Refinery’s inefficiency, possible closure bad for regional business

East African countries rely on Kenya Oil Refineries Ltd for fuel refining, so its closure will have a huge impact on them. FILE  Nation Media Group

By JOINT REPORT The EastAfrican

In Summary

• The complete closure of the refinery, which is a strategic national asset, directly employing about 250 people and supporting over 1,000 families will have far reaching economic ramifications for the region.

The entry of Indian conglomerate Essar into Kenya’s oil refining business in 2008 was widely welcomed by East African consumers.

The objective of the deal — which saw Essar acquire a 50 per cent stake in Kenya Petroleum Refineries Ltd (KPRL), leaving the government with an equal shareholding — was to finance the modernisation of the Mombasa-based facility and improve its efficiency.

Five years later, it has emerged that Kenya is considering closing the refinery in the wake of growing inefficiency. New data compiled by the Energy Regulatory Commission (ERC) shows that Kenya is losing at least Ksh5.7 billion ($68.6 million) due to inefficiencies in refining its own fuel.

READ: Financial crisis at refinery as fuel shortage looms in Kenya

This is the price difference between products sourced by oil marketers from KPRL and ready processed fuel imported directly from outside markets. As a result, consumers are being forced to pay at least Ksh10 more per litre of fuel.

Kenya is considering abandoning the policy that bars oil marketers from importing refined oil products and forces them to buy the products from KPRL.

In order to accord KPRL protection, the Ministry of Energy introduced a rule requiring that all oil companies involved in importation of petroleum products purchase them from the facility in accordance with market share.

Surplus refining capacity and planned large-scale export oriented refineries in the Middle East and India have put KPRL at a great disadvantage in terms of economies of scale, freight rates and quality specifications.

The complete closure of the refinery, which is a strategic national asset, directly employing about 250 people and supporting over 1,000 families will have far reaching economic ramifications for the region.

“The continued reliance on KPRL with its outdated refining technology means the country is unable to take advantage of the new diesel engine technologies available in the market, with adverse consequences on air quality and consequent health care costs,” said fuel marketing firms in a joint statement.

“Loss of jobs has been put forth as an argument against the refinery’s closure, but this was bound to happen with any upgrade due to implementation of advanced stock management technologies that are less reliant on manpower. Neighbouring countries have lost confidence in KPRL,” they argued.

Uganda refinery

Opinion is divided on whether plans by Uganda to construct a refinery to process the estimated 2.5 billion barrels of hydrocarbons discovered in 2006 threatens Kenya’s geostrategic importance as the only country with a refinery in the region.

Last month, the Ugandan government and companies exploring oil in the country agreed to construct a refinery to cater for the country’s domestic fuel needs and, later, a pipeline to cater for the international crude market.