Business Daily (Nairobi)
Zeddy Sambu
19 February 2008
Plans to upgrade Kenya's only refinery may be delayed due to a tussle over who should buy the shares that three multinational oil firms are giving up.
It has emerged that despite Indian firm Essar Energy Holdings having struck a deal to buy the 50 per cent shares that Kenya Shell, BP and Chevron owned in Kenya Petroleum Oil Refineries (KPRL), it recently changed its mind and is blocking the deal.
This is because the Government did not like the outcome of the bidding process-organised by the multinationals-which saw the Indian firm win and the preferred firm linked to the Libyan government score the poorest in the bidding process.
According to insiders, the Essar win seems to have presented a diplomatic challenge to the Government which had promised it would sell half of the refinery to the Libyan government owned, OilLibya.
This deal was sealed after President Kibaki visited Libya's President Muammar Gaddafi in last year.
However, when the Government had approached the multinationals over the sale of their shares, they insisted that they wanted to dispose them on their own to the open market. But after Essar struck the deal and signed a shareholding agreement, the government now wants to exercise its legal right of buying these shares first, which is also known under the legal terms as pre-emptive rights.
The deal will see the Government owning the refinery fully, but since it does not have money to pay for the upgrades that are estimated to cost Sh22 billion, it will be forced to sell to a strategic investor, who in this case is likely to be the Libyans.
An analysis conducted by Standard Chartered, which had been hired to advise on the financing of the venture, had placed the value of the refinery at Sh4.2 billion ($60 million). This means that if the Government were to buy the shares back, it would have to pay Sh2.1 billion if that is the agreed valuation or match up what Essar is offering.
Kenya Shell says there has not been any progress since a new shareholders agreement was signed on January 15 between Shell Petroleum Company, Beyond Petroleum plc and Chevron Ltd and an Indian oil firm - Essar Energy Holdings Ltd.
Sources say the Government-which owns half of the refinery is not keen to cede its pre-emptive rights and is yet to endorse the joint sale to India's second biggest private oil firm. As a co-owner, The Government has a say in accepting new owners. The deal can only proceed with the approval by Government.
"It is true that a decision by Treasury and the Energy ministries is being awaited," sources told Business Daily.
Some of the options available to Government include buying back the 50 per cent stake and selling it to any investor they please, including to unsuccessful bidder. Apart from Essar, other contenders were Bharat Petroleum and Reliance, both of India and Libya's OilLibya.
Mr Patrick Nyoike, the Energy Permanent secretary, in an interview said the government is keen on exercising the pre-emptive rights. He complained about the oil majors' decision to sell their 50 per cent shares in block.
"If Essar Oil is picked as our new partner, they must guarantee debt financing for the Sh22 billion joint venture project," Mr Nyoike who is currently on a trip to Northern Africa with the ministry's senior officials said before leaving for Algiers last week.
Algeria is one of the world's biggest crude oil producers. With current production at more than 2, 000 barrels per day, the Opec member is Africa's second largest producer after Nigeria.
Mr Nyoike said they were currently in talks with four other 'serious' interested investors in the upgrades and Essar Oil must compete with them.
"From February, we must move on and with speed. In exactly six months time, we must begin construction, which will last exactly 36 months before commissioning," he said.
Mr Nyoike says new investors in the refinery will not be allowed to exit the Changamwe-based facility until 2013. The Government owns 50 per cent of the four million barrels per year refinery. A timetable for the future plans shows a three-year time frame to fulfil future obligations at KPRL including completion of the upgrade plans.
The government partner will in six months do a due diligence on Essar to ascertain their capability and capacity to fulfil the obligations.
Analysts say the three multinationals decided to sell their shares because they were not convinced with the viability of the upgrade investment. Essar is therefore being faced with a new set of conditions after outgoing shareholders, outlined their obligations ahead of the financial closing of the deal whose financing details is still largely guarded affair.
"Shell, BP and Chevron have signed a Share Purchase Agreement to sell their shareholdings to Essar Energy Overseas Limited. The sale is subject to conditions. The transaction is expected to close in early 2008," said Kenya Shell in a statement when the deal was signed.
Kenya Shell yesterday sought to put the record straight: "The proposal to sell jointly was presented to the Government and discussed with them from the outset. The idea was to make the offer attractive to the potential buyer(s) as this would enable the buyer to have a bigger say in the running of the firm, rather than buying the shares of say, only one partner and becoming just another minority shareholder," said Mr Mwaura Ngaari, the firm's external affairs manager.
This strategy helped to get a willing buyer quickly and break the deadlock with the government.
"This was a straight forward business issue of willing buyer/willing seller, a deal that was within the requirements of the shareholders agreement, and we did not have to sell at any cost," he added.
By joining KPRL, it appears that Essar has evaluated the upgrade economics and accepted to partner with the government on the upgrade.
The regional demand for products stands at five million barrels/day, three million of which are consumed by Kenya.
Currently, the value of products output from the facility is lower than input costs by three per cent, meaning it is better to import.
Mr Nyoike says it costs shareholders up to Sh70 million to maintain the 43-year old refinery.
"In August 2007, import cost and output value was about the same. Economics vary from month to month depending on landed costs of crude and products," says the Petroleum Institute for East Africa (PIEA).
But after upgrade, fuel oil output will decrease and more expensive products increase. Value from refining will also increase by 11 per cent , meaning it is better to refine.
The Mombasa refinery, the only one in Eastern Africa, produces LPG, gasoline, diesel, kerosene and fuel oil. It will be upgraded with secondary units at a project cost of between $400 million- $450 million (about Sh22 billion).
In December, Mr Naresh Nayyar, the chief executive of Essar Energy Holdings Limited was upbeat saying: "We look forward to working with the Government of Kenya to develop KPRL further to supply the growing Kenyan and adjacent markets and finalise the upgrade project."
KPRL products are sold into the Kenyan market and exported to neighbouring countries including Tanzania, Uganda, Burundi and Rwanda.
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