxpayers also face the possibility of paying millions of dollar to oil marketing companies demanding compensation from KPRL owing to losses they incurred due to the refinery’s inefficiencies.

This came to fore after KPC backtracked on a government-spearheaded plan to acquire the obsolete KPRL but instead agreed to settle on a three-year leasing agreement.
The decision, which saw KPC opt for leasing KPRL storage facilities, was reached after a forensic audit by consultancy firm PricewaterhouseCoopers unearthed massive debts and compensation claims totalling close to $95 million.

Among the banks that KPRL owes millions of dollars is Barclays Bank of Kenya, which in 2011 extended a loan of $13.5 million to the refinery to finance the installation of a 10MW power plant. The company also owes Citibank $5 million in overdraft.

“We decided to put the acquisition on hold because we have concerns over KPRL liabilities. As a company, we do not want to take over the liabilities,” Joe Sang, KPC managing director, told The EastAfrican.


He added that KPC also feared being entangled in historical disputes between KPRL and oil marketing companies, which are demanding compensation for yield shift losses, with some cases pending at the Energy Regulatory Commission’s tribunal.

Yield shift losses are the losses that emanate from the variation between the actual crude processing yields and the expected yields.
According to a report by Deloitte, KPRL is facing compensation claims amounting to $67 million and a total of $33.5 million is yet to be settled. Total Kenya is among oil companies demanding $19.1 million from KPRL and has a case pending at the Energy Tribunal.

“We feel it is important for the disputes before the Energy Tribunal between KPRL and oil companies to be resolved and that is why we opted for the leasing agreement,” said Mr Sang. During the three-year lease period, KPC intends to invest $28.7 million to rehabilitate and modernise KPRL storage tanks. This is expected to enable the country to boost its strategic petroleum reserves from the current low of 12 days to 30 days.

In the immediate term, KPC plans to invest $10 million in the facilities to guarantee enough storage capacity for the early crude scheme.
The Kenyan government last week signed a production agreement with British firm Tullow Oil, paving the way for commencement of crude production in Turkana and consequent transportation to KPRL for storage before being exported.

“With this agreement, which covers legal and technical issues, we will next month start moving oil from Lokichar to Mombasa for exports,” said Charles Keter, Energy Cabinet Secretary.

Increasing the country’s storage capacity will also facilitate quick berthing of vessels to discharge fuel, in the process saves the costs incurred in demurrage charges, which currently amount to $2 million per month. KPRL has 45 tanks with a total storage capacity of 484 million litres, of which 254 million litres is reserved for refined products while the left 233 million litres is reserved for crude oil.

KPC, on the other hand has seven storage depots with a total capacity of 612 million litres and is currently constructing four additional tanks at its Nairobi terminal with a combined capacity of 133.5 million litres.

According to Mr Sang, KPC is investing about $57.3 million in new facilities like the multipurpose Mombasa Nairobi pipeline that is slated for completion by end of April and a new jetty in Kisumu to boost supply to the regional market.

“We have lost a significant market to the Central Corridor in Tanzania due adulteration, and we hope to recapture it,” he said.