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.