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"id": 189196,
"url": "https://info.mzalendo.com/api/v0.1/hansard/entries/189196/?format=api",
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"type": "speech",
"speaker_name": "Mr. Murungi",
"speaker_title": "The Minister for Energy",
"speaker": {
"id": 93,
"legal_name": "Kiraitu Murungi",
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"content": " Mr. Deputy Speaker, Sir, last week on Wednesday, 9th July, 2008, Mr. Ababu Namwamba requested me to make a Ministerial Statement on the upgrade of the Kenya Petroleum Refineries. Mr. Deputy Speaker, Sir, I beg to make the following Ministerial Statement. The Kenya Petroleum Oil Refineries Limited (KPRL) comprises two refineries known as \"Complex 1\" and \"Complex 2\" commissioned in 1963 and 1974, respectively. The Refinery has a designed processing capacity of up to approximately 4 million metric tonnes of heavy crude oil per annum. The current shareholding of the KPRL is as follows: the Government of Kenya, 50 per cent; Shell Petroleum Company Limited, 17.1 per cent; Beyond Petroleum Plc (BP), 17.1 per cent and Chevron Global Energy Inc, 15.8 per cent. This makes another 50 per cent. The refineries are 1848 PARLIAMENTARY DEBATES July 16, 2008 currently uncompetitive due to their outdated technology. With the partial deregulation of the oil industry in 1994, the Government had to issue a legal notice under the repealed Petroleum Act, Cap.116 of the Laws of Kenya, requiring all oil marketing companies importing oil into Kenya for domestic consumption to process, at least, 1.6 million metric tonnes of crude oil per annum through the refinery to ensure its commercial survival. Without that legal notice, the refinery would have collapsed. The products processed by the refinery are not competitive and, in fact, they are more expensive than imported refined products. Several studies have been undertaken by the shareholders, that is both the Government and the private sector, on the refinery upgrade to make it more competitive. These studies have concluded that the installation of a product quality and enhancement facility, including a thermal cracker to produce additional automotive diesel for residue oil, would make the refinery competitive and, therefore, commercially viable. An upgrade study undertaken by Foster Wheeler UK Limited estimated the cost of these upgrade facilities, including truck and rail products loading, terminal facilities under a 6,000 metric tonnes LPG storage facility at US$322 million, that is about Kshs20 billion. On the basis of the recommendation made by Foster Wheeler UK Limited, the Cabinet approved the upgrade of the refinery in May 2007 at a cost of US$322 million. The Cabinet directed that the KPRL modernisation programme be implemented to completion by December 2009. The Cabinet also directed that the Government retains 50 per cent of its shareholding in the refinery. The Cabinet also directed the Minister for Energy and the Minister for Finance to take on board interested investors on competitive basis in the refinery upgrade project. The new investors were to take over the equity holding of the existing private shareholders, that is the other 50 per cent. The Government, through the Treasury, was to contribute Kshs3.64 billion as its enhanced equity portion needed for the refinery upgrade. This was to be done in three instalments beginning from 2006/2007, 2007/2008 and 2008/2009. In the Financial Year 2006/2007, a token contribution of Kshs50 million was made by the Treasury to the refinery. Mr. Deputy Speaker, Sir, following this Cabinet decision, the three industry shareholders, that is Shell, BP and Chevron, decided to divest and jointly sell their shares in the refinery. The process kicked off in mid 2007, with the appointment of Wood Mackenzie Limited of London to market the 50 per cent equity to the highest bidder. Several companies expressed interest in purchasing the equity holding of the private shareholders in the KPRL. These companies included Petrofac of the UK, Oman Oil of Oman, Essar of India, Bharat Petroleum of India, Tamoil of Libya, Engen of South Africa and Althani Group of Qatar. After a competitive process conducted by Wood Mackenzie of London, ESA of India was selected to buy the combined 50 per cent equity of the private shareholders at the refinery at a price of US$10 million. I would like to inform the House that Tamoil, which is now Libya Oil, refused to deal with Wood Mackenzie on behalf of the shareholders, because it wanted to have direct bilateral arrangements with the Government of Kenya in its equity participation in the refinery upgrade. So, it did not participate in the competitive process, which was conducted by Wood Mackenzie. In an MOU signed on 5th June, 2007 between Tamoil and the Government of Kenya, Tamoil Libya expressed its interest to participate in the upgrade project, but indicated that its level of commitment would be conveyed once the consultant's report was submitted. Wood Mackenzie continued with its process and on 7th January, 2008 we received a letter dated 20th December, 2007, in which the three private shareholders informed the Minister for Finance that they had organised a competitive and transparent sale process that had resulted in the selection of a preferred purchaser, that is Essar Energy Overseas, to acquire the 50 per cent shareholding of the private sector companies. The three private shareholders attached to their letter a copy of a signed sale and purchase agreement for US$10 million, and requested the Minister for Finance to waive its right of July 16, 2008 PARLIAMENTARY DEBATES 1849 pre-emption as provided under Article 22 of the Kenya Petroleum Refineries Limited Articles of Association within 30 days. Mr. Deputy Speaker, Sir, this waiver was necessary to enable the transfer of their 50 per cent equity to Essar Energy Overseas (EEO) of India. I understand that to date, Treasury has not granted waiver to its right of preemption, and that it is facilitating discussions between (EEO) and Libya Oil with a view to getting them to agree on the purchase of the 50 per cent equity on offer by the three private shareholders. I would like to inform this august House that the sale process of the 50 per cent equity owned by the private shareholders has not yet been concluded. The Ministry of Energy is the Government's refinery asset manager. The matter is now pending under discussion at the Treasury, which has the mandate to waive the preemption rights, because Treasury is the Government's equity representative. The shares are held by Treasury, on behalf of the Government. Mr. Deputy Speaker, Sir, I will now respond to specific issues raised by Mr. Namwamba. The first issue is about the status of the programme to upgrade the Kenya Petroleum Refineries at Mombasa, as recommended in the Foster Wheeler Report, 2004. The Foster Wheeler (UK) Limited Report, included a preliminary design, which needed to be upgraded to a detailed design. A detailed design is necessary before proceeding with procurement and construction. A tender for detailed design work has been floated to international firms with experience in design of refineries and petro-chemical plants, but the tender process has been put on hold as the current shareholders have decided not to support any further expenditure on the refinery upgrade. In their view, the tender process should be undertaken upon divesture of their 50 per cent equity and on entry of the new shareholders. Mr. Deputy Speaker, Sir, the second issue raised by Mr. Namwamba is: What is the justification of the escalation of the proposed upgrade budget from the initial Kshs20 billion or US$322 million to Kshs28 billion or US$430 million, in view of the fact that Essar Company of India had made an offer of US$400 million, which is the equivalent of Kshs26 billion? I would like to state that original cost estimates as presented to the Cabinet was US$233 million as recommended by Foster Wheeler (UK) Limited. Over time, this figure was reviewed by Foster Wheeler (UK) Limited to US$357 million to take into account escalation of both energy and metal prices. I am not aware of the estimated cost having risen to US$430 million. Also, Essar Energy Limited has not made any offer to upgrade the refinery at a cost of US$400 million. We do not have any such information. Mr. Deputy Speaker, Sir, the third issue is: How did Essar Company of India and Tamoil of Libya come into the picture? Is it true that plans are afoot to have these two favoured foreign firms irregularly share this lucrative venture to the detriment of the Kenyan taxpayer? I would like to respond as follows: The assumptions made in this question is not correct. EEO was selected competitively and in a transparent manner by Wood Mackenzie of United Kingdom, who are the transaction consultants for the three private shareholders. It should also be noted that Tamoil (Libya Oil) refused to deal with Wood Mackenzie since it wanted to have direct bilateral arrangement with the Government of Kenya on its equity participation in the refinery upgrade. There is, therefore, no detriment to the Kenyan taxpayer. The Government will ensure that the taxpayers' interests are protected in this transaction. Mr. Deputy Speaker, Sir, the fourth issue was: Is it true that the said upgrade programme has become hostage to wheeler- dealing within the Ministry of Energy and the Ministry of Finance, respectively, which has resulted in a litany of irregularities that include a unilateral decision to ignore competitive process of selecting the upgrade partner, which process was to be managed by Standard Chartered Plc of UK? Mr. Deputy Speaker, Sir, let me say that I have a problem with the manner this question has 1850 PARLIAMENTARY DEBATES July 16, 2008 been framed. The allegation is malicious, incorrect and ill-founded. The three private shareholders chose Wood Mackenzie as their transaction consultant instead of Standard Chartered Plc of UK, to conduct a competitive process for the selection of a buyer of their 50 per cent equity. The Government-owned shares in the Kenya Petroleum Refineries Limited (KPRL) are not for sale. Therefore, the allegations of a litany of irregularities are in bad faith and in bad taste. I would add that the allegations are an abuse of the privileged communication accorded to hon. Members of this House."
}