State agencies and Essar Energy are to meet on Wednesday to decide the fate of the Kenya Petroleum Refineries Ltd, which has been out of business since July 1.
No crude oil has been procured for processing at KPRL after the product off-take agreement between it and oil marketers, effected last year, expired on June 30.
Cabinet Secretary for Energy and Petroleum Davis Chirchir told a Senate committee on Thursday that as a precondition to signing a new product off-take agreement with KPRL, oil marketers demanded compensation for yield shift loss which created a deadlock.
KPRL has been operating as a merchant refinery since July 2012, after oil marketers pushed for it to switch from the previous tolling arrangement. They argued it was expensive to process crude oil at refinery especially under tolling mode.
The shift was what necessitated the signing of a product off-take agreement with oil marketers, which has now expired. The merchant mode requires oil companies to mandatorily lift petroleum products at KPRL to sustain its operations.
"This policy to protect the refinery has had adverse effects including loss to the economy in the form of foreign exchange. ... because imported refined petroleum products are cheaper than refined products ex-KPRL," Chirchir told the Senate committee on Energy, Roads and Transport chaired by Gideon Moi.
Oil firms claim compensation amounting to Sh7.1 billion for yield shift loss after KPRL's performance failed to meet contractual targets.
They want the government, which owns a 50 per stake in KPRL, to commit on the modalities of compensating them the yield shift loss before they can commit to lift petroleum products from the refinery.
The Indian firm Essar holds the remaining 50 per cent stake, and has expressed intention to exit mid-2014. It bought the stake from BP, Shell and Chevron in December 2007, as part of a raft of measures intended to turn-around KPRL.
KPRL's outstanding liabilities include a Sh930 million overdraft from Citibank and CBA, a Sh932.5 million loan from Barclays and a StanChart loan balance of Sh6.22 billion.