Essar Completes Refinery Acquisition, Plans to Retail Fuel in Kenya

Indian conglomerate Essar Group has finalised the acquisition of a 50% stake in Kenya Petroleum Refinery Ltd’s (KPRL) Mombasa refinery through its subsidiary Essar Energy Overseas Ltd. Essar also operates a GSM (Global System for Mobile) telephony licence in Kenya under the brand YU, which it launched in October 2008. The deal closes a protracted chapter in Kenya's downstream sector, which dragged on for three years amid competing firms trying to control East Africa's only operational refinery. KPRL is a privately owned limited liability company and the government of Kenya has always been the majority shareholder in the company, owning 50% of the equity. The other shareholders in KPRL were Shell and BP, which each held a 17.1% stake, while U.S. oil company Chevron owned the remaining 15.8%. The supermajors were not willing to invest the necessary funds to modernise it and agreed to divest of their stakes in the facility in order for a new partner to provide the needed financial backing. Kenya's Prime Minister Raila Odinga told the media; "We are happy to conclude the deal and will immediately embark on upgrading the facility".

Essar completed the deal on 31 July after a year of negotiations with the Kenyan government. The East African Standard reports that Essar will invest up to US$450 million (22 billion Kenyan shillings) over the next three years. Essar also plans to enter Kenya's already crowded fuel retail sector and expects to be able to price its product competitively as the new owner of the refinery.

Prashant Ruia, chief executive of Essar Group, told the media on a conference call that the refinery would be upgraded by adding secondary units that will increase capacity from 4 million t/y to 5 million t/y. The upgrade for the refinery will also increase current production of liquid petroleum gas (LPG) from 30,000 t/y to 120,000 t/y to serve the domestic market. Reuters quoted Ruia as saying; "It is early days but we have a plan. Our model in India is to be a refinery with retail and market distribution. We have 1,500 gas (petrol) stations in India which we operate on a franchise basis. We will see how we can bring that model to Kenya". Ruia told the Hindu Business Line that the acquisition marks Essar’s entry into overseas refining, provides an excellent addition to the company's assets, and fits well with the group’s strategy of enhancing its presence in the growing African market. Essar Oil operates a 280,000-b/d refinery at Vadinar in Gujarat, which is being expanded to 320,000 b/d by 2010 and then to 700,000 b/d by 2011.  Essar's near-term vision is to have a global refining capacity of 1 million b/d.

Outlook and Implications

Closing the agreement has taken over 18 months since BP, Shell, and Chevron first agreed to sell their cumulative 50% stake in the refinery in January last year (see Kenya: 18 January 2008: Shell, BP, Chevron Sell Stakes in Kenyan Refinery). Essar also agreed to pay the Kenyan government US$2 million to not exercise its pre-emptive rights as majority shareholder in KPRL. The exact price of the deal has not been announced, but Business Daily reports that BP, Shell, and Chevron received between US$5 million and US$10 million for their 50% stake. Two other firms competing with Essar for the refinery were Tamoil (under the brand name Oilibya) and another Indian firm Reliance Industries Ltd (RIL). The Kenyan government seemed to prefer to have Oilibya as the new major stakeholder in the refinery. Government meddling caused the long delay of the sale as it is known that senior civil servants and high-level ministers in Kenya have close relationships with Oilibya officials, after a series of talks took place on other projects. Kenyan government officials conducted their first meeting with Libyan investors when they flew to Tripoli, the Libyan capital in January 2007 (see Kenya: 31 January 2007: Tamoil to Dominate Kenya's Oil Industry with New Refinery and Pipeline Deal).

Essar will now proceed with investing in the refinery and competing in the fuel retail business in Kenya, which could see it also branch out into other East African countries. However, the company is likely to be forced to acquire another downstream company to give it access to fuel retail stations. Business Daily reports that Essar has expressed interest in purchasing the assets belonging to Triton Petroleum. Triton collapsed at the start of the year but has more than 20 retail outlets, as well as storage facilities in Mombasa, offering Essar the easiest route to the distribution market. In June Chevron completed the sale of its subsidiary, Chevron Kenya Ltd, to Total Outré Mer. The sale of the assets and the refinery interest means Chevron no longer has a presence in Kenya. BP sold its fuel marketing business to Shell earlier this decade. Total now has around a 25% market share (once the two groups’ assets are merged) with Kenol having a 24% share and Shell holding 21% of the market. Over the past few years Italian firm Agip has pulled out of the country as well as ExxonMobil, which sold its assets in Kenya including 70 service stations and the associated supply and distribution facilities to Oilibya.