Final Report

To Ministry of Economy, Trade and Industry

Feasibility Study Project of Overseas Development for High-Quality Energy Infrastructure in FY2018

(Republic of Kenya: Study on LPG Import Terminal

Project in the Port of Mombasa)

Final report

March, 2019

Toyota Tsusho Corporation

Project map (Candidate site)

Target location

List of acronyms

Acronym Proper name AGOL Africa Gas and Oil Limited API American Petroleum Institute CAPEX Capital Expenditure CO2 Carbon Dioxide CP Contract Price D1 Name of the Free Zone developed inside the SEZ DK-1 Name of the berth developed inside the SEZ EAC East African Community EIA Environmental Impact Assessment EMCA Environmental Management and Coordination Act EPC Engineering, Procurement, and Construction ERC Energy Regulation Commission ESIA Environmental Social Impact Assessment FEED Front End Engineering Design FS Feasibility Study GDP Gross Domestic Product GJ Giga Joule GNI Gross National Income ha hectare HP Homepage IEA International Energy Agency IFC International Finance Corporation IRR Internal Rate of Return JBIC Japan Bank for International Cooperation JETRO Japan External Trade Organization JICA Japan International Cooperation Agency JV Joint Venture KOT Kipevu Oil Terminal KPA Kenya Ports Authority KPC Kenya Pipeline Company Limited KSh Kenyan Shilling KWh Kilowatt hour

LAPSSET Lamu Port and South Sudan Ethiopia Transport LPG Liquefied Petroleum Gas MoEP Ministry of Energy and Petroleum MoI Ministry of Industrialization MoPM Ministry of Petroleum & Mining MoT Ministry of Transportation MT Metric Ton MW Mega Watt NEC National Environmental Council NEMA National Environmental Management Authority NOCK National Oil Corporation of Kenya ODA Official Development Assistance OPEX Operating Expense PIEA Petroleum Institute of East Africa PPP Public–Private Partnership SEZ Special Economic Zone SEZA SEZ Authority SGR Standard Gauge Railway SoT Simanzi Oil Terminal TICAD Tokyo International Conference on African Development TOR Terms of Reference USD United States Dollar VAT Value Added Tax

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Contents

1. Introduction (Background, Purpose, Search plan/period, etc.) ...... 1 2. Overview of the Republic of Kenya ...... 3 (1) Economy/financial situation in Kenya ...... 3 (2) Energy situation in Kenya ...... 5 (3) Energy use status in Kenya ...... 6 3. Partner country government, local municipality, and competitor trends ...... 7 (1) Partner country policy trends ...... 7 (3) Determining actual status including current infrastructure ...... 9 (4) Future plan of infrastructure ...... 10 (5) Determining needs/problems of people concerned ...... 12 (6) Market size estimate / demand prediction ...... 13 4. Project Summary (Basic Design & Business Model Development) ...... 17 (1) Project site selection ...... 17 (2) Project outline ...... 20 (3) Outline design...... 21 (4) Procurement (check into superiority of Japanese businesses, possibility of third-country cooperation & measures on increasing cost competitiveness) ...... 21 (5) Calculation of project scale, etc. (including operation and service/maintenance expenses) ...... 22 (6) Project implementation organization and schedule ...... 22 (7) Project financing ...... 25 (8) Environmental impact assessment (including research into environmental improvement effect, impact on environment and society, etc.) ...... 25 (9) Environmental impact assessment (estimated reduction in CO2 emission based on energy source) ...... 36 (10) Risk analysis...... 37 (11) Economic assessment ...... 38 (12) Expected benefits for Kenya and benefits (economic effects) to Japan to be gained from the project ...... 39 5. Action Plan and Issues to Implement Project ...... 41 (1) Progress of the efforts made by the authorities concerned and implementing organizations ...... 41 (2) Expected utilization of political support (Consideration of possibility of utilizing various tools: inviting or sending experts) ...... 42

(3) Repose to items requested or pointed out by Kenyan government officials and survey required to improve project proposals ...... 42 (4) Possibility of expansion into other countries and measures to promote expansion ... 42 (5) Possibility of Japan-India cooperation ...... 42

Summary

This report is a summary of the results of the feasibility study on developing LPG import terminal business at the Port of Mombasa, a main port in the Republic of Kenya.

(i) Necessity of the LPG import terminal In the Republic of Kenya (hereinafter Kenya), the government is promoting a proactive policy to convert, into LPG, the cooking use of firewood and charcoal with a high environmental load, and kerosene which causes health damage. Specifically, the policy includes tax-exemption on LPG, LPG purchase subsidy to the low-income bracket and also the tightened regulation to wipe out concerns about safety which might hinder its spread. As a result, the amount of LPG consumption in Kenya is increasing rapidly at an annual rate 14% and the present consumption of approx. 200 thousand tons is expected to exceed 1 million tons in 2030. Meanwhile, Kenya depends 100% on imports for LPG and two import terminals exist at the Port of Mombasa. One is Simanzi Oil Terminal (SoT) owned by Kenya Ports Authority (KPA) and the other is a terminal exclusively used by a private enterprise AGOL. More than one private LPG importer is using SoT, but the management is markedly inefficient due to the lack of capacity in LPG storage facilities of importers and the irrationality of the pipeline, resulting in the situation of inevitable rise of the LPG distribution cost. The AGOL terminal is overwhelmingly efficient, in comparison with SoT, but LPG price reduction effect is limited with its monopoly system. Foreseeing the rapidly increasing LPG demand, AGOL is expanding its storage facilities (pressurized tank) but how low a price goes is unknown. Also, KPA has a plan for adding the LPG import vessel acceptance facilities (KoT project), but the feasibility depends on how the LPG importer runs a pipeline, and its realization cannot be optimistically considered in view of the difficulty of the land use. What cannot be overlooked is the fact that the LPG price in Kenya is more expensive by at least 30 percent than those in Asian countries where the LPG use is markedly increasing likewise. Considering the GDP/Capita of the country, the price is highly likely to be a barrier against its spread, and some measures must be taken. The above two locations of the sole LPG import facilities in Kenya cannot be regarded as enough to cater for the increasing domestic LPG demand, and it is judged that the addition of the LPG import terminal is indispensable to suppress import/distribution expenses for the stable supply of the low-priced LPG.

(ii) Candidate site for LPG import terminal LPG As a candidate site of the LPG import terminal which can maximize management efficiency, the utilization of SEZ (Special Economic Zone) is examined where the development is proceeded in the Dongo Kundu district on the shore opposite to the Port of Mombasa. This SEZ is a development project in consideration of the highway to Nairobi and the access to the railroad, therefore this location will contribute to minimize not only the import cost but also the domestic distribution cost.

(iii) Business profitability This LPG import terminal business has the policy to expand storage facilities in response to the expansion of the LPG demand in Kenya. A pressurized tank widespread in Kenya will be used (Phase 1) while the LPG market size is less than 1 million tons, and beyond 1 million tons and further on, a refrigerated storage tank which is common in countries with large LPG consumption such as Japan will be introduced (Phase 2). In both cases, the storage tank/allocated vessel size is set aiming at minimizing costs and maximizing the management efficiency.

Table: LPG Terminal Scale LPG Storage Size Phase 1 - Pressurized 4,500 MT Phase 2 - Refrigerated 66,000 MT

The business investment at Phase 1 and Phase 2 each was estimated. The premise is that all taxes such as the import duties and the VAT regarding the materials and equipment for LPG terminal construction will be exempted.

LPG Sales price is roughly calculated and compared with the domestic wholesale price in Kenya (at Mombasa) as of October, 2018 obtained by this study. When Jetty work is beard by KPA and an enterprising body shoulders only the terminal construction, the prices at Phase 1 and Phase 2 fall below the current price. Specifically in Phase 2, the prices are at the same standard with Asian countries.

Though the business investment and the management cost expenses requires thorough investigation in the future, judging from above-mentioned result, it is possible to say that there is sufficient business profitability.

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1. Introduction (Background, Purpose, Search plan/period, etc.)

(Background and purpose) In Kenyan household, firewood, charcoal and kerosene are widely used as the home heat source mainly for cooking. The Kenyan government recommends LPG use as the restraint on deforestation and the countermeasure against pollution (smoke pollution) and is taking various policies for its popularization such as the exemption of the value-added tax and the cylinder purchase subsidy. With this subsidizing policy in the background, the consumption of LPG in Kenya reached 192,502 tons (2017). This is an increase by 59% in comparison to that of 2003 and is expected to increase in an average of 14% in the future (Survey by the Petroleum Institute of East Africa). The Port of Mombasa where the terminal construction is planned is serving as a main port for Kenya as well as functioning as a gateway (Northern Corridor of East Africa) in East African Community (EAC) and the Japanese government also pledged the planning of extensive regional developments, including the Northern Corridor Master Plan in the Fifth Tokyo International Conference on African Development (TICAD V). In April, 2017, “Master Plan on Logistics in Northern Economic Corridor" was complete with JICA’s assistance and JICA also committed a cooperation of more than 170 billion yen to the development of infrastructure.

Investigation was carried out about the feasibility of the new LPG import terminal development management business that can lead to the pollution control measure and the deforestation restraint in rapidly urbanizing Kenya as well as contribute to stable supply of energy as the basis of the development of this country.

(Search plan/period, etc.) A report summarizing the following contents are prepared. (1) Status of Kenya and its energy sector  Economy/financial situation in Kenya  Status of electric power sector (Present situation and problems of market/policy, future plan, competing companies, etc.)  Analysis on present situation of target area, etc. (2) Examination of project outline, technical aspect  Project outline, background, necessity  Optimal facility specification and composition (Including a comparative-advantage analysis with competing companies).

 Problems and proposals in management and maintenance (Including a comparative-advantage analysis with competing companies).  Possibility of participation of Japanese companies in management and maintenance  Possibility of cooperation of the third country

 Analysis on environmental load effects such as CO2 reduction effect accompanying project implementation, etc. (3) Examination of environmental and social aspect

 Environmental improvement effects such as CO2 reduction effect accompanying project implementation (4) Implementation schedule of the project (5) Ability to execute in Kenyan implementing organization  Analysis on electric power market system in Kenya  Analysis on ability of the implementing organization (construction, management, maintenance, etc.), etc. (6) Analysis on finance/economic efficiency and prospect of project fund raising  Integration of project cost (CAPEX, OPEX) (7) Action plan and problems for realization of the agenda item  Working status of Japanese companies, Kenyan authorities concerned and implementing organization  Legal and fiscal restriction inside Kenya  Future action, horizontal spreading to other countries, etc.

Table 1: Research Plan FY2018 Item 7 8 9 10 11 12 1 2 3 Documents search, hearing survey Business model examination Partner search Finance examination Site candidates narrowing-down Outline design Environment preliminary study Business trip to site ★ ★ ★ ★

Spot report meeting ★

Domestic report meeting ★

2. Overview of the Republic of Kenya Kenya, located in East Africa, faces the Indian Ocean on the southeastern side, and the rest is bordered by Somalia, Ethiopia, South Sudan, Uganda, and Tanzania

Figure 1: Map of Kenya (Source : Website of Embassy of Kenya in Tokyo)

(1) Economy/financial situation in Kenya Kenya became independent of the United Kingdom in 1963, switched over to the republic in 1964, and achieved democratization in 1991. It has the Port of Mombasa, the largest in East Africa, and plays the core role of the regional economy as the entrance of the East African countries. Further attention will be paid to the development of the various big projects such as the construction business of standard gauge railway that connects Nairobi from the port city Mombasa, and power business including the geothermal power plant construction. (Basic data of the Republic of Kenya, Ministry of Foreign Affairs) Though Kenya plays the core role in East Africa, but the resources are scarce and

industrialization is not sufficiently realized, therefore remaining an agricultural country like other African countries (Agriculture accounts for 36% of GDP (World Bank, 2016)).

Table 2: General condition of Kenya (Excerpt from Basic data of the Republic of Kenya, Ministry of Foreign Affairs) Area 583,000 km2 (Approx. 1.5 times the area of Japan) Population 49.7 million people (United Nations, 2017) Capital Nairobi Major Ethnic Kikuyu, Luhya, Kalenjin, Luo Group Official Language Swahili, English Religion Traditional beliefs, Christianity and Islam GDP USD 70.5 billion (World Bank, 2016) GDP growth rate 5.80% GNI per person USD 1,380 (World Bank, 2016) Unemployment 11% (World Bank, 2017) rate Total trade Export USD 5.61 billion : Tea, Garden crops, Coffee, Fish value/Main trade Import USD 13.9 billion : Industrial products, Capital equipment, items (2016) Transport equipment, foods Main trading Export : Uganda, the Netherlands, the U.S., the United Kingdom, partners Pakistan (2016) Import : China, India, the United Arab Emirates, Japan, Saudi Arabia

In the general election in August, 2017, although the former President Kenyatta was thought to have been elected with 54.27% of the vote, an election re-run was held in October because his rival candidate Mr. Odinga from the opposition party contested the electoral commission. However, Mr. Odinga boycotted the repeat vote because he said no reforms had been made to the electoral commission. As a result, President Kenyatta was re-elected once again. After that, a surprise “handshake” between President Kenyatta and Mr. Odinga in March 2018 started the Kenyatta-Odinga cooperation structure. However, it is strongly felt that the purpose of this was to drive Deputy President Ruto away, who is said to be the candidate for the next presidential election. As the preparation of the next presidential election (2022) goes into full swing, the political situation may become unstable.

In the confusion by the presidential election, the GDP growth rate in FY2017 fell below 5%, but still remains at a comparatively high value of 4.81%. GDP is estimated to be USD 79.5 billion (JETRO, Kenya basic economic indicator). As of 2018, the economy has returned to a stable state, and even with the anxiety of the split between tribes started from the presidential election, continuous high economic growth is expected. As Kenya maintains a high economic growth rate, it is also a country with a trade deficit and a deficit in the fiscal balance. Specifically, the recent large-scale public investment by the government such as the standard gauge railway (SGR) causes the expansion of the gross debt. According to the release of the Central Bank of Kenya, the gross debt of the government in 2017 reached the record 4.56 trillion KSh. In the first half of the year 2018, the figure worsened to approx. 5 trillion KSh and the public debt seems to approach 60% of GDP. The Kenyan government has scheduled the introduction of a value-added tax (VAT) to oil products for September 1. This VAT has been postponed since 2016, but the opposition from the financial circles continues. If the VAT taxation is postponed further, the tax revenue is expected to decrease and more severe fiscal conditions are expected. (JETRO, Business brief note dated 26th September 2018).

Table 3: Kenya basic economic indicator (Excerpts from JETRO website) Export value (Customs clearance basis in 2017) USD Import value (Customs clearance basis in 2017) USD 16,652 million Current account (International balance of △USD 4,755 million payments basis in 2017) Trade balance (International balance of △USD 10,205 million payments basis in 2017, Property) Financial balance (International balance of △USD 4,606 million payments basis in 2017) Foreign reserves (2017) USD 7,353 million

(2) Energy situation in Kenya Three kinds of energy are used in Kenya. These are biomass (those with biological origin such as firewood, charcoal, and cow dung), oil, and electric power. The composition ratios are 69%, 22%, and 9% respectively, indicating that biomass is overwhelmingly the most common (Institute of Economic Affairs, Situational Analysis of

Energy Industry, Policy and Strategy for Kenya, 2015). Surprisingly, 83% of the population still depends on the biomass mainly in non-electrified rural areas. As it is a cause of environmental destruction and health hazards, the government is aiming for the immediate development of energy sources. Kenya imports all of its petroleum. Although an oil field was discovered in the northwestern part of Kenya in 2012, it has not moved to a development phase. The LAPSSET (Lamu Port and South Sudan Ethiopia Transport) project for importing oil from South Sudan with the pipeline, MoU was concluded with Ethiopia in 2016, but no major developing is seen. The oil import terminal only exists at the Port of Mombasa at present and extreme lack of capacity has been reported (Global Legal Insights, Energy 2018 Kenya). The composition of electric power is hydroelectric power at 37.2%, geothermal power at 27.0%, thermal power at 29.7%, and others at 6.1%, and the total power generation is 2,234 MW as of 2017 (Business Finland 2017, Energy Sector Insights Kenya). The electric power master plan of the Kenyan government, Updated Least Cost Power Development Plan 2017-2037, is planning to increase the total power generation to 7,213 MW in year 2030, and up to 9,932 MW in year 2037. The electricity charges are approx. USD 0.2/kWh, which is equivalent to those in Japan. The demand for electricity is rapidly increasing by the economic growth in Kenya, whereas the rate of electrification remains 65% (2014 IEA). Even in electrified areas, diesel electric power generation is introduced as back-up power at factories, hospitals, hotels and commercial establishments due to frequent power failures caused by the aging of the power generation equipment and the power grids, power theft and the decline of the amount of power generated at the hydroelectric power station resulting from factors such as climate change. Diesel electric power generation is often used as the main power source in the villages or towns away from the grids.

(3) Energy use status in Kenya Because electricity charges are expensive, people who use electricity for cooking and water heating at the bathroom are above the intermediate bracket. As there are strong needs for illumination and cell phone charging regardless of hierarchy, these are the principle reasons for the use of electricity. In recent years, in non-electrified areas, solar lanterns and small-sized solar power generators have started to satisfy principal electric power needs. While LPG is also becoming a popular choice for cooking in big cities, charcoal still

plays a major role in rural areas.

Table 4: Cooking fuels in Kenyan households (Kenya Bureau of Statistics 2014, Exploring Kenya’s Inequality: Pulling Apart or Pooling Together?)

Charcoal manufacture causes deforestation as well as the destruction of land from which the forest has been lost, lower groundwater and landslides. The Kenyan government has been unsure of what countermeasures to take, and has started banning the use of charcoal in recent years. However, the charcoal industry is one of the main exports of Kenya and is said to be at a level of USD 427 million, which equals the tea industry, accounting for the 2nd largest production volume in the world. Therefore, it is unlikely that a favorable outcome can be obtained as it is a source of income for many people, such as farmers and the poor. (The Conversation: Banning charcoal isn't way to go. Kenya should make it sustainable, dated 16th May 2018).

3. Partner country government, local municipality, and competitor trends (1) Partner country policy trends Laws related to LPG in Kenya are integrated in the Energy Act (No. 12 of 2006) and appropriately corrected and added by Legal Notice. The LPG related issues are stipulated in the Legal Notice No.121, which was officially announced in July, 2009. Energy Regulatory Commission (ERC) is responsible for the development of rules and license management.

Tthe Ministry of Energy and Petroleum (MoEP) indicated that the obstacles to the LPG popularization are kerosene being 57% lower-priced than LPG (of which 20% is due to the taxation to LPG), and cylinders being expensive (47% derived from the tax in the pricing of a cylinder). As of September, 2018, the Kenyan government has already taken the following response.

(i) Abolition of LPG taxation

(ii) Start of cylinder purchase subsidy

In addition, the Workshop also referred to the review of the mutual filling system (Exchange Pool※) which serves as a hotbed for fraud, and actually, Kenya has begun to abolish the Exchange Pool. (※: A system that allows a seller to sell a cylinder filled by the seller’s company according to a request from a user, even if the used empty cylinder is not of the brand of the seller’s company, and to return the empty cylinder via Exchange Pool. This system promotes the circulation of cylinders, whereas poor-quality cylinders and LPG with the insufficient amount of contents and quality go on the market, and there are many businesses supplying inferior and cheap LPG.) In April, 2018, an amendment proposal for Legal Notice No.121 was presented which contains the system reinforcement regarding LPG license assignment by ERC. Safety control is recognized as being important for LPG popularization, and Exchange Pool abolition is also stipulated while including penalty reinforcement.

(LPG promotion policy/plan of Kenyan government) The Kenyan government is implementing two popularization subsidizing policies as previously mentioned to promote LPG use. (i) Exemption of value-added tax: LPG is tax-free, in comparison to 16% taxation of other oil products (ii) Cylinder purchase subsidy: Through the state-run National Oil of Kenya (NOCK), a set of LPG, a cylinder for 6kg, a pan-support and a burner is sold to the low-income people. This can be bought lower than half the usual price (2,000 KSh) by the subsidy application. After use, the user exchanges an emptied cylinder with a filled cylinder in the store and pays only the gas bill. In the original plan, 1 million cylinders were to spread, but affected by the budgetary cutback, the number is said to be substantially decreased. The first supply was 300,000 pieces, which were distributed to the Kajiado and Machakos districts. (The Standard, dated 7th September 2018) (iii) Filling station installation (Under planning): According to the hearing, it is said that a filling station loaded on a small vehicle is being discussed. Specifically, at rural areas, unstable supply and necessity for users to bring in a cylinder to a filling station by themselves are supposedly hindering the LPG popularization.

(Policies/regulations regarding LPG import and sales (National and local governments)) LPG-related licenses are currently being revised, but it is expected to be as follows.

Table 5: Standards requiring observance to implement LPG business LPG KS 03:91:1985 Butane-propane mixed gas Or those approved by KBS. cylinder KS ISO 4706-1989, KS 06-896, KS 2122:2008, KS ISO 11118:1999 Integrated-type valve KS 201:2010 LPG facilities for house/ KS 1938:2015 commercial establishment (Plumbing, etc.)

Table 6: Necessary authorization LPG bulk import License needed  Duty to report, by the 10th of every month, import volume/import country/domestic sales volume/re-export volume/sales destination LPG bulk storage License needed  Prior approval of storage facilities (need to satisfy safety standards by DOSHS).  Necessary to acquire permission from County constructing storage facilities. LPG bulk storage facility owner  Construction permission acquisition needed  EIA acquisition needed

(3) Determining actual status including current infrastructure As to LPG market in Kenya, the import is substantially monopolized by the local company AGOL (calculated as approx. 70% by our company's hearing survey). AGOL has started terminal management in the Port of Mombasa from 2013, and currently is under construction for expansion. There exists Shimanzi Oil Terminal (SoT) directly connected to the pipeline owned by Kenya Ports Authority (KPA) at the Port of Mombasa, in addition. From there, LPG is carried through a buried pipeline to LPG dealers VIVO Energy and Oilibya, having tanks in the neighborhood of SoT, and the LPG tank owned by KPC in Changamwe district located north from SoT. The LPG is transported via the pipeline from KPC to Hashi and Total which are LPG dealers situated in the neighborhood. At the time of our on-site survey, an LPG ship of 8,100-ton class was at the shore. Significantly inefficient

management has resulted from long-term demurrage due to the ship having to moor or to stand by in Mombasa bay for a long time while waiting for room to be made in the land tank, which has limited capacity. It is only at the Port of Mombasa where the marine import of the LPG is carried out in Kenya and only AGOL and SoT possess the facilities. While LPG land import by the land transportation (tank truck) is also carried out via Tanzania, the details are unclear.

According to the trade association PIEA which plots the healthy promotion of the oil gas products in East Africa with Kenya at the center, LPG sales volume of Kenya in 2017 is 192,502 tons (PIEA 2018, Petroleum Insight 1st Quarter) and is said that 240,000 tons are expected when including an illegal deal, too. A quantity equivalent to approx. 25% of the statistics is imported without going through the regular procedure, and most of it is likely to be transported overland. To begin with, this seems to happen because the price competitiveness is low due to the overwhelmingly insufficient capacities of the facilities at the Port of Mombasa, the marine import location, and high LPG import costing via SoT.

(4) Future plan of infrastructure AGOL has a plan to magnify the land LPG tank as mentioned above. Expansion is regarded as sure because the lands, etc. have already acquired and construction is also actually being carried out. Meanwhile, as to SoT owned by KPA, the capacity of storage facilities on the land is not enough in Jetty, LPG ship cannot unload with one landing. In addition, the expensive demurrage occurs due to the limitation on the pipeline diameter and inefficient management, becoming one factor of the rise of the domestic LPG price.

In order to break through the present situation, MoEP has KPA and KPC work together and aims at construction of new LPG import facilities and expansion of the existing storage facilities in accordance with the replacement of Kipevu Oil Terminal (KoT) dedicated to oil products. The plan is to add a LPG pipeline on the marine Jetty for the oil products planned to be constructed inside the Port of Mombasa and to transport to the KPC-owned LPG tank in Changamwe. LPG is named as the emphasis field in KPC, however, KPC is in charge of the reinforcement of domestic storage facilities as well as the import facilities, and the priority of import facilities in the Port of Mombasa seems to be under various discussions.

In addition, more than one project to attempt a new entry to the LPG terminal business can be confirmed. One is a project promoted by Milio International Ltd (Dubai) IFC announced the financing of USD 48 million. The plan is said to construct storage tanks near the channel of the Port of Mombasa. It appears that EIA ended and that the building was approved. Another is a project which combines a land tank owned by Mansa East Africa Ltd and the marine tank. This plan is also said that EIA ended and berth licensing was approved. All projects set a construction planning site on the west side of Mombasa Island, near the channel to the Port of Mombasa. LPG is planned to be transported to the consuming regions such as Nairobi using lorries. However, major problems are still associated with this location, as the chronically congested bridge must be crossed to join to the highway (express) to Nairobi.

Figure 2: Prognostic chart of future LPG storage facilities around the Port of Mombasa (Pipeline described as our expectation)

(5) Determining needs/problems of people concerned LPG retail price in Kenya was USD 2.57/kg in 2010, which was much higher than the global standard. However, the establishment of LPG import terminal in 2012 by AGOL significantly reduced the retail price.

Graph 1: LPG end user price in December 2010

(https://energypedia.info/wiki/Liquefied_Petroleum_Gas_(LPG))

LPG prices were again surveyed in Nairobi and Mombasa, with results indicating approx. USD 1.5-1.6/kg in major gas stations and at general retail stores. Meanwhile, the common price range in the developing countries is USD 1.0-1.3/kg worldwide. Price reduction was achieved by improving LPG distribution by AGOL. Meanwhile, it can be said that the market has been monopolized, with prices maintained at higher than at other locations worldwide.

AGOL is proceeding with plans to expand storage facilities and to meet ever-increasing demand. However, further reductions in supply costs might not be possible due to the crucial issue of geographical conditions. It is likely that the cost reduction by the scale merit of the size increase cannot be sufficiently drawn out. The Kenyan government aims to lower the price by restructuring in the LPG import route using national enterprises KPA and KPC as mentioned. This is because the government recognizes that the key factor hindering the spread of the LPG use is its high-price. Likewise, the national enterprise NOCK is made to sell the LPG starter kit at a half price by the subsidy.

It was also found that some retail stores sell at USD 1.1/kg, which is about 30% lower than the average price. Such items are highly likely to be illegally distributed LPG. According to the on-site hearing, problems in the illegally circulated LPG were pointed out such as the illegal cull when circulating, in addition to physical damage such as insufficient filling amount and bulk increase by adding water.

In this context, the Ministry of Petroleum and Mining (MoPM, old MoEP) commented that they support our business in consideration of the fact that it contributes toward relieving the public financial burden by reducing the supply cost of the LPG and the establishment of regular circulation. We hope to consider introducing Japan's safety standards and detailed operation procedures, which have long been cultivated, so as to contribute to securing the quality or safe use of LPG through the safe operation of import terminals and establishing regular distribution channels that are prone to be perfunctory as demand increases and facility expansion is urgently required.

(6) Market size estimate / demand prediction (Present demand) Kenya imports LPG by 100%. According to PIEA, the consumption in 2017 reaches 192,000 tons and at present, it is calculated around 10% of the people use LPG. The future increase is expected at the average 14% of annual rate, and about 70% of the people are expected to use LPG in 2030. The survey below shows predicted demand for LPG in Kenya.

(LPG consumption) As for the developing countries mainly located in Asia, the introduction of LPG depends on the degree of the economic development in each country. LPG demand is stimulated as the national policy in Thailand and Indonesia. The Kenyan government is also positive with regards to the popularization of LPG. Therefore, it appears likely that there is potential for rapid demand expansion in line with the future economic development/population increase. However, as currently inexpensive heat sources such as firewood and charcoal are used, more extensive popularization throughout the country will require price reductions. The price of LPG in Kenya is more than 30 percent higher than in Thailand or Indonesia.

Table 7 : LPG consumption per person in each country Japan Thailand Indonesia Vietnam Kenya Bangladesh Myanmar Cambodia

53.6kg 30.6kg 25.5kg 16.0kg 4.0kg 3.0kg 1.7kg 0.6kg

(Kenyan government policy) Refer to 3. Partner country government, local municipality, and competitor trends. The government’s outlook on LPG popularization remains positive. (Demand in Kenya) Future LPG demand in Kenya is estimated as follows. i) Demand increase by 14%/year continues at present (A) ii) LPG demand potential in Kenya is estimated from GNI/Capita and LPG consumption in the various countries, and developing countries in particular (B). iii) Estimation of future GNI/Capita is implemented. GNI (assumed from the recent values and the GDP growth rate) and the future population estimate from the World Bank are also used (C). iv) After 14% of demand increase reaches LPG potential, according to the relational expression with (A) and (C), LPG demand potential estimate in Kenya is shown (D). As a low case, the annual rate of increase has been set at 5%.

Correlation between GNI/Capita and LPG consumption/Capita

(Data: World Bank, Global Economic.com)

Kenya LPG consumption/capita (kg/ person) consumption/capita LPG (kg/

(US$/person)

Graph 2: Correlation between GNI/Capita and LPG consumption/Capita (B) (World Bank Data、Global Economic.com)

Kenyan GNI, population prediction

Population (1000 people) (1000 Population

Graph 3 : Estimation of future GNI/Capita in Kenya (C) (World Bank)

LPG demand is expected to reach 800,000 tons in 2030, which is four-fold the current demand level of 200,000 tons. LPG consumption per population at this point is 11 kg/ person, which is less than in developing countries in Asia. These figures appear to be highly achievable.

LPG demand prediction

LPG demand (ton) LPG demand LPG consumption amount (person) amount consumption LPG

14% increase case

GNI/Capita LPG consumption/

Analysis Capita

Graph 4 : LPG demand prediction in Kenya (D)

(Demand in neighboring countries) LPG demand is also rising in neighboring Tanzania. In this country, the non-governmental enterprises proceed with the business as a major player, and it is said that each enterprise is working to reinforce LPG storage facilities (by a hearing conducted by our company). This appears to relate to an aspect of the enough land at the port compared with Mombasa. However, like in Kenya, the mass transport of LPG using refrigeration equipment will be necessary in the future in this country in order to reduce costs. As for the land transportation to Uganda, a landlocked country, our hearing indicated that Tanzania is advantageous for transportation by truck. However, rail transportation is achieved in Kenya in the future, it may lose out to Kenya in terms of competitiveness.

4. Project Summary (Basic Design & Business Model Development) (1) Project site selection (Port of Mombasa and its surroundings) As mentioned earlier, Kenya's LPG sales volume in 2017 was at 192,502 tons (PIEA 2018, Petroleum Insight 1st Quarter). When illegal volume is included, the volume is estimated to be at 240,000 tons. LPG demand in Kenya is expected to grow steadily in the future and is projected to reach 1,000,000 tons by the mid-2030s. AGOL plans to increase the capacity for in-ground tanks. However, if annual tank turnover is assumed to take place 10 times*, this capacity will only be able to respond to approximately half of the actual demand. (estimated at 1-2 weeks compared to one day for a world-class refrigerated storage tank, thus resulting in the projection that tank turnover will be restricted to 10 times.) Furthermore, the storage tank owned by KPC/KPRL has very limited capacity. Even when the storage facility of a major vendor is included, the total reaches only thousands tons. Although a plan to build a new jetty appears to have been developed alongside replacement of the old KOT, its schedule and concrete details remain unclear. In view of the circumstances, it can be determined that the need for a new LPG import terminal remains high.

Land that could be used for storage tank construction while making use of the existing jetty was examined with satellite photos and on-site study of Mombasa. However, there is a shortage of available land in Port of Mombasa area. With the residential and developed areas found in close proximity to SOT, suitable land was

unable to be found. The only area where sufficient land is available was found to be Dongo Kundu located on the opposite shore of Port of Mombasa, where special economic zone (SEZ) development is underway. Other properties are owned by existing players, namely, AGOL, KPC/KPRL and KPA in some cases.

Although the chances are not zero for collaborative land use with a competing player, stable LPG sharing and supply with safety and at low cost requires terminal development on geographically advantageous land. For this reason, SEZ in the Dongo Kundu area was selected as the top prospect for the LPG import terminal in this study.

(Dongo Kundu SEZ) The SEZ located on the opposite shore of Port of Mombasa developed under Japanese initiative is a major development plan divided into multiple phases. Phase I consists of construction of access roads, electricity and water infrastructure, development of Berth 1 (also known as DK-1) and earthwork for D1 area (10 ha) east of Berth 1.

Figure 3: Dongo Kundu SEZ development map (JICA 2015)

Project site selection requires attention to land conditions (geological conditions, foundation, etc.), presence of residents, possibility of land acquisition, safety regulations (which are in place for storage facility construction, due to flammability of LPG). Satellite photo analysis shows that the SEZ is located in a hilly area at altitude of roughly 40-60 m. There is also a mangrove forest on the coastal area, possibly requiring action in the area of environmental protection. Adequate study is also required on the water depth of the jetty, vis-à-vis the size of LPG tankers.

In this study, around the DK-1 and D1 areas targeted for Phase 1 of the SEZ development project were visited. As examined in satellite photos, the land was confirmed to be undeveloped, with hills undulating at altitudes of 40-60 m.

Figure 4: Plotted map of the SEZ project site (elevation & coordinates)

Photo 1: DK-1 site Photo 2: D1 site

Resident evacuation and transfer are expected to be implemented without serious confusion. Resident briefings have already been held jointly by KPA, the development project owner, and JICA. The DK-1 project is planned as a yen-loan financed project, while D1 is planned as a grant aid project. Further study is scheduled to look into essential matters. At the same time, activity will be coordinated with JICA and KPA that are implementing SEZ development, as well as parties including Kenya's Ministry of Industrialization.

(2) Project outline The project is being planned to satisfy future LPG demand in Kenya. For this reason, the strategy is expansion of terminal in step with the growth in demand. Specifically, initial investment will be kept controlled while annual demand is 1 million tons or less with use of pressurized tanks that are generally available for procurement and construction in Kenya (Phase 1). In time with rise in annual demand surpassing the 1 million ton mark, refrigerated tanks will be introduced to maximize operation efficiency (Phase 2). For maximum operational efficiency, the pipeline will also be kept as short as possible. The size of storage facilities will be planned paying attention to the availability of LPG transport vessels.

Table 8: Project scale LPG Storage Size Phase 1 - Pressurized 4,500 MT Phase 2 - Refrigerated 66,000 MT

The business model is expected to focus on the tolling fee business based on fixed leasing of storage tank capacity in order to minimize LPG inventory risk for the project owner. Therefore, the prospective customers are expected to be chiefly the existing LPG vendors excluding AGOL, namely, NOCK, Vivo, Total, Oilibya and Hashi. Additionally, voluntary supply of LPG to businesses to locate in SEZ, as well as residential homes in the zone, is taken into consideration. In this case, however, such service will result in inventory risk for the project owner. Therefore, business risks must be sufficiently investigated.

(3) Outline design Details, such as the exact location (coordinates) and topographical features in SEZ has not been disclosed. For this reason, the site was assumed to be quadrilateral in shape in this study in producing an outline design for Phase 1 and Phase 2 of the LNG import terminal project.

Phase 1 Attachment 2: LAS-073-PFD-1001-1 Phase 2 Attachment 4: LAS-073-PFD-1003-1

(4) Procurement (check into superiority of Japanese businesses, possibility of third-country cooperation & measures on increasing cost competitiveness) (Construction cost) Due to the maturity of LPG technology, Japanese equipment manufacturing and engineering lacks competitive edge over other countries. For this reason, a tie-up with an Indian business with extensive business track record and outstanding cost competitiveness will be examined. At the same time, competitiveness will be bolstered by involving domestic Kenyan businesses. At present, construction materials are expected to be imported from India in view of cost and quality considerations. In addition to geographical proximity to Kenya, India has numerous LPG facilities and possesses a high level of competitiveness in both quality and pricing. Construction machinery are expected to be procured in Kenya (in the form of purchase or lease as needed) for both Phase 1 and Phase 2. Refrigerated tanks cannot be designed and manufactured in Kenya and therefore will be designed and manufactured in India and transported to Kenya. Construction work is expected to be commissioned to an Indian business, with Indian nationals hired as project site supervisors and advisors.

(LPG import cost) LPG is refined from associated natural gas or crude oil, supplied chiefly from the Middle East. Due to increase in US export of LPG, with increase in production of associated gas from shale oil, surplus has grown in LPG supply. Because nearly all of LPG from the US consists of propane, there has been marked drop in propane prices. This has led to global change in propane-butane ratio (increase in the ratio of propane). (Source: HIS Markit website)

On the other hand, however, LPG distributed in Kenya has higher butane content, due to the structure of gas cylinders in use. An interview survey of a number of LPG businesses showed that the ratio of butane is more than 70% in Kenya. Although butane is comparatively higher in pricing than propane, production costs for storage tanks and gas cylinders can be kept low, due to butane's low liquefaction pressure. Use of butane-rich LPG appears to be growing due to feasibility in initial investment cost. At the present stage, storage tanks for both butane-rich and propane-rich types should be taken into consideration.

In terms of LPG import price, the procurement price is generally based on Saudi Arabia CP, with surface freight and other expenses added. Therefore, unnecessary demurrage charges must be avoided to cut down import cost. In this project, the system has been designed to curb the number of days for LPG unloading drastically and prevent demurrage charges, by keeping pipeline length to the least minimum, selecting appropriate pipe diameter and optimizing LPG tanker size and storage tank capacity. This is expected to minimize LPG import costs.

(5) Calculation of project scale, etc. (including operation and service/maintenance expenses) Based on the requirements set forth above, the project scales for Phase 1 and for Phase 2 have been estimated. Regarding jetty use, use of facilities owned by KPA or the addition of an LPG unloading facility to the DK-1 site to be built in the SEZ development project is being planned. Terminal operation cost has been calculated vis-à-vis labor cost, as well as electric power costs, etc., in Kenya. The results show that labor cost accounts for a major portion (more than 85%) of the total for both Phase 1 and Phase 2. The number of workers has been based on information from a similar terminal in India.

(6) Project implementation organization and schedule (Project implementation organization) Participation is planned for terminal construction, ownership and operation. A joint venture with a partner possessing extensive experience in LPG terminal operation is being planned. Investment will also be solicited from leading LPG vendors who are expected to become long-term contract users of the storage tanks. Participation in

22 terminal operation will not be restricted to companies located in Kenya. Rather, it will extend to Indian businesses with extensive experience and performance records. Participation of Japanese businesses other than TTC is expected in the area of maintenance and safety.

In the case of investment by the Kenyan government, bid tendering is required under PPP law even when investment is by a state-run business enterprise. For this reason, a large amount of effort and time is anticipated for administrative procedures and the like. For this reason, methods other than investment, such as super-long-term tank lease contract and lease of NOCK-owned facility lease, are being planned in collaboration with the government entity. In the interviews with government representatives and LPG sales businesses, all expressed strong demand for speedy project startup, in view of the overwhelming shortage of LPG storage terminals at the Port of Mombasa and the extremely high procurement cost resulting from inefficient management. AGOL is making steady progress in increasing storage capacity and at the same time has invested into an LPG cylinder manufacturing and sales company (Proto Energy), which in turn has started up LPG sales business under its own brand. It is apparently strengthening action to capture the entire LPG value chain, raising fears of dominance in price control.

The plant project implementation organization is illustrated as follows.

Figure 5: Current project implementation organization plan

(Project schedule) The project schedule is as below. Completion of this feasibility study will be followed by selection of partners, establishment of a joint venture, acquisition of permits and licenses, detailed design development, selection of EPC contractors and terminal construction. The project assumes SEZ development and the fact that construction will begin following the completion of D1 site earthwork must be noted. The final investment decision completes with business partner selection, which is anticipated to take place in the second year, when necessary permits and licenses are acquired.

Year 1: Feasibility study for project Year 2: Business partner selection, JV establishment, licenses & permits, detailed design & EIA Year 3: Fund procurement, EPC contractor selection, construction startup Year 4: Construction & pilot operation Year 5: Full operation startup

(7) Project financing Due in part to the private-sector leadership in LPG sales in Kenya, private investment is reasonable if emphasis is placed on project development speed. With TTC at the helm of investment in the project, Japanese financing through the parent company is being planned. Although this will depend on the project scale, IFC, Africa Development Bank, JICA and JBIC are being considered as potential lenders.

(8) Environmental impact assessment (including research into environmental improvement effect, impact on environment and society, etc.) (Summary of environment-related laws) Kenya's basic legal framework in the area of the environment is the Environmental Management and Coordination Act (EMCA) and forest in 1999 and amended in 2015. Under the Act, the National Environmental Management Authority (NEMA) was established as the executive entity responsible for the supervision and coordination of all matters related to the environment and for implementing environmental measures. The National Environmental Council (NEC) has also been established as its regulatory authority. The environment-related legal framework relevant to the project is shown in Table 9.

Table 9: List of laws on environmental and social considerations Laws, etc. Outline Environment (general)

Environmental Management and Coordination Act Law pertaining to environmental protection and enforced in 1999 and amended in 2015 environmental management in general. The law grants authority to NEMA as its regulatory authority.

Environment (Natural) Water Act Chap. 372, 2002 and amended in 2012 Law pertaining to the protection and management of water resources and Kenya's

water resources.

Environmental (Impact Assessment and Auditing) Regulations that provide legal basis to Regulations, 2003, Legal Notice No. 101 implementation of environmental impact assessment.

Environmental Management and Co-ordination (Air Regulations pertaining to the prevention and Quality) Regulations, 2014, Legal Notice No. 34 mitigation of air pollution and standards for air

Laws, etc. Outline quality and emissions.

Environmental Management and Co-ordination (Water Regulations pertaining to the prevention of Quality) Regulations, 2006, Legal Notice No. 120 water contamination and standards for water quality and contamination.

Environmental Management and Co-ordination Regulations on waste management and (Waste Management) Regulations, 2006, Legal Notice control, covering solid wastes, industrial No. 121 wastes, hazardous wastes, insecticides, etc., biomedical wastes and radioactive wastes.

Environmental Management and Co-ordination (Noise Regulations pertaining to the control of noise and Excessive Vibration Pollution) (Control) and vibration as well as noise standards. Regulations, 2006, Legal Notice No. 121

Environmental Management and Co-ordination Regulations pertaining to the management of (Wetlands, River Banks, Lake Shores and Sea Shore wetland, riverbank, lakefront and coastal Management) Regulations, 2009, Legal Notice No. 19 environments.

Wildlife Conservation and Management Act (Cap Law on wildlife conservation and management. 376), (1985) and amended in 2019 It also prohibits unauthorized entry, tree felling and hunting in protected habitats.

Prevention of Pollution in Coastal Zone and other Regulations pertaining to the protection and segments of the prevention of pollution in coastal areas environment regulations, 2003 regulated under EMCA.

Environment (society) Coast Development Authority Act, 449, 1992 and Law granting the Coast Development Authority amended in 2012 the authority to plan and coordinate development projects in all coastal regions and special economic zones.

Public Health Act (Cap. 242), 1986 and amended in Law pertaining to the maintenance of a healthy

2019 environment in land development.

Occupational Health and Safety Act, 2009 and Law pertaining to occupational health and amended in 2010 safety.

National Museums and Heritage Act (Cap 216), 2006 Law requiring impact assessment on cultural and amended in 2012 properties and heritage, etc.

County Government Act, 2012 Law that sets forth the authority and administrative framework of county governments.

Other

Laws, etc. Outline Occupational Safety and Health Act, 2007 Law regulating health, safety and welfare of legal workers and all persons at work sites and the establishment of the National Council for Occupational Safety and Health (NACOSH).

Environmental standards in Kenya are established in concrete form under regulations for each sector in compliance with EMCA. Environmental standards relevant to the project are shown in Table 10.

Table 10: List of environmental standards Category Name of regulatory standard Description

Air quality Environmental Management and Parameters for ambient air quality Co-ordination (Air Quality) Regulations, set forth in the standard: SOx, NOx, 2014, Legal Notice No. 34 NO2, SPM, PM10, PM2.5, Pb, CO/CO2, H2S, non-methane hydrocarbons, VOC, O3

Wastewater Environmental Management and Water quality standards are Co-ordination (Water Quality) Regulations, established as follows.

2006, Legal Notice No. 120 — Domestic wastewater — Wastewater release into the environment — Wastewater discharge into public sewage system

Excessive Environmental Management and Daytime and nighttime permissible Vibration Pollution Co-ordination (Noise and Excessive noise levels are set by zone, such Vibration Pollution) (Control) Regulations, as silence zone, residential zone, 2006, Legal Notice No. 121 commercial zone, etc.

Environmental impact assessment (EIA) in Kenya The Second Schedule of the EMCA specifies projects that require submission of an EIA report, based on the business sector and project characteristics. The project understudy is believed to classify in "management of hydrocarbons," thus requiring the following EIA procedure. It must be noted, however, that the issue of business scale is not stated explicitly

27 regarding whether or not IEA procedure is necessary in this sector. For this reason, advance confirmation with NEMA on this matter is required.

 Mass storage of natural gas, petroleum and all other flammable and volatile fuels

(EIA procedure in Kenya) The Environmental Impact Assessment Guidelines and Administrative Procedures by NEMA aims at elucidating potential impact of a proposed development project, policy or government program, etc., on the environment through EIA. At the same time, it is designed to maximize positive impact while identifying measures to mitigate negative impact. With this basic concept, EIA is recognized as a tool for promoting sustainable development decision-making in Kenya. In the EIA procedure, NEMA holds the authority of issuing, revising and canceling environmental impact assessment licenses and is responsible for coordination between the public and private sectors. The steps involved in the EIA procedure are illustrated in Figure 6. A summary of the actual steps involved is also shown in Table 11.

Table 11: Principal steps in the EIA process No. Step Outline 1 Screening The project proponent is to prepare and submit a project report. (Decision-making on The project must include chiefly the following. whether or not an EIA  The objective and scope of the project study is required)  Project site and area affected  Project activities (construction, operation and closure phases)  Design  Materials used, output, waste  Latent environmental impact & mitigation measures  Measures on accident prevention & health and safety  Project budget  Views of affected parties  Environmental management plan 2 Scoping Scoping of the environment is a process for defining important (Establishment of the conceptual matters related to the project activities and for scope of the EIA determining the terms of reference of the EIA study. Matters to

No. Step Outline study and of the be studied in scoping include the following. terms of reference  Communication plan (target parties & timing) (ToR))  Information disclosure for gathering views and opinions  Listing matters of concern to people  Definition of the terms of reference for the study regarding major issues 3 Preparations for the The EIA study must address issues of concern found in the EIA study terms of reference established by the project proponent through consultations with relevant parties. Furthermore, the study is to be conducted by specialists registered with the regulatory authority. However, the responsibility for the study lies with the party implementing the project.. 4 Execution of the EIA The EIA study aims at identifying the following matters. study  Identifying impact from the project  Impact prediction  Impact assessment and analysis  Review into mitigation measures  Environmental monitoring and environmental management planning It must be added that effective consultations with local citizens is the key in EIA planning and execution. Engagement of relevant parties, including affected persons and regulatory authorities, is necessary from the planning stage to the closing stage of the project. 5 Review of the EIA The project proponent is to submit an EIA report, together with report designated fee" to the regulatory authorities (in 10 hard copies and digital media). The report is examined from the standpoints of whether the project complies with its terms of reference, whether the study results are scientifically and technically appropriate, whether it is clear for the general public to understand, whether appropriate mitigation measures have been studied after designating the negative impact, whether there is sufficient record of deliberations with local citizens and other matters of concern. 6 Review of the EIA The project proponent is to submit an EIA report, together with report designated fee" to the regulatory authorities (in 10 hard copies and digital media). The report is examined from the standpoints of whether the project complies with its terms of reference, whether the study results are scientifically and technically appropriate, whether it is clear for the general public to understand, whether appropriate mitigation measures have been studied after designating the negative impact, whether there is sufficient record of deliberations with local citizens and other matters of concern.

Figure 6; Procedure for the EIA process (Environment Impact Assessment Guidelines and Administrative Procedures, NEMA, 2002)

(Impact on the environment and society (including safety) as a result of project execution) The environmental impacts on the natural environment and to society predicted in the project have been organized in a preliminary scoping matrix shown in Table 12.

Table 12: Scoping matrix (LPG receiving terminal & ocean floor pipeline) Number Assessment Predicted impact Impact category Construction Operation

stage stage Pollution control measures 1 Air pollution B- B- Construction stage: Dust created by construction work is likely to impact air quality. After operation startup: Exhaust from LPG tankers is likely to impact air quality. Additionally, incidents such as outflow or leakage from the pipeline may affect air quality. 2 Water pollution B- C Construction stage: Dredging and earthwork may impact sea water quality. Additionally, wastewater used in pressure tests for the ocean floor pipeline may affect water quality. Operation stage: Domestic wastewater may be released by terminal facilities. Additionally, incidents such as outflow or leakage from the pipeline may affect water quality. 3 Waste B- B- Construction stage: Solid wastes and construction wastes will be produced. Operation stage: Wastes will be generated with LPG tanker and terminal operation. 4 Soil pollution D B- Construction stage:·No particular matter of concern Operation stage: There is possibility of leakage at LPG transport in and out of facilities, as well as from the pipeline. 5 Noise and B- C Construction stage: Construction work Excessive Vibration may increase the noise level. Pollution Operation stage: Operation may increase the noise level. 6 Soil subsidence D D Construction and operation stages: No particular concerns. 7 Foul odor D D Construction and operation stages: No particular concerns. 8 Bottom sediment B- C Construction stage: Dredging, earthwork and installation of ocean floor pipeline may impact the bottom sediment quality. Operation stage: Maintenance dredging may impact the bottom sediment quality. Environment (Natural) 9 Protected areas D D Construction & operation stages: Protected areas are not found in the area surrounding the project site. 10 Ecosystem B- C Construction stage: Construction work may temporarily impact the marine ecosystem. Also, mangrove clearing is anticipated. Operation stage: Although the marine ecosystem could be affected by wastewater, the extent of such effects will be confirmed going forward. 11 Hydrometeor B- C Construction stage: Dredging and earthwork may impact hydrology in the surrounding area. Operation stage: Although the marine

Number Assessment Predicted impact Impact category Construction Operation

stage stage ecosystem could be affected by wastewater, the extent of such effects will be confirmed going forward. 12 Topography/geology B- D Construction stage: The terrain will be altered. Operation stage: No particular concerns. Environment (society) 13 Land acquisition C D Construction stage: Residents may have and relocation of to be relocated with land acquisition. residents Operation stage:·No particular matter of concern 14 The poor B+ B+ Construction & operation stages: Job opportunities for local citizens are expected to grow. 15 Minorities & C C Construction & operation stages: The indigenous presence of minorities and/or indigenous ethnicities ethnicities requires inspection in the future. 16 Local economy, B+/C B+/C Construction stage: Job opportunities such as will increase for local residents. At the employment and same time, the project may impact means of livelihood fisheries, etc. Operation stage: The project will reduce the use of firewood, resulting in shorter cooking time and reduction of health hazards caused by fumes. At the same time, however, it may impact fisheries, etc. 17 Use of land and C C Construction stage: There is possibility regional resources of impact on fisheries, etc. Operation stage: There is possibility of impact on fisheries, etc. 18 Water use D D Construction & operation stages: Impact on water use is not anticipated in the area surrounding the project site. 19 Existing social C B+ Construction stage: There is possibility infrastructure & of traffic congestion by construction work services vehicles. Operation stage: The project will reduce the use of firewood, resulting in reduction of effort required for cooking with firewood. 20 Social capital & D D Construction and adjoining stage: social organization, No particular effects are anticipated. such as local decision-making entities, etc. 21 Imbalance in D D Construction and adjoining stage: damages and No particular effects are anticipated. benefits 22 Conflict of interests D D Construction and adjoining stage: within the region No particular effects are anticipated. 23 Cultural assets C D Construction stage: There is possibility of cultural heritage property existing in the area surrounding the project site. Operation stage: No particular concerns. 24 Scenery C C Construction stage: There is possibility of construction work affecting the surrounding landscape. Operation stage: There is possibility of

Number Assessment Predicted impact Impact category Construction Operation

stage stage impact on the surrounding landscape. 25 Gender C C Construction and operation stages: Latent effects need to be confirmed going forward. 26 Rights of children C C Construction and operation stages: Latent effects need to be confirmed going forward. 27 HIV/AIDS and other B- C During construction: There is a risk of infectious diseases infection with HIV, etc., due to influx and movement of construction workers. After operation startup: Safety and public health risk in the region in the operation stage must be examined in the future. 28 Work environment B- B- Construction and operation stages: (including There is a danger of accidents and other occupational safety) latent risks. Latent risks and dangers need to be confirmed going forward. 29 Accidents B- B- Construction and operation stages: There is a danger of accidents and other latent risks. Latent risks and dangers need to be confirmed going forward. 30 Trans-boundary D B+ Construction stage: No impact of impact and climate concern is anticipated. change Operation stage: The project will reduce the use of firewood, resulting in reduction of CO2 emission. Legend: A+/-: Significant positive/negative impact anticipated B+/-: Positive/negative impact is anticipated to a certain degree C: Impact is unknown D: No impact anticipated

(Terms of reference (ToR) for environmental and social impact assessment (ESIA)) This project will require an environmental and social impact assessment (ESIA) study. In the ESIA study, assessment of environmental impact will be followed by the preparation of mitigation measures for predicted impacts and a monitoring program. ESIA is conducted in compliance with Kenya's IEA legal framework. It must also be executed according to the requirements of the lender, such as international banks. Based on the above, the terms of reference (ToR) proposal for the project's ESIA study are shown in Table 13.

Table 13: TOR proposal for the ESIA study Environmental & social Study categories Study methods impacts 1 Air pollution . Collection and update of climate & . Gather and review secondary meteorological data (temperature, data humidity, wind velocity, wind . On-site survey direction & precipitation) . Baseline data for air quality (as . Current air quality conditions needed)

Environmental & social Study categories Study methods impacts . Organize related standards . Evaluate impact and propose mitigation measures and a monitoring program 2 Water pollution . Study into the current state of water . Gather and review secondary quality in areas where potential data impacts are likely, such as the LPG . On-site survey terminal and ocean floor pipeline . Baseline data for water quality route (as needed) . Organize related standards . Evaluate impact and propose mitigation measures and a monitoring program 3 Waste . Inspection of discharged waste . Gather and review secondary volume & type data . Study into waste storage, transport . Interviews with related bodies & handling method . Propose recommended mitigation measures 4 Soil pollution . Current soil quality conditions . Gather and review secondary . Propose recommended mitigation data measures . On-site survey 5 Noise and . Current noise conditions . Gather and review secondary excessive vibration . Organize related standards data pollution . Evaluate impact and propose . On-site survey mitigation measures and a . Baseline data for noise (as monitoring program needed) 6 Bottom sediment . Current bottom sediment conditions . Gather and review secondary on the pipeline route data . Evaluate impact and propose . Interviews with related bodies mitigation measures and a monitoring program 7 Ecosystem . Current state of underwater and . Gather and review secondary land ecosystems, including data mangrove . On-site survey . Identification of the status of the . Interviews with related bodies examined ecosystems (protected areas, protected species, etc.) . Evaluate major impact of business and propose mitigation measures 8 Hydrometeor . Inspection of general conditions . Gather and review secondary related to water flow, such as water data flow volume and peak flow volume . On-site survey in surrounding areas . Interviews with related bodies . Evaluate major impact of business and propose mitigation measures 9 Topography/geology . Current conditions on terrain and . Gather and review secondary soil quality data . Evaluate impact and propose . On-site survey mitigation measures and a monitoring program 10 Non-voluntary . Land acquisition and inspection of . Gather and review secondary resident relocation the need of resident relocation data . Study into options to minimize . On-site survey non-voluntary resident relocation . Interviews & consultations with . Execution of social economic study relevant organizations & & preparations for resident communities relocation plan 11 Lifestyle/livelihood . Baseline data on social, . Gather and review secondary demographic & economic data

Environmental & social Study categories Study methods impacts characteristics of the communities . On-site survey surrounding the project site, . Interviews & consultations with including persons in fisheries surrounding communities . Identification of receptors vulnerable to impacts in the area surrounding the project site . Evaluate impact and propose mitigation measures and a monitoring program 12 Cultural assets . Study of the current status of . Gather and review secondary cultural heritage properties in and data surrounding the project site . On-site survey . Evaluate impact and propose . Interviews with related bodies mitigation measures and a monitoring program 13 Scenery . Study of the current status of . Gather and review secondary landscape in and surrounding the data project site . On-site survey . Evaluate impact and propose mitigation measures and a monitoring program 14 Work environment . Identification of hazards and risks in . Gather and review secondary labor data . Systematization of relevant . Study into applicability of standards, including gas handling Japanese standards on gas . Propose recommended mitigation handling on the project measures 15 Safety and public . Identification of hazards and risks . Gather and review secondary health risk in the to communities data region . Propose recommended mitigation . On-site survey measures

(Matters to be addressed by nations interested in the realization of the project) Project development is scheduled to take place in Mombasa SEZ, for which a development master plan has been developed. Because the plan includes construction of roads in the surrounding areas and other infrastructures of the SEZ, the modes of LPG shipment and the shipment routes may be affected, depending on the development status. Furthermore, dredging inside the bay close to the planned project site is likely to be implemented with port development underway on the shore opposite the project site. For this reason, the project must be executed in coordination with surrounding development projects as needed. As a result, the interested nations must execute coordination with the organizations involved in these projects. In the area of safety in gas handling, study into applicable safety standards, etc., by the nation's regulatory authority is necessary, in view of the possible application of standards equivalent to relevant Japanese standards as the need arises.

(Study into environmental improvement effect, environmental and social impacts, etc.)

The project's environmental improvement effect and significant effect on the environment and society are the reduction in use of kerosene that produces large quantity of fume and soot and replacement of firewood and coal with LPG. Additionally, firewood and coal consumes time and effort for preparation and cleanup. On top of that, poor thermal efficiency makes cooking time-consuming. In urban areas where increasing number of women participate in the job market, wider use of LPG has led to the reduction of workload for women who run households. In rural areas, it is believed to contribute to reducing the workload of women and children responsible for picking firewood.

(9) Environmental impact assessment (estimated reduction in CO2 emission based on energy source) LPG consumption in Kenya was 192,502 tons in 2017. In this study, consumption is projected at 662,000 tons 10 years later in 2027 and to reach 1,091,000 tons in 2031. In these consumption statistics, the project is expected to cover 25% of the market share, with annual LPG sales volume at 272,750 tons. The reduction in CO2 emission based on energy source is estimated as follows.

 All of the LPG supply in Kenya will be used for cooking.  Of the total volume, 33.3% will replace kerosene. (Source: Figure 52 Cooking heat sources, Report on the Survey of Potential Needs in the BOP Business: Energy Sector in Kenya, JETRO, 2010)

CO2 emission reduced per year by the project (CO2t) = Total kerosene volume replaced by LPG x Emission coefficient for kerosene — Total LPG volume that replaced kerosene × LPG emission coefficient

Total kerosene volume replaced by LPG (MT): 33.3% of 272,750 tons of LPG sold under the project will replace kerosene. If the unit calorific value of LPG is 50.80 GJ/t and that of kerosene is 36.70 GJ/kl (source: List of Calorific Value & CO2 Emission Coefficients of Fuels, Japan LP Gas Association)

LPG calorific value =272,750 MT x 33.3% x 50.80 GJ/t = 4,613,948 GJ

Replaced kerosene volume = 4,613,948 GJ ÷ 36.70 GJ/kl = 125,720 kl

Total LPG volume replacing kerosene (MT): 272,750 MT x 33.3% = 90,825 MT

Reduction in CO2 emission (CO2t) per ear under the project, assuming that the market scale is roughly 1 million tons and the project gains a 25% share:

= 125,720 kl x 2.49 tCO2/kl - 90,825 MT x 3.00 tCO2/t

= 313,042 tCO2 – 272,475 tCO2

= 40,567 tCO2

(10) Risk analysis The following items have been examined as risks in terminal operation business & LPG import/sales business. 1． LPG sales price: The price is to be the total of the cost price, combined with freight and other miscellaneous expenses and topped with profit. LPG sales price assuming that the project period is 30 years and IRR at certain % has been analyzed for each scenario. (Details shown in (11) Business feasibility assessment) 2． Security risk: The violent crime rate in Kenya is higher than in Japan (roughly double), with guns and other weapons used in virtually all violent crimes including burglary. (Source: Safety Guidelines, the Embassy of Japan in Kenya) As foreign nationals are sometimes targeted in such crimes, attention is required in promoting the project. However, the project is being planned in collaboration with local businesses and companies from other countries, with Japanese involvement kept to a minimum. For this reason, the security risk was determined not to affect business operation in the feasibility study. 3． Kenyan political risks: With the chaos of the 2017 presidential election still lingering in the cities, political risks cannot be regarded as nonexistent, despite the fact that the development of the Port of Mombasa is being promoted by the central government. Notwithstanding, as the project involves sales of LPG to be used in the everyday lives of the end-users, political risks were assumed not to affect the project (change in LPG-related regulations, etc., rapid decline in sales volume, etc.) in the feasibility study.

(11) Economic assessment In this feasibility study, economic assessment was based on analysis and forecast of LPG demand in the country. Phase 1 of the project is assumed to startup at the point when domestic demand reaches 300,000 tons. Phase 2 is to start in the 10th year when demand is expected to rise to 1 million tons. Regarding storage tank turnover, the conservative figure of 24 turnovers (twice a month) was selected. Phase 2 turnover is projected at 10 turnovers. LPG wholesale price in Mombasa City as of October 2018, obtained in interviews conducted for the study, was used as a benchmark for examining price competitiveness.

Regarding jetty construction cost, the two alternatives of construction by the project owner (Scenario A) and construction by KPA (Scenario B). In the case of Scenario B, the port tariff to be paid to KPA will be added to the cost by the project owner. Furthermore, there is information that investment into LPG business is tax-free. (Provision found in Finance Act; investigation currently underway.) Therefore, cases involving exemption from VAT, import tax and other levies were also taken into account in the scenario analysis.

Scenario A A-i) If we pay all project costs A-ii) If we are exempt from paying taxes on project costs

It will be difficult to achieve business results in Phase 1 because the price will not be able to capture the market.

Scenario B B-i) If we do not pay for costs of building a jetty but pay for costs of building a terminal

The price in Phase 1 is equivalent to the current whole sale price. Some costs were conservatively estimated as the details had not been clarified at the time of this survey. Although we need to survey some costs sufficiently that have not been visible, Scenario B should be continuously considered to make the project successful.

B-ii) If we are exempt from paying taxes on project costs

The prices in Phase 1 and Phase 2 fall below the current price. As mentioned earlier, although cost items need to be sufficiently surveyed, we have found that this scenario needs to be continuously considered to make the project successful.

(12) Expected benefits for Kenya and benefits (economic effects) to Japan to be gained from the project

(Expected benefits (economic effects) for Kenya) Our project is on the premise of lowering the prices of LPG. For this reason, we calculated in this survey the amount of reduction in the sale price estimated in Scenario B-ii for economic evaluation based on quantitatively expected demand as shown below. As Phase 2 can significantly reduce prices, economic effects are estimated to exceed USD 777 million in 30 years.

Reduction Amount (USD) Expected Sales Volume (MT) Phase 1 Confidential Confidential 10,108,800

Phase 2 Confidential Confidential 767,243,800

Total Economic Value（USD) 777,352,600

(Expected benefits (economic effects) for Japan) Introducing Japanese machinery and materials is difficult from a competitive pricing perspective. On the other hand, there is a strong potential for the introduction of Japan’s safety practices because of a delay in developing laws in Kenya.

For this survey, we interviewed Japanese experts (consultants, terminal builders, and shipping companies) and found that ”Hazard Prevention Rules*” that the High Pressure Gas Safety Law requires operators to make and a plan for education on operational safety in accordance with the rules work effectively in the operation of LPG terminals in Japan. (*Operators are obliged to make hazard prevention rules on maintenance and management of equipment required to operate LPG facilities safely.)

For this reason, we expect that this project will bring benefits to Japan by applying rules based on Japan’s Hazard Prevention Rules and conducting activities to raise Kenya’s

awareness of the necessity for laws. We are also considering cooperating in education mainly with regards to safety control. We aim to consequently continue to operate terminals safely and optimally. While there is no LPG refrigerated storage tank especially in Kenya, Japan has many of them. Therefore, Japanese LPG operators have acquired much knowledge of them. As many international standards have been established for designing and building LPG terminals, we have adopted API’s international standards and Kenyan and Indian rules in basic design for this project. While design and construction based on these rules ensure the facility is safe, rules have not been established especially in many developing countries, such as rules on safety maintenance and control in operation, daily inspection and regular inspection, and discussion bodies with the organizations and operators concerned. For this reason, they operate without sufficiently controlling safety, failing to prevent accidents. In addition, some operators are forced to operate inefficiently to comply with the rules that were established later. The above cases lead to an increase in operating costs. Therefore, we would like to avoid this by observing Japanese safety standards from the beginning.

Table15: Rules that were applied during the process of basic design for the project

It is also important in the future FEED phase to select an operator for this project from the perspective of hazard prevention rules and to create a detailed design in consideration of operational and safety control. Safe and optimum operational structure leads to an increase in LPG terminal rotation speed (increase in the amount of LPG handled), directly enhancing cost competitiveness as estimated for economic potential. Adopting Japanese safety standards as Kenyan standards will lower the barriers for the entry of Japanese companies, consequently bringing about economic benefits to Japan as well.

5. Action Plan and Issues to Implement Project (1) Progress of the efforts made by the authorities concerned and implementing organizations The authorities concerned, which hold the key to the project, are the MoPM, which promotes the expansion of LPG, the MoI and its subordinate SEZA, which controls the development of the SEZ, the KPA, which owns land in the Dongo Kundu district and manages ports in the SEZ, and the MoT, which supervises the KPA. Progress in discussions between the authorities and organizations is as follows.

1) MoPM The MoPM has expressed its intention to support this project, which enables the ministry to take measures to improve the Import Terminal Project, which has become a difficult problem in terms of prices, while increasing the popularity of LPG amongst citizens. It also indicated the possibility that the market will mature quickly in relation to rapidly increasing demand for LPG because not only the import terminal but also cylinder manufacturing and filling projects, and new LPG brands are greatly involved. The MoPM expects that Pay As You Go (advance payment for use) using smart meters and mobile phones will also expand. The MoPE wants this project to be implemented speedily.

2) KPA and MoT We have obtained an agreement of the KPA and MoT that an LPG import terminal operator is one of the companies that will move to the SEZ. We will need to discuss the building of a jetty with an Official Development Assistance (ODA) loans in order to lower prices in order to promote LPG.

3) MoT and SEZA The SEZA (SEZ Authority) serves as the parent body that compiles the SEZ development plan, but its policy for the Dongo Kundu district remains uncertain. On the other hand, as they have high expectations for the development of the Dongo Kundu led by Japan, the director-general of the SEZA has expressed his intention to support making coordination with the authorities and groups concerned even at this phase.

(2) Expected utilization of political support (Consideration of possibility of utilizing various tools: inviting or sending experts) We are considering holding seminars on Japanese safety standards by referring to the “Project for Surveying Feasibility of Projects for Building High-Quality Infrastructure Overseas” led by the Ministry of Economy, Trade and Industry.

(3) Repose to items requested or pointed out by Kenyan government officials and survey required to improve project proposals Kenyan government officials have strongly requested conducting training on operational know-how because there is no terminal for LPG refrigerated storage tanks in Kenya. In addition, there is an increasing need for setting safety standards in anticipation of promoting LPG in the future and sharing know-how because accidents related to inferior cylinders have caused consumers to feel anxious about LPG.

(4) Possibility of expansion into other countries and measures to promote expansion There is a high possibility of exporting LPG to landlocked countries Uganda and Rwanda through the northern corridor of East Africa as the countries share borders with Kenya and have created the East African Community (EAC). As LPG popularization has progressed to the same level as Kenya, there appears to be potential for expansion. This survey found that all private LPG operators anticipated the export of LPG to Uganda. They have especially high expectations for the extension of the Standard Gauge Railway (SGR) to Uganda, which opened from the Port of Mombasa to Nairobi. Some operators have already started building storage facilities in Kisumu, which shares a border in Lake Victoria with Uganda. We plan to build a 66,000-ton terminal in Phase 2 of this project, which has a capacity to export LPG to neighboring countries. The SEZ will be developed considering interaction with the SGR, which will support horizontal expansion.

(5) Possibility of Japan-India cooperation India actively promoted the spread of LPG, becoming the world’s second largest LPG consumer. In 2017, India consumed 22.5 million tons of LPG and in 2030 it is expected to consume over 30 million tons (The Economic Times issued on February 5, 2019). The number of registered LPG distributors is 20,146 as of July 1, 2018 and the number is

42 increasing year after year (LPG Profile as on 01.07.2018, Petroleum Planning & Analysis Cell, Ministry of Petroleum & Natural Gas, India). Thus, relatively many Indian operators have advanced expertise on terminal operation. In addition, Indian communities have long been established in Kenya due to the geographical proximity of India and Kenya. AGOL was actually founded by an Indian individual who immigrated to Kenya. For this reason, it is relatively common for Indian companies to enter Kenya. So, we have decided to aim to cooperate in the LPG business in Kenya through this project with Indian companies.

In this survey, we checked Indian listed and unlisted energy, oil, and gas companies that have been registered in Kenya using the system of SPEEDA, a Japanese database company, and found 336 companies. Based on this result, we examined their experience in operating LPG terminals and relationships with our company and narrowed these companies down into five candidates. We will engage in concrete negotiations considering each company’s experience in operating LPG terminals and motivation to enter Kenya.

We are also specifically considering using Indian companies to build the terminal. For the basic design of the terminal in this survey, we have adopted the Indian engineering company. Although we plan to start FEED after selecting a terminal operating partner, we will continuously move forward on the premise of using an Indian company as an engineering company.

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