StanChart may suspend financing pact with Kenya refinery

The company has been defaulting on its payments; it warned last week that it may soon default on its loans

UK-based Standard Chartered Bank, which signed a $350-million financing arrangement with Essar Energy’s Kenya Petroleum Refineries Ltd (KPRL) in June 2012, has threatened it would suspend the pact owing to rising defaults by KPRL.

Under the financing arrangement, Standard Chartered was to finance crude oil purchases for the refinery.

Last month, owing to severe financial constraints, KPRL had cautioned it might be unable to refine petroleum products soon. A May 29 meeting between the two shareholders — the Kenyan government and Essar Energy — to decide the fate of the 50-year-old refinery has been postponed indefinitely. An email sent to Essar Energy yesterday remained unanswered. In an emailed reply, a Standard Chartered spokesperson said, “We cannot comment on market speculation.”

With about nine oil marketers reportedly failing to lift 3,578 tonnes of products worth $2.6 million from the refinery, KPRL’s cash flows have been impacted. “We may declare all amounts outstanding payable on demand, make no further advances or issue letters of credit, require full cash cover to be provided in respect to each letter of credit currently outstanding or require that all outstanding loans are repaid in whole or in part,” Richard Etemesi, chief executive officer of Standard Chartered Bank, Kenya, wrote to KPRL last month, according to The East African weekly.

The Mombasa refinery is the only one in eastern Africa and the first international one acquired by an Indian company. It has been planned the refinery would be upgraded by adding secondary units at a projected cost of $400-450 million.

As part of its global expansion plans, Essar Energy had, in 2009, acquired 50 per cent stake in KPRL from Royal Dutch Shell, BP and Chevron. The government of Kenya owns the remaining stake.In June 2012, KPRL had signed a financing agreement with Standard Chartered Bank to help the refinery roll out its business transformation plan. The agreement would enable KPRL to access $350 million and transform the toll refinery to a merchant refinery to improve efficiency and cut product costs. After the transition, it would process Murban crude from the UAE.

It would also be able to handle crude oil from cheaper sources. Currently, KPRL secures crude oil from oil marketing companies; a merchant refinery would enable it to purchase its own crude oil.

“This facility would be utilised for our working capital requirements. We will now be able to procure oil, process it and sell the petroleum products to marketing companies,” Brij Mohan Bansal, chief executive, KPRL, had said.

The refinery processes crude oil imported from the Persian Gulf region for marketing companies. KPRL’s primary products include LPG, unleaded premium gasoline, regular petrol, automotive gas oil, industrial diesel, fuel oil and special products such as bitumen and grease. KPRL products are sold in the Kenyan market and exported to neighbouring countries, including Tanzania, Uganda, Burundi and Rwanda.

Incidentally, Standard Chartered is also KPRL’s financial advisor and is conducting a study before KPRL makes a final investment decision to expand capacity.

KPRL, Kenya’s only refinery, also plans to raise $1.2 billion to expand its facilities and increase crude handling capacity to 4 million tonnes a year by 2018 from the current 1.6 million tonnes a year. The 35,000-barrels-a-day refinery plans to raise a portion of the funds through debt, with the remaining to be provided by shareholders as equity.