Kenya could shoulder a heavy bill for the Mombasa refinery if it accepts a proposal by Essar Energy as the Indian conglomerate exits from the facility.

Essar, the government’s partner in the Kenya Petroleum Refineries Ltd-run facility, wants the government to take over debts owed to banks and other creditors.

In a proposal tabled on November 11 at a meeting between the two shareholders, the firm also asked the government to settle salary arrears owed to employees as well as commit to meet all the labour costs in the event the refinery is shut down.

According to officials who attended the meeting, Essar also expects Kenya to meet the plant-decommissioning cost if the refinery is closed down.

Kenya was reported to have rejected the entire proposal, triggering a stalemate that is expected to be resolved this week.

Abandoned plans

Essar said last month it would sell its 50 per cent stake in the Mombasa plant after its plans for a $1.2 billion upgrade were abandoned on the advice of consultants, who said it was not economically viable.

READ: Essar plans $5m exit from Mombasa oil refinery

KPRL chairman Suleiman Shakombo said shareholders will decide the way forward for the plant. “Benchmarks for further discussion were agreed on by the shareholders, but the details can only be disclosed by either the government or Essar. I do not want to pre-empt the next meeting,” he said.

The meeting is set for November 29, and it is understood that a decision is to be made on whether the refinery will be shut down, upgraded or converted into a storage terminal.

Shutting down the refinery would hurt Kenya’s geostrategic role as the hub of the oil trading business in East Africa. Kenya is the dominant oil supply route to landlocked neighbours Uganda, Rwanda, Burundi and eastern Congo.

“Shareholders will meet to discuss a smooth exit for Essar. We want to manage the attrition of workers in case it happens,” said Energy Cabinet Secretary Davis Chirchir.

Sources said although Essar in October announced it will work with the government to ensure a smooth transition of ownership, officials dealing with Indian firm want to ensure Kenya is not saddled with a hefty bill.

“If Essar leaves, Kenya may have to look for another strategic investor. The issue is being handled cautiously as KPRL’s closure is likely to raise a political storm in the Coast region due to loss of jobs,” said an official who attended the meeting.

The exit deal, valued at Ksh433 million ($5 million), is Ksh173 million ($2 million) lower than what the Indian firm paid in 2009, representing a 28.5 per cent depreciation.

Conversation of KPRL to a storage facility to be managed by Kenya Pipeline Company (KPC) has been suggested. KPC’s board of directors this month visited the refinery, a move that was interpreted as a familiarisation tour.

Essar said a series of studies by international consultants into the technical, economic and funding elements of an upgrade of the Mombasa refinery had shown this was not viable.

“Essar Energy will continue to work closely with the government of Kenya to ensure a smooth transition of ownership… Beyond that, we have no further comment,” said the company’s head of media relations Jonathan Miller.

The politics around the upgrade or closure of the refinery have set East Africa talking, with Uganda planning a refinery in which Kenya is to get a stake.