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 i 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 ii 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 iii 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 iv (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 v 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. vi (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