Essar Energy Plc, an Indian firm that co-owns the Kenya Petroleum Refineries Ltd with the government has announced plans to exit the joint venture.
The announcement comes as two parliamentary committees are probing allegations that the company’s acquisition of a 50 per cent shareholding at the country’s only refinery could have been fraudulent and meant to fleece consumers through high fuel prices.
“Essar Energy, through its subsidiary Essar Energy Overseas Limited, has exercised a put option under the shareholders’ agreement to sell its stake in KPRL to the government of Kenya, which owns the remaining 50 per cent interest in the Mombasa refinery,” said Essar in a yesterday’s notice posted on the company’s website.
The firm is selling its stake for $5 million (Sh435m), which is more than double the $2 million that Essar paid as goodwill to the government in 2009.
Essar has defended the move saying it has been informed by a series of studies by “international consultants into the technical, economic and funding elements” of an upgrade of the Mombasa refinery whose outcome has made the Indian firm believe that “the upgrade is not economically viable in the current refining environment”.
Addressing the parliamentary committee on energy on Wednesday, KPRL chairman Suleiman Shakombo said Essar had failed to honour its obligation to finance the upgrade of the refinery as stipulated in the shareholder agreement.
No funds injected
“Essar has not performed the way we expected,” he said.
The energy committee is investigating circumstances under which Essar acquired its stake at KPRL.
At the Wednesday’s meeting, it emerged that the Indian company could have been duped into signing a deal to upgrade the refinery. For the three years that Essar has held the shareholding, it has not injected any funds for the upgrade.
Thursday, the parliamentary committee on public investments questioned Essar’s management on the acquisition of its shareholding at KPRL.
Controversy had arisen on which company between Essar Energy Overseas and Essar Energy negotiated for the shareholding deal with the government.
Addressing the committee, majority leader Aden Duale said Essar Energy Overseas, the outfit through which Essar Energy owns KPRL represented “powerful people” who served in the last government both in and out of the energy sector.
“Essar Energy Overseas Ltd that is incorporated in Mauritius only owns 30 per cent of the said 50 per cent. Eight per cent is held by powerful individuals in the energy sector and 12 per cent by other powerful people, all who served in the last government,” said Mr Duale.
Essar entered into a joint venture deal to run KPRL with the government in 2007. This was after a cabinet decision that allowed ministers of Finance and Energy to bring on board an investor to dilute existing shareholders and provide capital to fund modernisation of the refinery.
KPRL chief executive officer Brij Bansal told members of the investments committee that consumers are paying Sh3.6 more per litre of fuel because of inefficiency caused by an old refining technology.
Initially, Essar had offered to pay $11 million as goodwill in exchange for the government’s waiver to exercise its pre-emptive rights that would have seen it take up the 50 per cent shareholding that was collectively held by Shell, BP Africa and Chevron Global Energy.
However, in 2009, the Indian company said the initial offer of $11 million was not attainable and that it was willing to pay $2 million as goodwill.