Ruias-owned Essar Energy, listed on London Stock Exchange, could face trouble in its proposed pullout of Kenya Petroleum Refineries Ltd (KPRL), which runs an old and loss-making crude oil refinery in Mombasa, as the Kenyan government has raised questions over the legality of the of its exit plans."Essar Energy and Kenya government both are jointly working on termination deemed agreement," an official close to the development told dna on conditions of anonymity. He said the issue was first raised by public investment committee.According to the official, trouble started brewing for the Mombasa refinery, after the new Kenyan government decided to withdraw price protection provided to the refinery. KPRL, which is the only one in Eastern Africa and the first international refinery acquired by an Indian company, had agreement with oil marketers, under which oil retailers had to buy at least 40% of their fuel requirement from the refinery. But the refinery had come under sharp criticism from fuel distributors over the quality of its products, who wanted it shut so that they could buy cheaper and better imports from suppliers of their choice."The new government asked the refinery to sell its produce at import prices. Being a very old and small refinery, there is no economic benefit in selling the produce at imported price and hence it had to be shut down. We can just hope that government takes quick action as both refinery and manpower is lying idle," the official said.In December, Kenya government chose to operate without its own refinery and said that the refinery will be converted in to a storage facility. Kenya's Energy and Petroleum Cabinet Secretary Davis Chirchir cited that it was proving to be more costly to refine products at the facility and it was making Shilling (Kenya's currency) 15 million losses a day, which was in turn affecting retail price of petroleum products.
When contacted by dna, Essar Energy said that it was not going to say much beyond its statement in October 2013. "We're still in discussions with the government of Kenya to exit KPRL," the company said.
In October 2013, Essar Energy, which owns 50% in KPRL, had announced plans to exercise put option through its subsidiary Essar Energy Overseas to sell entire stake to the Kenya government. In March, Kenya's Attorney General (AG) in a letter sent to that country's Treasury Cabinet Secretary said that nothing has been done by both parties to satisfy the conditions to use the put option and hence the government was under no obligation to buy out Essar's share. In fact, AG advised that Essar should withdraw the notice it served to the Kenya government in October and pave the way for a mutual termination.
Essar Energy is supposed to get $5 million for its 50% stake, which it had bought in July 2009 for $7 million from BP, Chevron and Royal Dutch Shell.Kenya's AG also said that Essar should be paid the price for the stake only after both parties came to an agreement on the settlement of debts owned to KRPL. The debt of Mombasa refinery has escalated to $8.1 million from $ 309,888 in 2009."This decision by Essar Energy follows an extensive series of studies by international consultants into the technical, economic and funding elements of an upgrade of the Mombasa refinery. Following these studies, Essar Energy believes that the upgrade is not economically viable in the current refining environment," the company had said in statement issued in October, citing the reasons for exiting 50% stake in Kenya refinery.The refinery has been shut since December, with the East African country resolving to entirely import its fuel needs. KRPL used to produce liquefied petroleum gas (LPG), petrol, diesel, kerosene and fuel oil.
Before quitting the stake Essar Energy had plans to upgrade refinery by adding secondary units at a project cost of $400-450 million. "Usually the companies do not exercise put option before actually meeting all commitments. Such outbound investments often come with several financial and legal commitments," Deepak Mahurkar, an oil and gas expert with PriceWaterhouseCooper said while declining to comment on this specific issue.