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

i

Project map (Candidate site)

Target

location

ii

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

iii

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

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(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

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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.

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(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).

2

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 ★

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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

4

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

Group

Kikuyu, Luhya, Kalenjin, Luo

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

rate

11% (World Bank, 2017)

Total trade

value/Main trade

items (2016)

Export USD 5.61 billion : Tea, Garden crops, Coffee, Fish

Import USD 13.9 billion : Industrial products, Capital equipment,

Transport equipment, foods

Main trading

partners

(2016)

Export : Uganda, the Netherlands, the U.S., the United Kingdom,

Pakistan

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.

5

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

payments basis in 2017)

△USD 4,755 million

Trade balance (International balance of

payments basis in 2017, Property)

△USD 10,205 million

Financial balance (International balance of

payments basis in 2017)

△USD 4,606 million

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

6

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

7

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

8

(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.

9

Table 5: Standards requiring observance to implement LPG business

LPG

Butane-propane mixed gas

KS 03:91:1985

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/

commercial establishment

(Plumbing, etc.)

KS 1938:2015

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

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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.

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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)

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(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.

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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.

14

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%.

15

Graph 2: Correlation between GNI/Capita and LPG consumption/Capita (B)

(World Bank Data、Global Economic.com)

Correlation between GNI/Capita and LPG consumption/Capita (Data: World Bank, Global Economic.com)

LP

G c

onsu

mp

tio

n/c

ap

ita

(kg

/ p

ers

on

)

(US$/person)

Kenya

16

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.

Graph 4 : LPG demand prediction in Kenya (D)

Kenyan GNI, population prediction

Popula

tio

n (

1000 p

eople

)

LPG demand prediction

LP

G c

onsum

ptio

n a

mount (p

ers

on)

LP

G d

em

and (

ton)

14% increase case

GNI/Capita Analysis

LPG consumption/ Capita

17

(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

18

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)

19

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

20

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.

21

(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)

22

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

23

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.

24

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

25

(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

enforced in 1999 and amended in 2015

Law pertaining to environmental protection and

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, 2003, Legal Notice No. 101

Regulations that provide legal basis to

implementation of environmental impact

assessment.

Environmental Management and Co-ordination (Air

Quality) Regulations, 2014, Legal Notice No. 34

Regulations pertaining to the prevention and

mitigation of air pollution and standards for air

26

Laws, etc. Outline

quality and emissions.

Environmental Management and Co-ordination (Water

Quality) Regulations, 2006, Legal Notice No. 120

Regulations pertaining to the prevention of

water contamination and standards for water

quality and contamination.

Environmental Management and Co-ordination

(Waste Management) Regulations, 2006, Legal Notice

No. 121

Regulations on waste management and

control, covering solid wastes, industrial

wastes, hazardous wastes, insecticides, etc.,

biomedical wastes and radioactive wastes.

Environmental Management and Co-ordination (Noise

and Excessive Vibration Pollution) (Control)

Regulations, 2006, Legal Notice No. 121

Regulations pertaining to the control of noise

and vibration as well as noise standards.

Environmental Management and Co-ordination

(Wetlands, River Banks, Lake Shores and Sea Shore

Management) Regulations, 2009, Legal Notice No. 19

Regulations pertaining to the management of

wetland, riverbank, lakefront and coastal

environments.

Wildlife Conservation and Management Act (Cap

376), (1985) and amended in 2019

Law on wildlife conservation and management.

It also prohibits unauthorized entry, tree felling

and hunting in protected habitats.

Prevention of Pollution in Coastal Zone and other

segments of the

environment regulations, 2003

Regulations pertaining to the protection and

prevention of pollution in coastal areas

regulated under EMCA.

Environment (society)

Coast Development Authority Act, 449, 1992 and

amended in 2012

Law granting the Coast Development Authority

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

2019

Law pertaining to the maintenance of a healthy

environment in land development.

Occupational Health and Safety Act, 2009 and

amended in 2010

Law pertaining to occupational health and

safety.

National Museums and Heritage Act (Cap 216), 2006

and amended in 2012

Law requiring impact assessment on cultural

properties and heritage, etc.

County Government Act, 2012 Law that sets forth the authority and

administrative framework of county

governments.

Other

27

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

Co-ordination (Air Quality) Regulations,

2014, Legal Notice No. 34

Parameters for ambient air quality

set forth in the standard: SOx, NOx,

NO2, SPM, PM10, PM2.5, Pb,

CO/CO2, H2S, non-methane

hydrocarbons, VOC, O3

Wastewater Environmental Management and

Co-ordination (Water Quality) Regulations,

2006, Legal Notice No. 120

Water quality standards are

established as follows.

— Domestic wastewater

— Wastewater release into the

environment

— Wastewater discharge into public

sewage system

Excessive

Vibration Pollution

Environmental Management and

Co-ordination (Noise and Excessive

Vibration Pollution) (Control) Regulations,

2006, Legal Notice No. 121

Daytime and nighttime permissible

noise levels are set by zone, such

as silence zone, residential zone,

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

28

regarding whether or not IEA procedure is necessary in this sector. For this reason, advance

confirmation with NEMA on this matter is required.

<Management of hydrocarbons>

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 (Decision-making on whether or not an EIA study is required)

The project proponent is to prepare and submit a project report. The project must include chiefly the following.

The objective and scope of the project

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 (Establishment of the scope of the EIA

Scoping of the environment is a process for defining important conceptual matters related to the project activities and for determining the terms of reference of the EIA study. Matters to

29

No. Step Outline

study and of the terms of reference (ToR))

be studied in scoping include the following.

Communication plan (target parties & timing)

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 EIA study

The EIA study must address issues of concern found in the 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 study

The EIA study aims at identifying the following matters.

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 report

The project proponent is to submit an EIA report, together with 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 report

The project proponent is to submit an EIA report, together with 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.

30

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.

31

Table 12: Scoping matrix (LPG receiving terminal & ocean floor pipeline)

Number

Impact category

Assessment Predicted impact

Construction stage

Operation 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 Excessive Vibration Pollution

B- C Construction stage: Construction work

may increase the noise level. 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

32

Number

Impact category

Assessment Predicted impact

Construction stage

Operation 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 and relocation of residents

C D Construction stage: Residents may have

to be relocated with land acquisition. 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 & indigenous ethnicities

C C Construction & operation stages: The

presence of minorities and/or indigenous ethnicities requires inspection in the future.

16 Local economy, such as employment and means of livelihood

B+/C B+/C Construction stage: Job opportunities

will increase for local residents. At the same time, the project may impact 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 regional resources

C C Construction stage: There is possibility

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 infrastructure & services

C B+ Construction stage: There is possibility

of traffic congestion by construction work vehicles. Operation stage: The project will reduce

the use of firewood, resulting in reduction of effort required for cooking with firewood.

20 Social capital & social organization, such as local decision-making entities, etc.

D D Construction and adjoining stage:

No particular effects are anticipated.

21 Imbalance in damages and benefits

D D Construction and adjoining stage:

No particular effects are anticipated.

22 Conflict of interests within the region

D D Construction and adjoining stage:

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

33

Number

Impact category

Assessment Predicted impact

Construction stage

Operation 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 infectious diseases

B- C During construction: There is a risk of

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 (including occupational safety)

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.

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 impact and climate change

D B+ Construction stage: No impact of

concern is anticipated. 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 impacts

Study categories Study methods

1 Air pollution Collection and update of climate & meteorological data (temperature, humidity, wind velocity, wind direction & precipitation)

Current air quality conditions

Gather and review secondary data

On-site survey Baseline data for air quality (as

needed)

34

Environmental & social impacts

Study categories Study methods

Organize related standards Evaluate impact and propose

mitigation measures and a monitoring program

2 Water pollution Study into the current state of water quality in areas where potential impacts are likely, such as the LPG terminal and ocean floor pipeline route

Organize related standards Evaluate impact and propose

mitigation measures and a monitoring program

Gather and review secondary data

On-site survey Baseline data for water quality

(as needed)

3 Waste Inspection of discharged waste volume & type

Study into waste storage, transport & handling method

Propose recommended mitigation measures

Gather and review secondary data

Interviews with related bodies

4 Soil pollution Current soil quality conditions Propose recommended mitigation

measures

Gather and review secondary data

On-site survey

5 Noise and excessive vibration pollution

Current noise conditions Organize related standards Evaluate impact and propose

mitigation measures and a monitoring program

Gather and review secondary data

On-site survey Baseline data for noise (as

needed)

6 Bottom sediment Current bottom sediment conditions on the pipeline route

Evaluate impact and propose mitigation measures and a monitoring program

Gather and review secondary data

Interviews with related bodies

7 Ecosystem Current state of underwater and land ecosystems, including mangrove

Identification of the status of the examined ecosystems (protected areas, protected species, etc.)

Evaluate major impact of business and propose mitigation measures

Gather and review secondary data

On-site survey Interviews with related bodies

8 Hydrometeor Inspection of general conditions related to water flow, such as water flow volume and peak flow volume in surrounding areas

Evaluate major impact of business and propose mitigation measures

Gather and review secondary data

On-site survey Interviews with related bodies

9 Topography/geology Current conditions on terrain and soil quality

Evaluate impact and propose mitigation measures and a monitoring program

Gather and review secondary data

On-site survey

10 Non-voluntary resident relocation

Land acquisition and inspection of the need of resident relocation

Study into options to minimize non-voluntary resident relocation

Execution of social economic study & preparations for resident relocation plan

Gather and review secondary data

On-site survey Interviews & consultations with

relevant organizations & communities

11 Lifestyle/livelihood Baseline data on social, demographic & economic

Gather and review secondary data

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Environmental & social impacts

Study categories Study methods

characteristics of the communities surrounding the project site, including persons in fisheries

Identification of receptors vulnerable to impacts in the area surrounding the project site

Evaluate impact and propose mitigation measures and a monitoring program

On-site survey Interviews & consultations with

surrounding communities

12 Cultural assets Study of the current status of cultural heritage properties in and surrounding the project site

Evaluate impact and propose mitigation measures and a monitoring program

Gather and review secondary data

On-site survey Interviews with related bodies

13 Scenery Study of the current status of landscape in and surrounding the project site

Evaluate impact and propose mitigation measures and a monitoring program

Gather and review secondary data

On-site survey

14 Work environment Identification of hazards and risks in labor

Systematization of relevant standards, including gas handling

Propose recommended mitigation measures

Gather and review secondary data

Study into applicability of Japanese standards on gas handling on the project

15 Safety and public health risk in the region

Identification of hazards and risks to communities

Propose recommended mitigation measures

Gather and review secondary data

On-site survey

(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.)

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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.

<Assumptions>

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)

<Equation>

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

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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.

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(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

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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

40

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.

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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.

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(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

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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.

- end -