Unrefined oil politics

By Haggai Matsiko

How close links to Mbabazi  cost Chinese US$3bn deal

When Uganda’s Prime Minister Amama Mbabazi visited China in June last year, he met with Wang Yilin, the chairman of China National Offshore Oil Company (CNOOC).   At the time, The Independent heard from sources that the two discussed plans and it appeared to be a done deal that China would build the proposed US$3 billion oil refinery in Uganda.

The meeting between Mbabazi and Wang Yilin was four months after CNOOC and its two partners in Uganda’s oil sector; Total and Tullow, in February 2013 signed a Memorandum of Understanding (MoU) with the government, in which they agreed to among others the construction of the 60,000 Bpd refinery.

It appeared CNOOC was looking to build the refinery. But, in a surprising turn of events as bidding for construction of the refinery enters the final stages, Russian and South Korean firms appear to have grabbed the lead from China.

Oil sector investors and analysts are struggling to understand why CNOOC, which all has been seen as a frontrunner, did not even place a bid.

Instead, the Chinese interests were represented by China Petroleum Pipeline Bureau (CPPB), which specialises in construction of oil pipelines.  In a statement announcing the latest developments, Kabagambe Kallisa, the Permanent Secretary in the ministry of Energy, which is charged with the refinery building process, said the CPPB was kicked out because it “did not adequately satisfy all the requirements of the Request for Proposals (RFP)” that followed a bidders’ conference held in March in Kampala.   “Government will commence negotiations with the two preferred bidders and thereafter issue a request for the Best and Final Offers (“BFO”) document,” Kallisa said.

The two consortia in the lead now are South Korea’s SK Group and Russia’s RT-Global Resources, Kallisa said.

“The two consortia will be expected to submit their respective Best and Final Offers by the end of August 2014. Government will then negotiate the Principal Project Agreements with the highest scoring Preferred Bidder and once executed, take forward the development of the project,” he said.

High stakes

Unlike other projects, the refinery is very strategic for President Museveni. The Lead investor will hold a 60% stake, the government is expected to hold 30% and the regional government’s Kenya, Rwanda and Tanzania, 10%.

Estimated to cost U.S $3 billion, the project had attracted interest from Japanese Marubeni Corporation, UAE’s PETROFAC and VITOL SA from Switzerland—they had all expressed interest. The latter two did not put in bids.

An evaluation team comprising representatives from the government together with its Transaction Advisor, TaylorDeJongh, are undertaking a detailed evaluation of the proposals expected to take one month.

The evaluation criteria will include, but not be limited to, the overall technical experience and financial capacity and the development, financial and commercial plans submitted by the bidders.

Results will be announced and negotiations on the refinery are expected to be concluded by end of year.

“One of the Government’s objectives is to select an investor that will develop a refinery to convert Uganda’s waxy crude oil into the desired petroleum products that meet set standards”, Robert Kasande, the Refinery Project Manager in MEMD said in a statement.

The energy ministry acquired 29 Square kilometres of land in Buseruka Subcounty, Hoima District through implementation of a Resettlement Action Plan that provides for compensation for about 7000 affected people.  Uganda first discovered oil in 2006 and with an estimated 3.5 billion barrels of crude, the country intends to build its 60,000 b/d refinery in two phases of 30,000 b/d per phase, commencing in 2015.

Fierce competition for Uganda’s refinery is a huge departure from the past when President Yoweri Museveni and his army of technocrats at the Energy Ministry battled oil companies over whether construction of the refinery was feasible in Uganda.

The refinery has pitted the world’s biggest names not because of its worth, experts say, but the opportunity it offers players to expand their footprint in the region that has become a key hot spot for the global energy investor.

Russia, Korea jostle

“This project will significantly strengthen the position of Russia in East Africa on the whole,” Sergei Chemezov, the CEO Rostec, which owns RT-Global Resources said, “the project will provide an opportunity to restore Russia’s presence in African countries.   It will establish necessary conditions for the further development of relations with several countries in most diverse fields. This will ensure signing of new contracts, including those which provide for the export of Russian high-tech products.”

With this much at stake, Moscow and Seoul diplomats and their teams of technnocrats have been working around the clock and the Energy Ministry is teeming with activity.

While Uganda’s deputy ambassador to Russia, Nelson Ocheger, broke the news of RT’s performance to Moscow, it is no coincidence that the country’s deputy Foreign Minister Gennady Gatilov decided to pay Kampala a visit at this time.

While in Uganda, Gatilov met and held talks with President Museveni on June.20.

In Kampala South Korea’s ambassador PARK Jong-Dae has also been busy. He told The Independent they SK Group would win the contract.

With the big players, money for financing the venture, which initially was a problem, appears to have been resolved.

RT’s General Director Andrey Korobov, said that the company had already lined up about US$ 1 billion for the project. Its partners, VTB Capital Plc are expected to bring the funds and Tatneft to do the engineering work.

The SK Group has SK Engineering and Construction, China State Construction Engineering Corporation for the engineering work and SK – KDB Global Investment Partnership Equity Fund for the finances.

The entry of either Russia or South Korea, however, raises concerns over how the new players will work with the oil companies—Tullow, Total and CNOOC—which from day one have been opposed to a refinery bigger than 30,000 barrels.

Duncan Clarke, the author of the Crude continent: The struggle for Africa’s Oil Prize, told The Independent in an interview that the oil companies would not be willing to invest in a refinery, which to him is more risky than the crude export pipeline.

Clarke said, to construct a refinery, Uganda needs a different class of investors that will not be an upstream oil company like Tullow. In RT and SK Group, however, the government appears to have them.

Tullow, CNOOC, and Total have always insisted on the option of the pipeline.

The Independent could not verify claims that of the two companies that declined to submit bids—VITOL S.A and PETROFAC, one lost interest in the refinery after executives at one of the oil companies told them that they could not guarantee feedstock for the refinery.

Total’s former Country Manager Loic Laulandel, who left in mid-June, said “there is an obligation to supply the refinery, this is clearly stated in the MoU and we have oil enough to supply the refinery, so there are no issues”.

“What I know is that the oil companies agreed to the refinery of 60,000 b/d in the MoU, I therefore do not see how they would refuse to work with whoever becomes the lead investor in the refinery,” former Tullow Oil President, Elly Karuhanga, who is also the Chairman, Uganda Chamber of Mines & Petroleum (UCMP) said. UCMP is an organisation that seeks to promote and develop Uganda’s mining and petroleum operations and services.

China out

While surprising, insiders say it was not shocking that the Beijing consortia did not make the final list. China, which had expressed interest in the refinery as early as 2011, had been expected to take the deal.

While explaining why its US$2.9 billion farm-down to China’s CNOOC and France’s Total, Tullow Oil said it chose Total because the French company had the money required to develop the resources and CNOOC because the Chinese were coming in with refining experience. Total is the world’s fifth largest oil and gas company by revenue.

But the three; Total, Tullow and CNOOC, got caught up in a disagreement with President Museveni and his army of technocrats over the size of the refinery.

The deadlock lasted more than a year until it was finally settled with the signing of the MoU in February this year.

South Korean advantage

However, before it was resolved, President Museveni embarked on a globetrotting mission in search of other investors.

Museveni first travelled to Iran and consulted on refineries, he said in 2012. In December the same year, Museveni made another trip, this time to Russia.

During this trip, Museveni interested Russia in Uganda’s oil. The following year, Museveni sent to Moscow his Energy Minister, Irene Muloni, who on November 5, 2013 signed MoUs with Rostec.

Rostec owns RT-Global Resources, the company in the chase for the refinery deal and Rosoboronexport, the company that supplied Uganda with the Sukhoi fighter jets.  Having supplied Uganda the jets, Russia’s state company saw an opportunity in the construction of Uganda’s refinery to spread its tentacles in the region.

Apart from Russia, last year, President Yoweri Museveni travelled to South Korea and met President Park Geun-hye and a host of investors.

Just like the Russians, President Park expressed interest in Uganda and called for economic cooperation with the continent that is rich in oil, other resources and that has high economic growth potential.

Museveni is said to be a big admirer of South Korea and especially Park’s father, former President Park Chung-hee, who is hailed for transforming South Korea.

Small South Korea is today home to some of the world’s biggest brands—SamSung, Hyundai, the world’s biggest ship builder and  Samsung C&T, which constructed Dubai’s Burj Khalifa, the world’s tallest building.

In the business of oil refining, as of December 2013, SK Innovation, a subsidiary of the SK Group, owned the country’s Ulsan 840,000 b/d refinery, which is the country’s biggest. The second biggest is GS Caltex Corp’s Yeosu 775,000 b/d refinery followed by S-Oil Corp’s Ulsan 669,000 b/d refinery.

The three are among the world’s top ten biggest oil refineries despite South Korea importing almost all its crude oil.

When The Independent asked Loic Laurandel, the former Total E&P General Manager about the South Koreans, he said; “the South Koreans are very good in the refinery sector.”  “They could show a high level of expertise, they definitely would be good partners,” he said.

But most critical to President Museveni, South Koera is also a major producer of petrochemicals—the country is home to the single largest aromatics production site in the world, owned by GS Caltex.

Aromatics are used to manufacture everything from clothing, pharmaceuticals, cosmetics, computers, paints, vehicle components, cooking utensils, household fabrics, carpets, lightweight plastic components in vehicles and aircraft, and insulating foams in houses.

The Independent exclusively reports that President Yoweri Museveni consulted with South Korean diplomats about whether South Korea would build a petrochemicals industry if they won the contract for the refinery.  A petrochemicals industry would expand the basket of opportunities—jobs and boost the industrial sector in Uganda, something President Museveni has wanted for a long-time.

Following Museveni’s invite, a team of Korean experts flew into the country in March this year to work on the bid papers for the oil refinery.

China falls on Mbabazi sword

But, insiders say, China could have slid into the background on the refinery project because President Museveni wants it that way for two other reasons.

Museveni wants to check the pace at which Chinese companies were brokering deals in Kampala and, at the same time, silently reduce the prominence of his embattled Prime Minister Amama Mbabazi who is reported to be highly regarded in Beijing.

President Museveni, it is said, has had an issue with China’s delay to clear financing for the US$ 1.6 billion Karuma Hydropower dam project.  Initially, when Museveni got confirmation the Exim Bank would give him the loan to finance Karuma, he had hoped that unlike the western finance power houses like the World Bank, which have a lot of conditionalities that make strenuous the process of securing loans, the Exim Bank was different.

But for more than a year, Kampala waited as the Exim Bank, which had promised to contribute 85% of the financing took its time apparently scrutinising the project. Yet Karuma is several years behind schedule.

Even after the Bank’s President, Li Ruogo, visited Kampala in May, the deal was not getting closed.

The waiting dragged on even forcing Sinohydro, the company that got the tender to demand that the Ugandan government to pay its 15% contribution up front to kick-start the 600MW project, media reports indicated last month.

In reaction, Muloni said the government had no objection to advancing the money if it would speed up the project. “…we need to give them this money so that the project does not delay any further,” a regional publication, The EastAfrican, quoted Muloni, “We cannot afford any delays.”

For Kampala this was disturbing, given that Synohydro had got the contract controversially following an understanding that the Exim Bank would fund it. Exim Bank’s okay finally came through this June.

But apart from the Karuma delay, the estranged relationship between Museveni and his Prime Minister, Mbabazi, has also brought a bitter taste to Beijing-Kampala relations especially the influence coming off the business.

The erstwhile close relation between the two thawed after it emerged that Mbabazi harbours plans to challenge Museveni in the 2016 presidential elections. In spite of pressure from the NRM party in which he is the powerful secretary-general, Mbabazi has refused to categorically state that he will not run. Instead, he maintains that he will contest if the appropriate party organs nominate him and not Museveni.

President Museveni is said to be in possession of intelligence that Beijing was the financial muscle behind Mbabazi’s Presidential bid. Mbabazi was cited at the heart of the negotiations for Karuma and travelled to Beijing where he had met a top oil executive, who expressed interest in the refinery.

Insiders say that if the President had any doubts about Mbabazi’s ambitions, one key development erased them.

It is said that in September 2013 in Kampala, Zhang Dejiang, the Chairman of the Standing Committee of China’s the National People’s Congress (NPC) who was visiting – during a meeting with Mbabazi, Museveni, and the Speaker of Parliament Rebecca Kadaga, thanked Museveni for “choosing” Mbabazi as his successor.

Museveni did not contradict his Chinese guest but politely told him that “that is not how it is done here”. However, it became clear to Museveni that Mbabazi could be selling himself as the anointed Museveni successor.  Sources say from this point, President Museveni embarked on a silent mission to reduce the Beijing/Mbabazi influence in Kampala.

If President Museveni is indeed concerned about Beijing’s influence, insiders say, that unlike in the past when procurement laws would be bent for the country’s companies, this time it stood no such a chance.

Indeed while announcing the successful bids of RT and SK, Kabagambe Kallisa said “Kampala was looking for a credible, experienced and financially capable partner to work with Uganda to develop a refinery”.