Is Uganda’s $4b oil refinery a viable investment?

At a Geneva conference on oil and gas in 2014, Mr Ernest Rubondo, the executive director of Petroleum Authority of Uganda, welcomed investors to fund Uganda’s oil and gas sector.  The remarks were given at a time when Uganda was in high gear to secure a lead investor to develop the oil refinery.

At the time, SK Group, an energy conglomerate from South Korea and RT-Global Resources from Russia had presented final offers and, it was expected the lead investor would be selected by the end of 2014.

Mr Rubondo, who by then was a commissioner of petroleum and production in the Energy ministry, assured the Geneva audience in Switzerland that the first phase of the refinery development was expected to kick off in 2017, and would produce 30,000 barrels of oil per day.

This would later transform into 60,000 barrels of oil in two years. However, seven years later, this has not yet come to fruition.

Later, in 2018, following the government’s commitment to move ahead with the project, The Albertine Graben Refinery Consortium (AGRC) emerged as the selected lead investor.

The consortium consisting of Saipem SPA, Nuovo Pignone International SRL (both from Italy), Yaatra Africa, and Lionworks Group Limited (both domiciled in Mauritius) – is expected to sign a final investment decision for the 60,000-barrels-per-day refinery worth about $3 billion to $4 billion in 2022.

The commitment to have an inland oil refinery was advanced by Foster Wheeler Energy Limited Ltd from the United Kingdom, a consultancy firm contracted to conduct a feasibility study on building a refinery in Uganda in 2010/2011.

The firm recommended that the development of a 60,000 barrels per day refinery was commercially viable with a Net Present Value (NPV) of $ 3.2 billion at a 10 per cent discount rate and an Internal Rate of Return (IRR) of 33 per cent.

Foster Wheeler Energy Limited Ltd also recommended the size and configuration of the refinery, location, financing options, social and environmental assessment, among others.

Dr Micheal Mugerwa, the general manager of Uganda Refinery Holding Company at the Uganda National Oil Company, says the refinery project at the moment is a private sector led project.

He reveals that gvernment’s share is held by the Uganda National Oil Company, through its subsidiary Uganda Refinery Holding Company.

Uganda has up to 40 per cent equity in the refinery through the Uganda Refinery Holding Company (URHC).

In addition, East African states have been invited with Tanzania at 8.5 per cent and Kenya at 2.5 per cent as likely entrants.

Dr Mugerwa in an interview with Prosper magazine said the Final Front End Engineering Design (FEED) is expected to be complete in August 2021 and the project on Final Investment Decision (FID) is expected by mid-2022.

The refinery will produce: diesel, petrol, jet fuel, kerosene, liquefied petroleum gas (LPG) and heavy fuel oil (HFO).

Viability

Despite these developments, there are lingering questions from oil experts on whether Uganda should actually invest in an oil refinery.

This comes at the backdrop of the recent findings from a report by a UK based Think Tank Climate Policy Initiative (CPI), which reveals that Uganda’s oil refinery could simply be unviable in the long run. 

Uganda’s decision to build a refinery has been discouraged on the basis that the facility is not only an expensive venture but also lowers the value of the East African Crude Oil Pipeline (EACOP).

The report titled; ‘Understanding the Impact of a Low Carbon Transition on Uganda’s Planned Oil Industry,’ shows building the refinery is expected to result into a $1.8 billion loss of portential value to the upstream oil reserves at East African Crude Oil Pipeline, with $400 million of the loss accruing to international investors.  

“Because of the complexity required to refine Uganda’s waxy oil, capital costs of $4 billion for the Kabaale refinery are very high for a refinery which is of very small scale compared with the global market,” the report reads in part.  

Uganda’s refinery also has a small processing capacity of 60,000 barrels per day compared to other major oil refineries across the globe processing close to a million barrels per day.

 From a perspective of economies of scale, Denis Kakembo, a tax and energy lawyer, says Uganda’s refinery will not enjoy the benefits of economies of scale accruing from processing more barrels of oil.

“A country which refines more oil in a day offsets the balance on fixed costs that may come with the daily operations of the refinery,” Kakembo says.

However, Kakembo mentions that the only advantage Uganda has, is that the refinery is at the source of oil, making it cheaper to buy.

Uncertainty over oil

The oil and gas industry also remains uncertain because it lingers on exploration which must be confirmed by geologists whether it’s recoverable or unrecoverable.

Information obtained from Petroleum Authority of Uganda (PAU) reveals Uganda has 6 billion barrels, an estimate of 1.4 billion barrels being commercially recoverable.

 Uganda, at a projected peak is expected to produce a rate of about 200,000 barrels of oil per day, and it is estimated that the current discovered resources can last 20 to 30 years.

The length of time that oil and gas resources will last during production have put the oil refinery into sharp focus.

What will happen to the refinery after 30 years?

“Uganda’s oil may last for 30 years- or may out last the period depending on many factors,” Kakembo notes.

Currently, at least 40 per cent of Albertine Graben has been explored, and 80 per cent of the Graben remain unlicensed.

Kakembo cites a good example of the North Sea oil fields in the United Kingdom which have outlasted the projected time due technological advancements.

Refinery economics 

Uganda is relying on an import substitution strategy to cash in on East Africa as a premier market destination for her petroleum products.

 This includes its neighbouring countries such South Sudan, Tanzania, Rwanda, Burundi, Mozambique and Kenya.

According to details from the Petroleum Authority, by 2014, East Africa consumed about 200,000 barrels of petroleum products per day, a figure that has since increased to 300,000 barrels per day. 

This is hinged upon a demand increasing at an average rate of 7 per cent per year.

Currently, with such a high figure in petroleum consumption, all petroleum products are currently imported into the region at over $5 billion per year representing over 25 per cent of the total import bill of the region.

The refinery in Uganda will boost the region’s refining capacity and ensure the security of supply of petroleum products especially for the landlocked partner states such as Rwanda and Burundi.

However, Kakembo says the power play swirling around East Africa’s volatile market shouldn’t be taken lightly.

 In recent years, the region’s markets have been volatile over trade, and blocking of neighbouring countries’ imports.

Kenya and Tanzania have not yet committed to the invitation of Uganda to aquire a stake in the refinery.

Kakembo says Uganda can only attract Kenya and Tanzania, if the project is very attractive and mature, but it remains too early to predict whether they will commit or not. 

Dr Mugerwa reveals that; besides being a strategic investment for the country and the region, developing a refinery in the country will improve Uganda’s balance of payments by reducing the petroleum products import bill.

Value

Dr Mugerwa explains that Uganda will have a $25 to $30 cost advantage for its crude and refined petroleum value by knocking off the transportation margin of imported petroleum products.

UBOS statistics reveal Uganda’s petroleum product consumption has been growing around 7 percent a year and 37,000 barrels per day were consumed in 2018.

Most of the demand was on diesel and petrol by the transport sector, however, very little was Heavy Fuel Oil by the power sector. 

A Uganda Refinery model developed by the Natural Resource Governance Institute reveals that a growing economy and population means overall demand is likely to continue increasing.

The demand for petroleum products may outstrip the refinery supply within 10 years of its operation.

With key final touches on the Front End Engineering Design for the oil refinery, and Environmental and Social Impact Assessment, government has an uphill task of getting potential investors on board to finance the $3.5 billion refinery that Ugandans hope will wheel forward the petroleum fortunes.

Banks such as Stanbic and Absa have made commitments to be part of the oil financing arrangements.

With no guarantee that East African states will buy Uganda’s refined petroleum products. This possibility remains clear that Uganda will have to remain competitive against foreign oil producers to attract neighbouring countries.

Growing demand

 A Uganda Refinery model developed by the Natural Resource Governance Institute reveals that a growing economy and population means overall demand is likely to continue increasing.

The demand for petroleum products may outstrip the refinery supply within 10 years of its operation.

With key final touches on the Front End Engineering Design for the oil refinery, and Environmental and Social Impact Assessment.

Government will have an uphill task of getting potential investors on board to finance the 3.5 billion refinery that Ugandans hope will wheel forward our petroleum fortunes.