(Dow Jones)–The Kenyan government has shelved plans to upgrade its sole refinery at the port city of Mombasa and is now in talks with Uganda over the prospect of importing refined fuel products once production starts in Uganda’s lake Albertine rift basin, a government official told Dow Jones Newswires Tuesday.Kenya, which holds a 50% stake in the 80,000 barrels-a-day refinery, is currently evaluating the viability of importing fuel from Uganda, once the latter starts oil refining in the next 2-3 years, said Martin Heya, Kenya’s commissioner in charge of petroleum.”Uganda is a good trading partner and we expect to reach a good deal,” he said by telephone from Nairobi, the Kenyan capital.
The plans to shelve upgrades at the refinery were mainly influenced by the higher costs and the discovery of commercial oil reserves in the Lake Albertine rift basin, which compelled the main shareholder, India-based Essar Energy PLC (ESSR.LN) to look for opportunities in Uganda, according to Kenyan government officials.However, Andrew Turpin, the Essar spokesman said separately that more studies are being undertaken to evaluate various options for upgrading the refinery.”Further studies are being commissioned on some of the technical, economic and funding elements of the potential project,” he said, adding that no investment decision can be taken until those studies are complete.According to Turpin, the refinery’s board is convinced that a viable option can be agreed. Essar hold a 50% stake in the refinery.According to Heya, a government team will hold talks with management of the refinery on Wednesday to decide on the way forward.The ageing refinery is currently producing at half if its installed capacity and requires upgrades.
The upgrade cost was earlier estimated at $450 million, but has since increased to $1 billion due to the requirement to upgrade the refinery to enable it process Ugandan waxy crude oil.Bimal K. Mukherju, chief executive of the plant’s refinery owner Kenya Petroleum Refineries Ltd., told Dow Jones Newswires in February that the Essar executives were in Uganda to look at more investment opportunities following the discovery of commercial oil in Uganda’s Lake Albertine rift.Ugandan government officials said that because the government ruled out exports of crude oil, it would have been possible for Essar to refine the Ugandan products, compelling it to look for investment opportunities at Uganda’s planned refinery.
Uganda and Kenya are already in talks to upgrade and extend the Mombasa-Eldoret oil pipeline to the Ugandan capital and later to the oil region.The pipeline, which currently transports oil for export to landlocked Uganda and neighboring countries, will be equipped with a reverse flow to enable it transport refined fuel products in future for export to Mombasa