The Kenya Petroleum Refinery Ltd (KPRL) has received a lifeline after the government placed it under the management of Kenya Pipeline Company (KPC) by buying out Essar Ltd.

“The National Treasury has agreed to pay Essar Ltd $5 million for its 50 per cent shareholding,” said Energy Cabinet Secretary Charles Keter. This matches the initial price at which Essar had bought its share despite the company’s claim that the price has appreciated to $7 million.

“This will be contained in the next budget,” Charles Keter, told The EastAfrican.

The annual $2.2 million that KPRL has been receiving from the government directly through Treasury as management fee will now be channelled through KPC. This money will be used to prepare the refinery to handle crude from the Turkana oil fields in northern Kenya.

But between now and the budget financing disbursement, KPRL will still have to generate income to fulfil its storage facility obligations (the government turned it into a fuel import store in 2014); pay its 200 staff, pay electricity and water bills and other daily operational obligations.

A KPRL official said the proceeds from storage fees only covered daily costs and that the refinery cannot afford to undertake any major projects or bank obligations.

KPRL needs money to upgrade the existing storage tanks — which have been lying idle since 2013 — to handle both crude and refined oil. It is expected that 2,000 barrels will be produced every day in the Turkana oil fields.

READ: Kenya refinery now stores crude oil

“The tanks were previously used for crude oil and they require cleaning and converting to the specifications of petroleum products, whose demand has risen sharply compared with that for diesel,” said Powell Maimba of the Petroleum Institute of East Africa (PIEA).

The move by the government to put the refinery under KPC finally resolves the dispute with Essar Ltd over the latter’s 50 per cent shareholding that the government wanted to buy out.

READ: Essar lays out costly exit terms for Kenya

The refinery has been in financial straits and by October 2013, KPRL owed debtors some to  $8.1 million — up from $309,888 in 2009. The current state of the loans could not be established but according to the Ministry of Energy, the government will with the lenders and agree on the periods of payment as KPRL currently has no money to meet such obligations.

“At the moment, KPRL doesn’t have any money. They are bankrupt. The government will also restructure KPRL’s loans,” said Mr Keter.

The delay in refurbishing the refinery was partly blamed on the dispute over ownership between the government and Essar and lack of resources.

“The government’s commitment to the refinery could change with full ownership and the discovery of oil at Turkana. A subsidy will bring down the oil products’ prices” said Patrick Obath, managing consultant at Eduardo and Associates.

According to Mr Obath, in the short term, KPRL could have problems funding its operations. “There are really no short term options for the refinery apart from its use as a storage or transit facility,” he said.

Bad times

KPRL has been struggling to stay afloat since it was converted into an fuel import store by the government in 2014, putting 200 jobs on the line.

Earlier, The EastAfrican had spoken with Andrew Kamau, Principal Secretary, Petroleum, and he said that the government had given KPRL up to the end of March to justify why it should not be completely cut off from Treasury funding, like other state corporations that are deemed to be a commercial nature.

Treasury stopped funding KPRL last June and the refinery was only financing one-third of its activities. Currently, KPRL is only meeting its recurrent expenses.

“We cannot continue funding the refinery as it long has ceased serving the mandate for which it was established. We expect a business plan by the end of March stipulating how the refinery will manage its own costs in the short term ahead of the refinery upgrade,” he said.

The government has asked KPRL to upgrade to an efficient fuel separator but the project did not take off because of the ownership wrangles with Essar Ltd.

In a petition to parliament in 2014, KPRL’s management wanted the planned $2 billion upgrade undertaken to avoid writing off high value specialised refining plant, machinery and equipment that have no alternative use.

KPRL was then mandated to identify an investor who could fund the upgrade. Sources said the deal is almost closed with two companies from the Middle East being touted as strategic partners. Leading UAE petro-products dealer Gulf Syndicate is one of the companies, the source said.

“A $2 billion investment is huge, only international companies can pump in such an amount,” said a source.

“I do not think that there will be any investors interested in putting up money to revive KPRL unless protection is guaranteed by the government. But this is unlikely since Kenya is a signatory to the WTO treaties and it can also not do so under the EAC Common Market tariffs,” said Mr Obath.

In the petition, the refinery argued that oil discovered in northwestern Kenya could be processed in three to four years with comparative low investment if the refinery were upgraded. This means that KPRL will only act as a storage and transfer terminal for crude oil, until its specifications are aligned to the available crude.

“The design configuration of KPRL is not suitable for waxy crude, which is what has been found in Turkana. Investing in modifying and upgrading the refinery to specifically process this waxy crude has worse economics than an upgrade for its current crude diet,” said Mr Obath.

Kenya now has an option to export all its production and lose the real game changer by which the value addition of processing the crude in the country or by investing in a greenfield fully complex, integrated value addition capacity that not only refines but converts output from a refinery into petrochemicals such as fertiliser, pharmaceuticals, plastics, textiles etc.