Global Insight Perspective | |
Significance | Libya's Tamoil will invest US$300 million in upgrading Mombasa's refinery. |
Implications | The deal came about because of Tamoil's involvement in the Eldoret-Kampala pipeline deal. The massive investment is needed, but the negotiations have been conducted behind closed doors and there have been allegations of corruption. |
Outlook | The agreement will see the Libyan company dominate Kenya's oil sector, with international oil companies playing a much reduced role. |
Tamoil to Dominate Kenya's Oil Industry
Kenya's oil sector is to be completely shaken up. The international oil companies that have long dominated the scene are set to become marginalized, to be replaced by Libya's Tamoil, which will dominate the sector after securing two major deals with the Kenyan government. For over six months it has been known that Tamoil East Africa Ltd had been awarded the contract to construct a pipeline between Eldoret in the west of Kenya to Kampala in Uganda. However, this week it has been announced that Tamoil has also won the right to build a US$60-million liquid petroleum gas (LPG) storage facility in Mombasa; the Libyan firm will also invest US$300 million in upgrading the Mombasa refinery, which serves the entire East Africa market with refined products.
The pipeline deal has come under fire in the local media because of allegations of corrupt practices during the negotiations, and the refinery deal consequently comes as a huge surprise to most observers. Mombasa is in great need of a redeveloped refinery, but the main question that Global Insight is asking is: why was there no open bid for the crucial refinery contract to allow other oil companies from around the world to bid competitively against each other?
Transparency Test Failed?
The Tamoil subsidiary initially won the tender to construct the 320-km pipeline under a build, own, operate, and transfer (BOOT) venture at a cost of US$71.2 million, against competing bids of US$135 million and US$125 million from Shell Uganda and the China Petroleum Pipeline Engineering Corp., respectively (see Sub-Saharan Africa: 26 July 2006: Tamoil Wins Kenya-Uganda Pipeline Bid). The Joint Coordination Commission (JCC), the bilateral Kenyan-Ugandan organisation overseeing the development of the planned petroleum pipeline from Eldoret to Kampala, has been beset by allegations of corruption and decided to ignore and sideline the independent consultant working on the project tender. Throughout the last six months there have been allegations that Tamoil East Africa did not have the funds to complete the deal: it emerged that the company has never made a profit and that its share capital is one million euro, not one billion euro as the company claimed. This led to Ugandan President Yoweri Museveni ordering the firm to be investigated (see Uganda: 15 November 2006:Ugandan President Orders Tamoil Pipeline Agreement to Be Investigated). The saga took another twist last month when Tamoil said the cost of the project could rise by as much as US$12 million (see Kenya: 27 December 2006: Kenya-Uganda Pipeline Concession Finally Awarded to Tamoil East Africa and Kenya: 10 January 2007:Tamoil Pipeline Costs Soar for Kenya and Uganda).
Officials from the JCC flew to Tripoli, the Libyan capital, last week to carry out due diligence on Tamoil East Africa, despite the contract having being awarded to the firm in the previous month. Because of unrest in the local media, the JCC needed to know basic details about the Tamoil East Africa and the Oilinvest Group, Tamoil East Africa's parent company, which in turn is wholly owned by the National Oil Corporation of Libya; however, this information should have been sought at the start of the tender last year.
During the visit to Tripoli it seems a new business venture emerged, which will see Tamoil upgrade the Mombasa refinery in a US$300-million investment programme. A LPG storage facility, which has been sought by the Kenyan government for many years, will also be built; at a cost of US$60 million. The East African reports that a memorandum of understanding (MoU) was signed during the visit to the Libyan capital, although it seems bizarre that such a huge deal was kept secret and did not emerge from a competitive bidding process. Kenya Petroleum Refineries Ltd (KPRL), which owns the Mombasa refinery, is currently owned by the government and three supermajors—Shell, BP, and Chevron, under the Caltex brand. However, because of the US$300-million investment from Tamoil, the stake of each shareholder will diminish proportionally, allowing the Libyan firm to take control of the facility.
KPRL has long stated that it needs around 21 billion Kenya shillings (US$300 million) to redevelop the Mombasa refinery; in its current state, it is a burden on the economy and costs the taxpayer 5 billion Kenya shillings a year as a result of its poor performance (see Kenya 1 November 2006: Inefficient Kenyan Refinery a Burden on Economy).
An upgraded refinery, which currently caters for 60% of the country's crude imports, will transform Kenya's oil sector. Under the conditions of the MoU, Tamoil will be able to import refined products from Libya. It has been reported that Tamoil will also take a majority stake in the LPG storage facility that is to be constructed and is deemed a necessity by the Nairobi government. Kenya's LPG consumption is forecast to rise from the current 50,000 tonnes to 100,000 tonnes in the next five years.
In October last year, ExxonMobil sold its assets in Kenya, which included 70 service stations and the associated supply and distribution facilities, to Tamoil. The sale came during an upsurge in anti-"Big Oil" rhetoric against international oil companies by senior government officials, led by Finance Minister Amos Kimunya, who had previously accused oil-marketing companies of "cartel-like behaviour" after they increased their prices when global crude prices increased, but failed to reduce them in line with the subsequent dip.
Outlook and Implications
The decision to invest US$300 million to upgrade the refinery in Mombasa is necessary, but the way in which the deal was conducted and subsequently announced will attract a significant amount of unwanted publicity and is certain to lead to further deterioration in the strained relations between the government and international oil companies. The decision finally to build a stand-alone LPG storage facility is an important step forward as the government urges consumers to switch to LPG from wood as their primary fuel. The need to invest in the Mombasa refinery seems to have been taken independently from the current drilling programme offshore near Lamu, where the first well came up dry (see Kenya: 23 January 2007:Woodside Well in Kenya a Duster). With Uganda pledging to set up a mini refinery by 2009 as part of its oil production project, the Tamoil investment can be seen as a fight to control the East Africa refined products market.
The announcement is huge news and is likely to shake up the entire oil sector in Kenya, but questions will now start. For instance: why was the MoU signed secretly and why was there no opening bidding process where other oil companies could have competed against each other? Allegations of corruption have surrounded Kenya's business dealings for years and the agreement with Tamoil will not change this. The massive investment in Kenya's oil sector is needed, but the government will need to explain why the whole process failed the transparency test.