Government officials and representatives of Essar Energy are set to meet next week in what is anticipated to end the partnership of both parties in the Kenya Petroleum Refineries Ltd.
Both are expected to sign a deed of settlement awarding the Indian firm $5 million (about Sh500 million) in exchange for its 50 per cent stake in the Mombasa-based refinery.
This will pave the way for execution of a planned takeover of the refinery by Kenya Pipeline Company (KPC) in preparation for early oil export from Lokichar fields scheduled to take place next year.
“On Wednesday, we invited Essar for the meeting where we are expected to sign the deed of settlement after which they will be paid to exit the refinery,” said Mr Andrew Kamau, principal secretary in the State department for petroleum.
In September 2014, the Cabinet approved a $5 million payment to Essar but the government has dragged its feet on the exit plan, prompting the Indian company to write protest letters.
“We refer to the meeting held on May 22 and the subsequent communication from the government that it is considering an alternative proposal on the exit of Essar from being a shareholder in KPRL. But the signing and completion of the settlement deed scheduled for May 28 was postponed. Let us know when we can expect to hear from you on your considerations,” said Essar in a letter to the Treasury cabinet secretary dated July 3, 2015, seen by Sunday Nation.
Sources within the Energy ministry and KPRL who sought anonymity say the process has been delayed by the search for an “appropriate buyer” of Essar’s stake to avoid it reverting back to the government as that would mean going through the privatisation process in case of sale.
Essar Energy acquired the stake at KPRL after it bought out Shell, BP Africa and Chevron Global Energy for $5 million. The international oil companies co-owned the refinery with the government.
At the time, the Indian company also paid $2 million (about Sh200 million) to the government for waiver of its right to take up the shares. Initially, Essar had offered to pay $11 million (about Sh1.1 billion) as goodwill in exchange for the government’s waiver of its pre-emptive rights.
But in 2009, the company said that the initial offer of $11 million was not attainable and that it was willing to pay $2 million as goodwill.
Essar was brought in as a strategic partner to inject finances and technical skills to the refinery.
The firm, however, failed to invest in upgrading of the refinery as per the shareholders agreement, leading to a fall-out with the government.
Its entry into KPRL has also been questioned, prompting the parliamentary committees on energy and public investments to probe KPRL affairs.
In April 2014, the public investments committee (PIC) said: “The government should not pay Essar Energy any consideration during their exit since they have failed to honour their responsibilities in terms of upgrading and modernising the refinery on the basis of which a shareholder agreement was signed”.
At the time, Attorney General Githu Muigai had already raised questions on the legality of Essar’s demands for a $5 million pay-out, which partly crippled negotiations between the two.
Even before Essar announced its intention to leave, the government was keen on such a move. In a letter dated September 12, 2013, Mr Joseph Njoroge, principal secretary in the Energy ministry, sought legal assistance from the attorney general on how to terminate the agreement.
“Essar Energy has not lived to the expectations... It will be prudent to disengage Essar in equity participation in KPRL to allow the government to seek a serious investor to modernise the refinery,” read the letter copied to Energy cabinet secretary Davis Chirchir and Treasury principal secretary Kamau Thugge.
It was written just days after investors from Nigeria visited the country and expressed interest in the local energy industry, specifically the nascent oil and gas sector, and electricity generation.
The planned takeover of KPRL by KPC means the refinery will be converted to a storage facility for crude from Kenyan oil fields before export to international markets.
KPC is expected to bring in technical skills to the refinery and refurbish the tanks to suit storage specifications for the Kenyan crude.
This puts into question the fate of about 200 KPRL employees, although operations at the facility were shut down in September 2013.
Estimates show it would cost $1.9 billion to refurbish the refinery, which has a capacity of refining up to 80,000 barrels of crude a day.
It also remains unclear how the current KPRL debts will be handled. KPRL is said to owe banks in excess of Sh2 billion.
A number of oil marketing companies are also demanding more than Sh7 billion from the refinery in losses incurred during the period it was in operation and for the value of stock still in the tanks below the outlet valves.