Kenya needs to float an Energy Bond

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The exit of Essar Energy from East Africa’s only and oldest refinery has opened the debate on what to do with the facility. To close the facility or bring in yet another ‘strategic investor’ to upgrade and operate seems to be the dilemma the Energy and Treasury officials are facing.
Closing the refinery would be very reckless, especially with the soon-to-be-available crude from the region and the country. The refinery will be the single most important oil infrastructure to enable the country harness the full benefits of oil windfall for the common mwananchi. Everything else from pipelines to port will primarily benefit oil companies ship out the crude to refineries abroad.
The only viable option for the refinery, like I have opined before, is a total overhaul geared towards development of a modern, large capacity (at least 200,000bpd) refinery capable of supporting a large petro-chemical industry. There should also be a LPG unit and significant reserve tanks that can hold a minimum of 6months country reserves.
So the question now is: where will the money come from?
First of all, dealing with the Kenyan energy needs demand that we focus beyond fossil fuels, though it is understandable that currently hydrocarbons are all the fashion in East Africa. Discovery of oil and gas in East Africa will not solve our energy problems. We have an obligation to develop a complete mix of energy sources to meet an ever rising energy demand now and in the future. A lot of money and a long term vision are required.
I hold the view that no ‘strategic investor’ will be able to raise the money needed in light of the bigger country energy demand picture. The much such an investor will do is continue with the inefficiency at the KPRL as he looks for funds to upgrade; all this while some connected Energy and Treasury officials skim hefty kickbacks from the deal. A strategic investor will fall far short f our energy expectations as a country.
The only sustainable way for the country to solve the energy problem is to float a long term Energy Bond.
In my estimation, such a bond should seek to raise about $5bln. The money will be channeled into the following key aspects:
1. Developing a significant oil infrastructure that is capable of handling and servicing crude from the entire region. Key among these must be a modern refinery with significant oil reserve facilities. Part of this money should also be invested in a petro-chemical industry to supply local pharmaceutical companies, fertilizer manufacture and others. All obsolete units must be removed and new technology put in place. At the least, the new refinery should be able to refine 200,000bpd. While this figure sounds huge when compared to current 32,000bpd capacity or Uganda’s soon-to-be constructed 60,000bpd, a capacity of 200,000 is essentially what Kenya’s local demand will be by 2025. This figure is drawn from the fact that current demand is about 80,000bpd and is rising at an annual rate of 7%. To power economic growth envisioned in Kenya Vision 2030 demands nothing less of our refinery. Finally, there should be maximum utilization of KPRL’s 300 acre land, including allowing space for strategic PPP and private enterprises to set up shop. The economics of building a refinery are clear; it is a profitable investment. Just to give an example, a feasibility report by Forster Wheeler Consultants on behalf of Uganda govt showed that a 60,000bpd refinery in that country would have a an Investment Rate of Return of 33 per cent.
2. Development of geothermal power. Kenya’s Vision 2030 strategy places priority on low-carbon development including renewable energy source development – with geothermal playing a critical role. It is estimated that geothermal power potential in Kenya could contribute over 5,000MW. The Menengai zone alone has the potential of 1,600MW which is the current total national grid capacity. The main challenge with exploiting this resource is the high risks involved in exploration, which means most financiers shy away from exploration stage and only come in at development stage. The money raised from the Energy Bond should allow the govt to undertake this risk, finance more exploration drilling and thereby open up the sector for other sources of funding to develop and distribute the power.
3. Development of other renewable sources of energy. These include wind power. Already, the country is in the process of developing the largest wind energy plant in Africa, the 300MW Lake Turkana Wind Power Ltd. There are numerous places in the country where wind can be harnessed. In addition, the govt needs to encourage County-based mini-power production plants especially hydro-electricity in riverine regions. Attention also needs to be focused on bio-fuels. All these will provide energy to the counties while stimulating much needed economic growth in the peripheries. Incentives should also be given to solar energy development in the country. This shift should wean the country from the current increasing trend of relying on environmentally unfriendly fossil fuels for up to 38% of total energy output, according to 2011 statistics. Despite the oil boom, GoK and Kenyans in general must remember that fossil fuels not only pollute the environment but are ultimately finite. It is time to invest heavily in renewables.
Raising money through an Energy bond will avail the billions locked up in the economy and from private investors and this money will bring a sustainable turnaround in the energy sector as opposed to short term prescriptions.
Finally, the ownership of these country energy investments must ultimately be handed over to Kenyans through listing at the securities market. Government should not continue holding such significant investments forever. They must go to the people.

DISADVANTAGES OF OIL SUBSIDIES AND THE ALTERNATIVE FOR KENYA

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I have previously been asked to explain my opposition to government subsidies on fuel. This time I lay out an alternative that would be both sustainable and see more open competition that will translate into lower fuel prices for the consumer.

But first, what are subsidies?

Subsidy means benefit given by the government to individuals or businesses whether in form of cash, tax reduction or by reducing the cost of goods and services. The purpose of subsidy is to help individuals and businesses purchase/acquire essential goods and services that they may not be able to afford, under normal circumstances.

In our Kenyan case, since the oil market is liberalized, the only option if for govt to deny itself valuable taxes from this lucrative sector in the hope that oil marketers will transfer those benefits to consumers.

Subsidies mean lower prices, which mean increased consumption. Why, because economists tell us that every time consumers realize that prices have dropped, they increase their consumption rates and these are not necessarily in activities leading to economic growth. High fuel consumption translates into more pollution. More importantly, the incentive to invest and develop alternative and hopefully renewable energy sources will certainly decrease and then our economy becomes addicted to oil. Oil could become so cheap that we’re no longer interested in expanding our other energy sources like geothermal, HEP, wind etc. Ultimately, we’ll have made oil into a centre piece of our economy; anything happens to it and market instability sets in.

History shows that eventually the cost of subsidies become too great for the government to sustain which leads to their lifting; or they get compensated for by higher taxation elsewhere. The lifting of subsidies is currently causing unrest in Nigeria, Sudan, Egypt and it is feared other African economies are headed in this unfortunate direction.

Finally, there is an argument that when government subsidizes firms, it reduces incentives of firms to cut costs and be more efficient.

SUBSIDISE agriculture and other sectors that will bring real social benefits to citizens.

ALTERNATIVE TO SUBSIDIZING OIL

The goal here is to demonstrate how we can bring down fuel prices in light of the oil boom (from both local and regional sources) without tinkering with markets through govt subsidies.

What is the one thing that oil boom will avail? Crude oil, plenty of it. And cheaper too. Cheaper in light of the fact that the country will largely eliminate high transport and attendant costs (insurance, demurrage etc) that contribute to high fuel prices.

Also, having multiple sources means that the country can negotiate for discounted rates especially from our neighbor Uganda and perhaps South Sudan. We still do not have a figure of Kenya’s total estimated oil reserves, exploration is ongoing.

However, having plenty of cheap crude does not help UNLESS we have one important thing in this country: a fully functional, modern refinery with the capacity to meet local demand of our fuel needs. The refinery must also have the capacity to refine light distillates in large volumes since these are the most used fuels in our economy. In addition, an LPG unit must be built to take advantage of the available gas from oil fields throughout the region. The refinery must increase its storage capacity to hold oil reserves that can last at least six months to hedge our economy against fluctuating global crude prices.

Let me put it this way; without a refinery, the benefits of having all this oil will almost be zero. We’ll be exporting our crude and importing refined through the currently existing OTS arrangements.

The benefits conferred on the country by a modern refinery are immense.

1) We’ll reduce the consumer price significantly without distorting the market or asking the government to deny itself precious taxes.

2) A refinery will create an important petro-chemical industry that besides fuel will also avail raw material for fertilizers manufacture and pharmaceuticals etc. We can all agree that our farmers could really use cheap fertilizer to increase their output and deal with food insecurity.

3) Employment opportunities for workers in the refinery and related industries. Currently, KPRL alone has over 500 workers and it is operating way below its 30,000bpd capacity. Imagine if we raise that to 200,000bpd which will be Kenya’s domestic demand by 2025. (Current demand is 80,000bpd, growing at 7% PA)

The Kenya government needs to invest money in the refinery. My advice would be for govt to raise money from the public and NOT from some private investor. Let Kenyans own a piece of the oil infrastructure. There are billions of shillings in people’s pockets. One way these can be unlocked is through and IPO.

I am not an economist but I’m sure raising funds for construction of such a valuable facility should not be difficult; especially seeing that even in its dilapidated and inefficient state KPRL was able to get a loan facility from Standard Chartered to the tune of KSh. 30bln!

Having the refinery also act as a merchant is a brilliant idea. This means that it can directly sell refined products to marketers. I dare say that with a modern and efficient refinery, the government doesn’t have to continue enforcing the rule that requires OMCs to buy 40% of their fuel products from the refinery.

Kenya Govt Should Resist Introduction of Fuel Subsidies

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As we in the East Africa consider how we shall ‘enjoy’ our oil windfall, I would take it upon myself to caution our government and the others in the region not to take the route of subsidizing fuel pump prices to please the masses. Here is why:
A subsidy is a cost on the government. It doesn’t make sense for the govt to deny itself such a huge chunk of revenue in a relatively stable economy like Kenya’s or Uganda’s. Zambia alone was spending $200million PA on fuel subsidies alone. Nigeria spent $8bln on fuel subsidies per year.
Subsidies are not sustainable in low GDP economies. Look at Sudan & Nigeria current unrests after govts there lifted unsustainable subsidies on fuel. Zambia has also lifted subsidies on fuel and maize. The fact is, our economies cannot sustain subsidies and our govts should resist this temptation esp after noting that we have survived this long without them.

Subsidies breed corruption esp in economies like ours where institutions of economic transparency are weak and prone to interference. I’m sure Ephraim can attest to the rot in the capital markets. Nigeria subsidies were misused by corrupt govt officials who would divert local refined fuel for export, taking advantage of loopholes to enrich themselves.
I expect the prices to come down due to market forces: high supply of crude & refined will bring down prices. Of course oil cartels will manipulate this, which is why we will need our govts to step up and properly play their regulatory role. Surely prices of around 100bob per liter of either petrol or diesel and about 50/lt of kerosene would not be too bad.
Govt should use a good fraction of the revenue to invest in renewable. After all, fossil fuels are finite. In 20-30 yrs we’ll have depleted current reserves and we’ll be looking for new energy sources for a population that will have more than doubled the current figure!