Museveni, investors fight over refinery

By Haggai Matsiko

Oil firms fear bankruptcy as President goes for biggest refinery in the region

In October 2011, President Yoweri Museveni urged members of his ruling party to resist ferociously those “parasites who want to give away this resource (oil) for a morsel of food”.

He was making a case for an oil refinery in Uganda. But oil companies’ officials were shocked by the President’s position because they thought that, at 1 billion barrels; Uganda’s confirmed recoverable oil reserves then were just that, ‘a morsel’ and were better off just exported.

Huge refinery

It now emerges that Uganda is planning Africa’s fourth largest oil refinery—far bigger than what a study in 2010 noted was viable for the country.

“Government’s plan is to develop a 60,000 BOPD refinery that will later be expanded to 120,000 BOPD and then 180,000 BOPD,” a recent request for Expression of Interest for Transaction Advisory Services from the ministry of Energy reads.

Algeria’s Skikda Refinery is the biggest refinery in Africa followed by Libya’s Ras Lanuf and Nigeria’s Port Harcourt I & II refineries– that produce  at only 25% of their capacity.

Libya has Africa’s biggest oil reserves followed by Nigeria. Algeria has the smallest reserves in this club but Uganda’s paltry 1 billion barrels cannot be compared to its 12 billion barrels of recoverable oil.

Although all these countries have several other refineries, at 180,000 b/d, Uganda’s refinery will be the fourth largest on the continent. While Angola has 13.5 billion barrels, Uganda’s refinery would be two times bigger than Angola’s two refineries—Cabinda and Luanda refineries combined. The two refineries, Cabinda owned by Chevron and Luanda by Sonangola have a combined capacity of 72,000 b/d.

Sources say that this huge capacity has driven away the oil companies that were brought in to fund it. After years of negotiations and counter negotiations, sources privy to the discussions say the government and oil companies have failed to agree on the refinery.

Ministry of Energy officials backed by President Museveni, have maintained that however small, without a refinery, no drop of oil would be exported by the oil companies.

More oil reserves

Behind this firm stance on an ambitious refinery, The Independent can reveal, is an increase in the demand of petroleum products over what a 2010 study had projected and an increase in Uganda’s oil reserves.

Uganda’s reserves have jumped up to 3.5 billion barrels from 2.5 and chances are high that the reserves will shoot up even further, according to Ernest Rubondo, the commissioner, Petroleum Exploration and Production Department (PEPD). The increase in reserves follows appraisal of three oil wells—Gunya, Mpyo, and Jobi East, in Exploration Areas 1 and 2 in the north of Lake Albert area.

“If we are very lucky, we will get 8 billion barrels and if we are extremely lucky 10 billion barrels,” Rubondo said on Sept. 13 at a public debate organised by the Konrad Adenauer Foundation and the Uganda National Chamber of Commerce and Industry in Kampala.

Rubondo, a humble man with a soft calm voice, likes to go slowly. This is perhaps the reason he was careful with the big figures, preferring “if were extremely lucky”. However, other officials have mentioned the 8 billion barrels figure before, dismissing claims that Uganda has too little oil for it to have a refinery. At 10 billion barrels, Uganda will be slightly behind Africa’s main oil producers Angola and Algeria—but as for now, this is still far off.

“We have engaged our partners, they might think our oil is small but you also have to look at their interests, they want to export the oil. For us we know that we have the crude and we are saying that they can only export when we are past our refining capacity,” an energy ministry official said.

Rubondo also said that of the 77 oil wells that oil companies have drilled, 70 had encountered oil and gas—representing a 90 percent drilling success rate compared to world’s average, which is 10 percent.

More re-affirming for the Energy officials is that only 40 percent of the area with potential for oil and gas has been explored. With such a success rate, and over 80 companies clamoring for licenses for the unlicenced exploration areas of the Albertine area, the source of confidence becomes clear.

These figures give a window into why despite opposition from oil companies and criticisms from donors, government officials have stood their ground on the refinery.

Refinery not viable?

World Bank, country manager, Moustapha Ndiaye earlier this year questioned the viability of the refinery in Uganda in the wake of several developments in the region saying that the feasibility study that had recommended a refinery “was only as good as the time it was conducted”.

Like Ndiaye, other critics also question the need for such a huge refinery in a landlocked country like Uganda when her neighbors Kenya, Tanzania are also discovering oil. Some critics also argue that the refinery will diminish volumes that would have been otherwise exported bringing in more revenues and at the same time fail to offset domestic fuel prices.

In such situations, examples in other oil producing countries show that governments reduce the price of the crude to boost the domestic refinery and even the revenue got from the crude that is exported, is injected into massive fuel subsidies for local consumers. Such is the case in Nigeria and Iran. Because these subsidies keep prices artificially low, wherever governments have removed them, the countries have suffered the wrath of riots by locals.

East Africa needs another refinery

But Rubondo defends what he calls “a strategic decision to construct a refinery”.

He says the benefits of a refinery are simply too many including creating jobs and saving Uganda a yearly petroleum products import bill between US$ 1 billion (2.5 trillion), which is a quarter of Uganda’s entire budget.

Uganda has suffered fuel shortages leading to price hikes that saw the country in 2011 suffer some of the worst riots led by the opposition. In 2007, Uganda was also cut off from the supply of petroleum products due to riots that rocked Kenya following a disputed election.

This perhaps explains why just after a year, officials at the energy ministry decided to make refining a priority. Objective Number Four of the National Oil and Gas Policy formulated in 2008 is in line with “refining the discovered oil to supply the national and regional petroleum product demand”.

Apart from the policy, the East African Community Heads of State in 2008 endorsed a Regional Refineries Development Strategy (RRDS), formulated by the secretariat recommending that Uganda constructs a refinery to supply the regional market.

The government commissioned an international company, Foster Wheeler, which determined the size, configuration, location and financing as well as markets for the products.

Based on this study, the government had announced that it would start with a small refinery of 20,000 b/d, develop it to one of 60,000 and the 120,000 b/d on a 29 sq kilometer stretch in Kabaale Parish, Buseruka Subcounty in Hoima District.

But before even settling the issue of resettlement of about 30,000 people on that land, the government has already announced plans to expand the project to one of 180,000 b/d. Although it will not affect the physical location, the size of the project has created doubts among even the most ardent supporters of a refinery.

Before the announcement, Irene Batebe, the Petroleum Officer, Refinery Project said that there was huge demand for petroleum products in the region adding that the growth of this demand now at 7% had already surpassed the 5% that the feasibility study had projected.

She ruled out claims that Kenya’s refinery at Mombasa makes Uganda’s irrelevant. She said Kenya’s refinery is very old and inefficient– the refinery recently broke down.

And although it has a capacity of 70,000 b/d but refines only half, which is very little to serve the region’s 200,000 b/d consumption demand that is growing at 7 percent.

Table showing countries’ refineries and their reserves

Lamu project

Museveni has also defended his refinery project. He once said Uganda would refine some of Southern Sudan’s oil. At the time, South Sudan had fallen out with the Sudan over exorbitant pipeline costs it was being charged to export the oil. Although most of the oil fields are in South Sudan territory, the pipeline infrastructure belongs to the north. However, last month after South Sudan had entered US$ 3 billion deal with Sudan to transport its oil, Kenya courted the former into a project that would lock Uganda out called the Lamu Port and Lamu Southern Sudan-Ethiopia Transport. LAPSSET is a grand project involving pipelines, roads and an oil refinery at the Lamu port of Kenya. Both Southern Sudan and Ethiopia have entered deals with Kenya.

Ugandan authorities have, however, ruled out LAPSSET as a threat. They say the project is not new and has dragged on since 1975 when it was conceived. But critics of Uganda’s refinery insist that such a project would technically lock Uganda out of the regional market.

It seems not everybody is treating this project lightly though. In fact, there are reports that talks are already on-going to map out ways of Uganda looping into the LAPSSET project by one of the oil companies. The Independent could not confirm these reports.

But it is because of these developments, sources say, that the oil companies that were initially supposed to fund the refinery have failed to release their dough. A source close to one of the oil companies intimated to The Independent that the company could not sink its funds into such a massive project. The source said that taken together with the other oil-related developments in the region, a 180,000 b/d refinery in Uganda would be but a white elephant.

When Tullow Oil looked to farm-down 66 percent of its assets in a $2.9 billion deal, it aimed for those companies that could enable refining in Uganda.

France’s Total qualified because of its financial muscle and Chinese National Offshore Oil Company (CNOOC) because “they bring with them refining experience”, Tullow Uganda’s General Manager, Eion Mekie told The Independent in an exclusive interview earlier this year.

However, the company officials had in mind and were only ready to finance a small refinery of 20,000 b/d that would cost about US$600 million contrary to the government’s plans. They hoped to combine this with a pipeline that would concurrently export crude out of Uganda.

“…an international crude oil export pipeline, combined with an optimally sized refinery will provide the maximum benefit to the wider Ugandan economy,” Loic Laurandel, Total E&P Uganda’s general manager, was quoted in local media. Total is expected to drill eight exploration wells in Uganda by end 2013, a drive that will see it spend about $650m.

A mini-survey by The Independent revealed that while International Oil Companies own refineries in Africa, refineries of a bigger magnitude like Uganda’s (estimated to cost about 18 trillion, almost two times Uganda’s 11trillion national budget) are owned by governments through their National Oil Companies (NOC). Uganda is yet to establish a NOC that is proposed in the oil bills before parliament.

With several meetings and negotiations between the companies and the government hitting a dead end over the mega refinery, the Energy Mineral released a statement for financial year 2012/2013, indicating that it was searching for a private firm to get a 60% stake in the country’s oil refinery, leaving 40 for the government under a public private partnership. That is a big and juicy carrot but so far, nobody is biting.

Meanwhile, the endless negotiations have delayed companies from carrying out production—none of them has a production licence, according to the PEPD commissioner.

Oil companies not happy

As a result, Elly Karuhanga, the President Tullow Oil Uganda cannot stop lamenting the endless delay and government bureaucracy, underscoring the oil company’s frustration.

At the Thursday debate, he expressed frustration about the fact that while Uganda discovered oil before Ghana, the West African country has been producing oil for years now. He said Uganda’s oil is not moving yet the country should be the hub of oil and gas in the region having hit oil before all its neighbours.   “What did they (oil companies) do?” Karuhanga lamented, “There is a lot of unhappiness from the oil companies and service industries because so many are running bankrupt. So many borrowed on the back of early oil production,” Karuhanga said, “now some of them have run bankrupt.” He challenged Rubondo to explain what “things are delaying Uganda” from “moving onto the next level” and warned that “capital is a coward that goes where capital grows”.

In his usual calm style, Rubondo noted that the government is acting with caution because it wants to ensure that the field development plans are developed optimally.

He added that initially the government was getting proposals of oil companies, which could only recover 10% of Uganda’s oil and that because of this patience, the proposals coming in now, are in the highs of 30%.

“We are starting with a smaller refinery not because we like it but because it comes faster and quicker,” he added as if to console Karuhanga and the oil companies he spoke for.

However, Petter Nore, the Director and Head of Department in the Norwegian Agency for Development Cooperation, cautioned that Uganda has to quit the talk at some point and start acting because all the countries surrounding it are discovering oil and gas at a faster rate.