Kenya’s Mombasa-based oil refinery requires $40 million to become a merchant plant importing its own crude for processing with products being sold at a profit.

Kenya Petroleum Refineries Ltd (KPRL) currently operates as a toll refinery charging marketers a fee for processing of crude imported under competitive tender by one company for the entire industry.

“ The Banks are willing to lend KPRL $40 million to import crude oil. The rate of changing to a merchant refinery also depends on how quick government comes up with new regulations on the situation,” he said.

KPRL, the only refinery in East Africa has not been modernised for many years.

Tanzania closed its refinery in the 1990s and Uganda has not started building a plant to process its newly discovered crude oil.

KPRL’s distillation unit II commissioned in 1974 and distillation unit 1 launched in 1963, have a combined crude oil processing capacity of 8,000 tonnes per day. The fuel is used in Kenya and the East African region.

A status change for KPRL requires procuring crude oil from a cheapest seller with refined fuel being sold to marketers at a profit margin.

This entails setting up of a raw material buying desk and marketing wings.

Therefore, quick access to $40 million to finance buying of crude oil is at the core.

Industry players who asked not be named said KPRL is likely to ask for some protection to remain profitable, requiring the Energy Regulatory Commission (ERC) and Ministry of Energy to work on new rules.

“It is an emotive issue as marketers may be required to buy locally produced fuel before purchasing imported cargo. The issue of which one is cheaper in terms of margins comes in,” they said.

Marketers in the past argued that with refined imports at about Ksh3 ($0.036) cheaper per litre compared with local fuel, the Mombasa based plant could not effectively compete with Middle East refineries.

The Mombasa based plant’s installed capacity is 4 million metric tonne per annum but it now processes 1.6 million metric tonnes of imported crude oil a year as the refinery has not been modernised.

Mr Mukherjee said upgrading could start in mid-2012 as Standard Chartered Bank is set to finalise a funding proposal for presentation to financiers.

Upgrading will enable KPRL produce lower sulphur diesel with other environmentally friendly products in line with global trends besides having steady electricity from a 60 Megawatts (MW) power plant.

As a short-tem measure pending commencement of the upgrade project, KPRL is installing an electricity plant of 9.6 MW at a cost of $13 million to address issues of outages attributed to the national grid.

Consumers Federation of Kenya (Cofek) has already opposed KPRL’s request to ERC on margin protection with regard to transition from toll to merchant crude oil processing.

“KPRL is seeking protection of $6.88 per barrel of products produced by the refinery without stating how long this would last,” said Cofek secretary general Stephen Mutoro.

He said Cofek had petitioned ERC to decline the request as it will unnecessarily raise fuel prices and warned that if awarded, Cofek would challenge the decision in court.