13 May 2013

Kenya: Fuel Shortage Looming Over Mombasa Oil Refinery Crisis

Uganda might experience a fuel shortage following a row between the Mombasa oil refinery and marketers that plunged the facility into a financial crisis, experts have warned.

The Kenya Petroleum Refineries Ltd (KPRL) last week warned that it could soon be unable to refine petroleum products owing to severe financial constraints, a development that could affect Kenya and its landlocked neighbours including Uganda, Rwanda and Burundi, according to media reports.

Shell country chairman Ivan Kyayonka said although Uganda imports already refined oil products directly from the gulf, a fuel shortage in Kenya may affect Uganda. "Uganda does not buy oil products from the Mombasa refinery but since the crisis affects Kenya, it might affect us as well in the long run."

Kyayonka explained that marketers in Kenya abandoned the oil refinery and started importing already refined oil products because it was cheaper to import than to buy crude oil and refine it.

"Initially, the refinery was like a contractor because it would process crude oil brought in by marketers. Over the years, the marketers realised that it was more costly to import crude oil and last year, it turned into a merchant refinery where it would buy the crude oil, process it and sell to marketers," he explained.

Daniel Segal, the chief executive officer of Tapuz Group, an oil consulting firm, agreed with Kyayonka but noted that the stalemate might have an indirect effect on Uganda where oil products destined for Uganda are diverted to the Kenyan market.

He said if the stalemate is not resolved by the end of June or at the beginning of July, the refinery will close.

"This will cause delays in offloading oil products at Mombasa harbour because the major getty at Kipevu is already overwhelmed and cannot quickly accommodate oil products," Segal observed.

Segal revealed that only a few products such as cooking gas and fuel for heavy industries like thermal power generating fuel and bitumen oil will be affected.

Transport fuel to Uganda is imported from outside East Africa. The refinery is largely for Kenya.

According to The East African newspaper, the financial shortfalls at the refinery were occasioned partly by a dispute between it and the oil marketers over the uplift of refined products.

The refinery said marketers had boycotted its products, hurting operations and stoking a cash flow crisis.

The marketers who argue that inefficiencies at the refinery had made processed oil products more costly than those imported directly have threatened to fully boycott the facility from July, a development that will be watched keenly in Kenya and neighbouring countries that rely on the refinery for petroleum stocks.

Currently, oil companies are lifting only about 65,000 tonnes out of the plant's monthly refining capacity of 130,000 tonnes of oil products, partly as a result of the inefficiencies and partly of the preference among oil marketers for importing refined oil products.

"We are finding it difficult to meet our obligations to stakeholders or even carry out medium-term investment plans," Brij Bansal, the refinery's chief executive officer, was quoted as saying in a statement although he did not give figures on the shortfall.

Oil marketers, under their lobby Oil Industry Supply and Co-ordination Committee (SupplyCor), said owing to inefficiencies, products processed at the refinery were Ksh10 ($0.11) more expensive than imported refined oil, costing the economy at least Ksh1.6b ($18.8 million) a month.

The refinery now hopes to source $1.2 billion for its upgrade in July.

According to Bansal, Standard Chartered, which was picked by the refinery as the financial adviser for the expansion, is expected to table a financing plan for the plant, which if approved by the board in the July shareholders' meeting, will allow the bank to source funds from lenders.

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