Why Indian firm is exiting refinery after only five years

Energy secretary Davis Chirchir (right) and principal secretary Joseph Njoroge during a past event. The ministry sought advice from the AG on how to kick out Indian firm Essar Energy from KPRL. Photo/File 

By MUGAMBI MUTEGI and GEOFFREY IRUNGU

In Summary

• Essar, which bought a 50 per cent stake in the refinery in 2009 for $7 million, has in recent months come under a double-pronged assault aimed at kicking it out of the business.
• Majority leader Aden Duale has accused Essar of having committed the government to a shady deal in which former Ministry of Energy officials pocketed millions of shillings. 
• The Ministry of Energy has written a letter to the Attorney-General asking for advice on how Essar can be legally kicked out of KPRL.

India’s energy conglomerate Essar’s announcement that it is selling its 50 per cent stake in Mombasa-based Kenya Petroleum Refineries Limited (KPRL) was the culmination of sustained pressure from key figures in the Jubilee government who have identified alternative investors for the plant, people familiar with the matter said.

Essar, which bought a 50 per cent stake in the refinery in 2009 for $7 million, has in recent months come under a double-pronged assault aimed at kicking it out of the business.

Majority leader Aden Duale has spearheaded that war in Parliament, accusing Essar of having committed the government to a shady deal in which former Ministry of Energy officials pocketed millions of shillings. 

Outside Parliament, the Ministry of Energy has written a letter to the Attorney-General asking for advice on how Essar can be legally kicked out of KPRL.

In the letter, seen by the Business Daily, the Energy principal secretary Joseph Njoroge makes it clear that the government wants to approach another partner and investor who is ready to pump in money into the plant’s rehabilitation — revealing the roots of Essar’s troubles.

On Thursday, Essar said it plans to exercise the $5 million (Sh433 million) ‘put option’ that was written in its contract with the government and hopes to conclude the sale by mid next year. The Indian firm said it was no longer economically viable to invest in the Changamwe-based refinery.

(READ: Essar plans Sh433m exit from oil refinery)

The “put option” clause allows Essar to sell its stake to the Kenya government — which owns the remaining shares — and will earn Sh173 million less than it bought the stake.  This represents a value depreciation of 28.5 per cent.

“Under the terms of the shareholders’ agreement signed with the Government of Kenya at the time of the acquisition, Essar Energy has the right, under certain conditions, to exercise a ‘put option’ that offers the government a chance to buy Essar Energy’s 50 per cent stake for $5 million,” Essar said in a statement.

A ‘put option’ is a contractual phrase that gives the owner of a share or stake in a business the right, but not obligation, to sell it at a price agreed upon earlier. The other party in the agreement, similarly, has the right, but not obligation, to buy the stake.

KPRL, the only refinery in Eastern Africa, produces LPG, gasoline, diesel, kerosene and fuel oil.

Essar had committed to undertaking a $450 million (Sh39 billion) upgrade of the facility before announcing plans to close it for ostensibly being moribund. Essar said it had planned to raise $1.2 billion for the upgrade but has since changed its mind after engaging consultants, and deciding instead to exit the investment altogether.

“The refinery currently requires significant modernisation if it is to operate viably: It is an old refinery and inefficient, does not recover its costs, and therefore does not make a return on operations,” said an Essar spokesman in a statement.

“Essar Energy believes it is not an economic proposition and would not deliver adequate returns on that investment hence the decision announced today. We expect it (the sale) to take nine months to complete, so July 2014.”

Essar entered into an agreement to acquire 50 per cent of KPRL in 2008 from Shell Petroleum Company Limited, Chevron Global Energy and BP Africa Limited, leaving the government with the other half. The acquisition was completed in July 2009.