KPRL: The trump card for Kenya Pipeline in post-stake sale era

For years, the Kenya Petroleum Refineries Ltd (KPRL) had been written off.

Since it quit crude oil refining operations in 2013, the refinery stood as a silent, rusted relic in Changamwe, whose glory days were well behind it.

Today, however, it could easily be termed the crown jewel for KPC as it prepares to go public.

Reading through the prospectus for KPC’s Initial Public Offering (IPO), investors keen on the future expansion by KPC will note that KPRL offers immense opportunities.

This is largely on account of its existing oil and gas infrastructure, albeit beaten and indeed of upgrades, but also vast empty parcels of land.

The facility is also strategically located next to the port, giving access to the Indian Ocean, and at the start of a transport corridor served by rail and road and stretching deep into the region.

The facility is also served by a network of pipelines for offloading and loading vessels with petroleum products.

Now KPC sees KPRL’s assets as having the potential of transforming the Kenyan coast into a major oil and gas hub, deepening the services offered to neighbouring landlocked countries, but also the possibility of expanding to serve Indian Ocean islands.

Other than refined petroleum products, KPC is looking at having infrastructure to handle cooking gas, liquefied natural gas, crude oil, and biofuel.

KPC acquired KPRL in a deal that was completed in 2023, taking control of its assets, including the refinery that has been idle for more than a decade, but also the vast land parcels, as well as huge tanks that once stored crude oil.

Some of the tanks have since been refurbished to store refined petroleum products, which have increased KPC’s fuel handling capacity, now accounting for a third of its storage capacity and improved security of fuel supply in the country.  

“This acquisition brought under KPC’s control a range of strategic infrastructure, including pipeline assets, storage facilities and truck loading operations, strengthening the Company’s capacity and enhancing overall business performance,” says KPC in the IPO prospectus.

“KPRL also holds significant undeveloped land, which provides critical opportunities for expanding existing infrastructure and developing new business initiatives aligned with KPC’s long-term growth strategy.”

KPRL stopped refining crude in 2013 after it turned out that the business was untenable without upgrading the decades-old equipment.

Due to inefficiencies, the facility produced costly fuel that kept local pump prices high, resulting in the government agreeing with oil marketers that consumers were better off if all fuel used locally was imported as refined.

At the time, about 40 per cent of what was consumed locally was processed at the refinery. The government had put in place protectionist measures requiring oil marketers to process a portion of the fuel they sold locally at KPRL. This, however, ended up being too costly for consumers.

KPC came on board in March 2017, operating the facility on a lease arrangement initially, during which it started converting tanks to store refined products, and with time, KPRL became a storage hub. The ownership of the facility was transferred to KPC in 2023.

In what could form among the priority investment areas after the IPO, KPC said it would build different oil and gas installations on the vast parcels of land owned by KPRL at the Kenyan coast.

KPC said it would use idle infrastructure to establish an oil and gas trading hub, with an eye on deepening the re-export of petroleum products to Kenya’s landlocked neighbours, but also tap into a vast market of the Indian Ocean islands.

There are also plans for the conversion of the two reigning complexes to become biofuel refineries, as well as the setting up of a strategic fuel reserve and building Liquefied Natural Gas (LNG) infrastructure.

In the prospectus for the IPO, KPC disclosed that KPRL has 18 parcels of land in Mombasa and Kilifi counties, the bulk of it located in Changamwe and Port Reitz, most of it vacant.

“Out of the total available land space of about 252.97 acres (including vacant land located in Changamwe and Port Reitz areas, land occupied by the idle Refinery plant, Nyali, and Kuruitu plots), 70.44 per cent (178.197 acres) has been reserved for oil and gas related business initiatives,” says KPC, noting that putting up oil and gas infrastructure on this land would significantly boost its capacity enabling it to serve additional markets including Indian Ocean Islands.

East African countries, including Uganda, Rwanda, and the Democratic Republic of Congo, use KPC infrastructure for fuel importation.

“The current market size for Kenya and neighbouring countries served by KPC is about 9.8 million cubic metres, while the untapped re-export business to the Indian Ocean is estimated at 45 million cubic metres.”

“The business initiatives include establishment of an oil and gas trading hub, creation of Petroleum Strategic Reserves, construction of LPG and natural gas facilities, installation of a Bio refinery, electricity generation and construction of an International Conference Centre.”

KPC says it is undertaking studies on the proposed trading hub. It also said it would put up facilities to store LNG following a deal between Kenya and Tanzania to trade in LNG.

Tanzania has huge reserves that Kenya seeks to import to power industries, including power generation. Kenya has been looking at converting thermal power plants to use LNG as opposed to heavy fuel oil that they currently use, which is both costly for power consumers and a heavy polluter.

If all goes according to plan, KPC will also set up strategic petroleum reserves at KPRL. This is fuel, ideally bought when prices are low and in large quantities, then stored for later use in cushioning the country from supply shocks, such as a sudden spike in global petroleum costs and even shortages.

The government has, for decades, been planning to put up strategic reserves but has not succeeded. 

“KPC intends to ensure that the assets of KPRL are optimally utilised to support its operations and strengthen the Company’s regional presence,” says KPC in the prospectus, adding that the projects “will require support from the Government and each stakeholder to raise the resources required to implement the programmes and projects envisaged in the master plan.”

The Energy and Petroleum Ministry has an agreement with Eni of Italy to convert the old refinery at KPRL into a biofuel refinery.

The facility will collect used cooking oil as well as oilseed, which will then be used to produce hydrotreated vegetable oil that can then be used for the production of cleaner fuels such as sustainable aviation fuel.

Following the signing of the memorandum of understanding, Eni Kenya launched its first agri-hub for oilseed collection and pressing in Makueni. It is targeting production of oilseed from castor, croton, and cottonseed oils across other areas, primarily through rehabilitation of degraded soils. In 2024, the project received a $210 million investment from the International Finance Corporation (IFC) and the Italian Climate Fund, with a view to expanding it to reach 200,000 farmers by the end of this year 

Additionally, there are plans to build a 30,000 metric tonne Liquefied Petroleum Gas (LPG) facility at KPRL grounds by Nigerian firm Asharami Synergies.

The project was initially set to be undertaken by KPC, but a last-minute directive from the Energy Ministry saw KPC cede to Asharami to deliver the facility under a public-private partnership model.

The company had spent Sh192.64 million in undertaking studies, including demand survey, Environmental and Social Impact Assessment (ESIA), Front End Engineering Designs (Feed) and the cost estimate for the project. 

The LPG handling facility is seen as among the game-changing investments in lowering the cost of gas by increasing local LPG handling capacity and, in turn, would see the government introduce an Open Tender System of LPG importation as well as control of the retail price of cooking gas.

In giving out the parcel to the Nigerian firm, KPC lost the earnings from offering logistical services to LPG importers that could be more lucrative and will instead have to settle for the rent paid by Asharami.

“KPRL has leased approximately 23.19 acres of land to Asharami Synergies Limited under commercial arrangements for the establishment and operation of a liquefied petroleum gas (LPG) facility for a term of thirty-one (31) years,” KPC explained to potential investors in the prospectus, adding that Asharami has possession and operational control of the land and hence it was not factored in the valuation before the IPO.

“Accordingly, for valuation purposes, the asset is not recognised by KPC or KPRL during the subsistence of the lease and has therefore been excluded in the Fixed Asset Valuation Report, which has been provided to investors as a document available for inspection. Income accruing under the terms of the lease is recognised in KPRL’s Profit and Loss Statements.”

Aside from the future promise that KPRL assets offer, the tanks that KPC converted to store refined products appear to be already yielding fruit.

The tanks have emerged as a key asset in guaranteeing the security of supply of fuel in the country, now accounting for more than a third of KPC’s petroleum products storage capacity.

The KPRL tanks added some 384,111 cubic metres (or 384.1 million litres) of capacity. This had the effect of increasing KPC’s storage capacity to 1.138 million cubic metres from an earlier 754,213 cubic metres.

Before adding handling capacity at KPRL, the largest depot KPC operated was the Kipevu Oil Storage Facility (KOSF), which has a capacity of 326,233 cubic metres (or 326 million litres) of refined petroleum products. 

The KPRL tanks have played a significant role in easing the constrained fuel storage situation in the country.

Previously, vessels bringing products to Kenya would at times have to wait for oil marketing companies to evacuate products from KPC’s storage system to create space for offloading fuel. Importers would pay demurrage costs, which are penalties levied by ship owners for holding the ships longer than agreed. The costs would be passed on to motorists at the pump.

Demurrage costs the Kenyan firms paid rose to a high of Sh3.59 billion over the 2021/22 financial year, according to the Ministry of Energy and Petroleum, but this has since reduced to under Sh1 billion.

Parliament had in approving the privatisation of KPC, recognised the potential of KPRL and demanded that the government explain how the refinery’s assets would influence the valuation of KPC.

“A clear statement should be included in the prospectus on how this subsidiary arrangement has been financially evaluated and factored,” read a report by Parliament’s Committee on Energy.