Essar plan for $500m upgrade of Mombasa refinery suffers yet another setback
The $19m tax dispute will delay the implementation of the investment plan at a time the refinery is seeking money from the international market to pay for an upgrade
The Kenya Revenue Authority has hit the Essar Group of India, the firm that co-owns the Mombasa-based Kenya Petroleum Refinery, with a $19 million tax bill.
The company is however contesting the tax bill, arguing that in the agreements establishing a joint ownership of the refinery with the government, the entity was not to pay back taxes.
The tax bill is the latest in a series of setback that continues to shackle the India-based multinational company since it invested in Kenya Petroleum Refinery in 2010, which it says it is planning to upgrade at a cost of $500 million.
Analysts said that the tax dispute is likely to delay the implementation of the investment plan at a time the refinery is seeking money from the international market to pay for an upgrade. The project also faces major political risks with major oil multinationals operating in Kenya calling for the refinery to be shut down.
So far, since the Kenya government brought in Essar, there is little to show for the change of ownership save for $10 million investment in a power plant at the refinery aimed at cutting energy costs.
The firm has for months been trying to get the Kenya government to commit funding to the upgrade and approve a major plan that could see the firm start importing its own crude for processing as well as seeking customers in the region.
The Essar Group is planning the $500 million upgrade of the region’s only refinery in an ambitious plan that could see the firm start importing its own crude for processing.
Essar aims to transform the 50-year-old toll facility into a merchant refinery as it positions itself to play a major role in an emerging petroleum industry in East Africa. This move comes at a time other countries in the region such as Uganda, Tanzania and South Sudan are weighing whether to build their own refineries.
This could set off an investing wave that would see the region put tens of billions of dollars into duplicating energy infrastructure as countries race to develop their petroleum industry infrastructure.
Essar’s four-year joint venture with the Kenya government has continued to flounder as it battles a series of setback related to funding model and operation strategy. The latest setback is the decision by the Kenya Revenue Authority to demand Ksh1.6 billion ($19 million) in back taxes.
The predicament of the investor is playing out against a backdrop of intense lobbying by oil majors against the upgrade of East Africa’s only refinery. Some of the oil majors have a significant interest in oil exploration and production in Eastern Africa. They are opposed to the upgrade on the grounds of overcapacity in the refinery business internationally. They have also argued that the refinery will still need tariff protection to survive even after the upgrade by the Indian investors.
They have been lobbying the government to instead shut down the refinery.
The Indian conglomerate has calculated that an upgraded refinery in Mombasa is likely to occupy a strategic place in an emerging petroleum sector that will have to be supported by new oil fields, refineries, and new oil pipelines connecting Kenya, Uganda, Ethiopia, Rwanda and South Sudan.
Indeed, recent developments point to an emerging petroleum sector in the East African region which will need new infrastructure. Kenya and Uganda have just appointed a joint technical committee to oversee the building of a $3 billion pipeline between the proposed port of Lamu and the oilfields in South Sudan.
A feasibility study for a pipeline between Eldoret and Kampala conducted by Pespen Ltd was completed in 1999. A later study by Nexant Ltd in 2006 established the viability of a unidirectional pipeline between the two countries. Indeed, Kenya and Uganda went to the extent of appointing the Libyan investor, Tamoil East Africa, to build the pipeline.
With the collapse of the Gaddafi regime in Tripoli, implementation of the project is now in doubt. Several other developments point to a new petroleum sector in the region. First, large quantities oil crude oil have been found in Uganda. Even though transportation and evacuation remain a major challenge, President Yoweri Museveni has made it clear that his priority is to build a refinery in Uganda.
Secondly, the intensity of oil exploration in Kenya and Ethiopia — especially by Irish company Tullow — suggests that the two countries could strike oil in the near future. Tullow is expected to make an announcement on its drilling efforts in May.
Thirdly, there is a strong possibility that the DRC will also soon strike oil on its side of Lake Albert.
These developments have sparked a major discussion among the region’s political elite with debate raging about what East Africa must do to harmonise investment spending to avoid waste.
Most oil-producing countries across Africa have chosen to export crude to Europe, Middle East and Asia and the United States and to re-import it as petroleum product. In the process, the value added was taken out of Africa, to be earned by the oil majors operating in locations where they have refining capacity.
Uganda has emerged as the leading voice in propagating the case for a local regional petroleum sector with a full value chain. Indeed, the three-billion-barrel oil reserve discovered in Lake Albert has seen Museveni go head to head with the oil majors, with Kampala arguing for a system where the value added by the petroleum sector remains in the region rather going to China or Europe.
On its part, Kenya wants to entrench its position and to stay ahead in terms of investment in petroleum infrastructure. In East Africa, Kenya is the only country with a refinery, which the government co-owns with the Essar Group.
The Mombasa-Nairobi pipeline that extends to Kisumu and Eldoret is also the only pipeline in East Africa.
Procurement for consultancy services for an alternative line between Nairobi and Mombasa has just started.
In the coming 10 years or so, Kenya has to take a strategic decision either to remain a consumer of product refined in Uganda or South Sudan or upgrade its own refinery in Mombasa and thereby position it to compete for the estimated total 500,000 barrels per day of crude projected to be produced in the region by South Sudan, DRC, Uganda, Tanzania and Kenya. Apparently, Kenya is also calculating that the Mombasa facility will be the natural facility to refine the initial 20,000 to 30,000 barrels per day that Uganda is expected to start producing.