Questions linger over Shs16t refinery project

Left to right: Ms Rajakumari Jandhyala, the managing partner of Yaatra Ventures LLC, President Museveni, Ms Irene Muloni, the former minister of Energy, and then US Ambassador to Uganda Deborah Malac during the signing of the Refinery Project Framework Agreement on April 10, 2018. Photo | Courtesy

What you need to know:

  • 17 years after announcing that its oil deposits are commercially viable, Uganda is still struggling to get investors for a refinery. Potential investors in the past included firms from Russia, Iran, China, Italy, China and America but none bore fruit. 

President Museveni returned to the US, mid-last month to attend the second US-Africa summit convened by the Biden administration, followed by a face-to-face meeting at the White House which reinforced that he is still Washington’s point man.

Most noteworthy from the trip to Washington DC, was the lightning-speed announcement of the looming Final Investment Decision (FID) for the $4.5b (Shs16 trillion) Greenfield refinery. This followed a side meeting between Mr Museveni and executives of the Albertine Graben Energy Consortium (AGEC), a special-purpose vehicle of American and Italian firms.

AGEC was in 2017 awarded the tender to design, finance and construct the 60,000 barrels per-day (bpd) refinery in Buseruka Sub-county in Hoima District. The land for the project is contiguous with the 29 acquired in 2013 to accommodate among others, the Kabaale International Airport and industrial park.

“The FID is the confirmation by all investors in the deal of their commitment under a shareholders’ agreement to invest equity,” the statement issued by State House, read in part.

Energy Minister Ruth Nankabirwa told journalists last week on Friday during a press conference to highlight 2022-2023 milestones for Uganda’s oil sector, that the refinery FID will be closed this June for the project to coincide with the start of commercial oil production in late 2025.

The development is welcome news but, according to industry sources, must be treated with a pinch of salt.

To start with, the Project Framework Agreement signed between the government and AGEC on April 10, 2018, is due to expire this year.  Upon expiry, with or without FID taken, the government has the option of granting AGEC an extension.

As such the meeting in Washington DC, which was conspicuously not attended by any Ministry of Energy official, and the resultant announcement was a good “overture” for a probable extension.

If at all AGEC opts out of the deal, the government through the Uganda Refinery Holding Company Limited (URHC) would claim intellectual property rights of the refinery designs and configurations and hit the streets again to scout for another developer/financier.

URHC is a subsidiary of the Uganda National Oil Company (Unoc), the statutory body mandated to manage Uganda’s commercial interests in the oil sector.

During the DC meeting, AGEC executives were led by Ms Rajakumari Jandhyala, the managing partner of Yaatra Ventures LLC, a Washington DC-based infrastructure development and financing outfit. She previously worked in Kampala as deputy assistant of the US government’s overseas development aid agency, USAID.

Prior to joining USAID, Ms Jandhyala worked as senior advisor and head of the Peace and Security division in the State Department office of the Special Envoy to Sudan. While at the State Department, she advised the Ugandan government for three years on the bungled Peace, Recovery and Development Plan (PRDP) in Northern Uganda through the Office of the Prime Minister.

She, and the US embassy in Kampala, according to sources were central in swaying the refinery deal for AGEC, which had been beaten by a consortium of a Chinese joint venture. A due diligence team told the President in 2017 that awarding the refinery deal to the Americans and Italians was a good move to “balance foreign interests.”

In the upstream—development of the oil fields—at the time were the Anglo-Irish wildcatter, Tullow Oil PLC which has since closed shop in town, China National Offshore Oil Corporation (Cnooc), and French super major, TotalEnergies EP. TotalEnergies EP also has a stake (62 percent) and Cnooc Uganda Ltd (eight percent) in the proposed East African Crude Oil Pipeline (EACOP) that will transport Uganda’s waxy crude oil to the international market via Tanzania’s Indian Ocean Tanga port.

West-East balance

In his October 8, 2006 address in which he announced that Uganda’s oil deposits were commercially viable, President Museveni stated firmly that it was his government’s intention to have a local refinery. Initially, starting with the production capacity of 6,000 bpd but would later be scaled up to 10,000 bpd to cater for local demand (10,313 bpd) at the time.

The proposed refinery complex. Photo | Courtesy of PAU

This, he said, would save the government the annual import bill of about $43m back then. Oil production, he expected, would start in 2009. The shuffling for an investor for the project also kicked off.

The WikiLeaks diplomatic cables released in 2011 revealed that President Museveni rubbed Washington the wrong way by visiting Tehran and cutting a deal with his counterpart, Mahmoud Ahmadinejad, to have Iran build Uganda’s oil refinery.

After the three-day call in May 2009, the cables detailed, Mr Museveni flew black with yet-to-materialise Iranian promises to fund the construction of oil-processing facilities here and train our oil scholars at its University of Petroleum Studies and other institutions.

“We remain concerned about the implications of Iran’s promised investment in the oil sector and for Uganda’s foreign policy decision-making,” Ms Kathleen FitzGibbon, the former political/economic chief at the US Mission in Kampala, wrote.

The Uganda-Iran deal suffered a stillbirth.

The Kampala regime is a key ally of Washington in the restive Great Lakes region. Uganda was one of the few countries to support the then [US President George] Bush administration invasion of Iraq in March 2002.

In 2007, the government latched on the war on terror in the Horn of Africa enclave to recalibrate a profound friendship with the West—the US and its allies across the Atlantic in Brussels. In turn, the West doles out millions of dollars in military aid and other forms of donations in vital sectors such as health.

In 2014, the government went back to the drawing board to search for a refinery investor, the process facilitated by a US firm Taylor Dejongh. The search process zeroed on RT Global Resources, a consortium led by Rostec the Russian firm that manufactures the AK-47/Kalashnikov rifles.

In February 2015, the then US Ambassador Scott DeLisi told a meeting of select journalists, including this reporter, that it is “not a done deal.” Amid heavy US-EU sanctions following Russia’s annexation of Crimea in February 2014, RT Global Resources walked away in July 2015.

Later in October 2015, the Ministry of Energy announced a fresh search for an investor and attracted 40 bidding ventures. Eight reached the pre-final stage but only four were considered for discussion including the now AGEC and Chinese DongSong ventures.

Question marks

AGEC is a special purpose vehicle of Yaatra Ventures LLC, alongside Nuovo Pignone International Srl, a subsidiary of Houston-based Baker Hughes with vast business in oil and gas worldwide, LionWorks Group Ltd, a Mauritius-based private equity firm, and Italy’s Saipem SpA.

Saipem SpA is the engineering, procurement, and construction (EPC) contractor in the consortium while the other lesser unknown outfits are in charge of the other heavy lifting.

During the meeting in Washington DC, Ms Jandhyala tagged with executives of Africa Finance Corporation and Eastern and Southern Africa Trade and Development Bank (TDB Group).

Africa Finance Corporation was loosely described in the State House statement as “one of the early-stage investors” for the project while nothing was said about the TDB Group in respect to the project financing.

“The announcement today brings Uganda and the region one step closer to a long-held dream: to add value to our resources, and achieve energy security and economic prosperity for all its citizens,” Mr Museveni was quoted as saying.

Industry sources told Daily Monitor that both Africa Finance Corporation and TDB Group are what one might call “arrangers of the actual financiers.”

“In effect, the real statement out of DC was to announce that we have got arrangers that will help us secure the financiers who will help us finance the project whenever,” one person familiar with the refinery goings-on told this newspaper.

The source added: “As the arrangers, they could dangle some money—pledge some equity, but in absolute terms they will facilitate the process to look for the actual money.”

It is also worth noting that, closing project financing—$4b (Shs14 trillion)—for development of EACOP has been a headache and taking longer, including ostensibly due to the adverse campaign mounted by local and international NGOs to phase out fossil fuels.

“And AGEC wants us to believe that theirs is an easy ride?” a Ministry of Energy official intimated on condition of anonymity. “Of course, as you know there are a lot of international stakes involved and so, even the President has to string along.”

Unoc officials did not immediately respond to our inquiries on the matter.

In the 2018 Project Framework Agreement, the government committed to, among others, land acquisition, issuance of letters of commitment to support the project, approval of the technical Front End Engineering Design (FEED) studies and configuration, approval of the Environmental Social and Impact Assessment (ESIA), and negotiating and concluding the Host Government Agreement (HGA)— the main binding agreement, Implementation and Shareholders Agreement, and the Crude Sales Supply Agreement.

On the other hand, AGEC committed to designing, financing and building the refinery complex.

Other undertakings that have been ticked off are, approval of the configuration of the refinery designs, while the ESIA is due for completion and approval by the National Environment Management Authority (Nema) by March.

However, negotiation and closure of the HGA, Shareholders Agreement, and the Crude Sales Supply Agreement, is still behind schedule. Without these, it is unlikely that project financing and FID can be anywhere close.

Energy minister Ruth Nankabirwa  revealed last Friday that the Front End Engineering Design (FEED)  report was submitted to the Petroleum Authority of Uganda in August 2021 and, accordingly approved in July 2022.

President Museveni (3rd right) alongside other local and government leaders during the launch of the Kingfisher oil field in Kikuube District on Tuesday. PHOTO | PPU

“The ministry is facilitating the negotiation of the three key agreements required to enable the refinery project. These negotiations cover the Crude Oil Supply Agreement (CSA), the Implementation Agreement (IA), and the Shareholders Agreement (SHA),” she added.

The refinery and the East African Crude Oil Pipeline (EACOP) were agreed upon in February 2014 between the government and the oil companies for commercialisation of Uganda’s oil project.

The refinery has the first right of call for 60,000 bpd of crude oil extracted from the oil fields in Nwoya, Buliisa, Hoima, and Kikuube districts. In the absence of the refinery, this crude will be fed to EACOP but a long-term crude supply agreement is required.

Albertine Graben Energy Consortium (AGEC), was handed the refinery tender on the basis of among others the reputable companies, General Electric/Baker Hughes with an estimated turnover of $300b and Saipem SpA, which meant “good corporate governance and strong project risk management principles” capable of attracting private equity financing.

However, one official intimated that “it is not a go-get it process” as the EACOP experience has shown “to easily mobilise European and American money to throw it in a backwaters like Uganda laden with risks. It takes a lot than just announcements.”

“The earliest AGEC can see through that project is 2026/2027 thereabouts,” the Energy ministry official noted.

The refinery is expected to be financed in Public Private Partnership arrangement of a 60:40 ratio.  The government’s 40 percent equity share is equivalent to Shs2 trillion ($500m), and was defined in December 2017 by the Unoc shareholders; the ministries of Finance and Energy, at their annual general meeting.

On paper, Kenya and Tanzania offered to buy a 2.5 percent and eight percent stakes, respectively as part of Uganda’s 40 percent stake. TotalEnergies E&P also offered to buy a 10 percent stake leaving the government with roughly 19 percent stake. It remains unclear how far negotiations on both fronts have advanced.

Rwanda and Burundi declined participation in the project, while there is no Ugandan entity that has committed to take up shares.

The President has on various occasions argued that there is a ready market in Uganda for the locally refined petroleum products, and a captive market in Rwanda, east Congo and other neighbouring countries—making Uganda’s refinery viable. According to the Ministry of Energy, Uganda’s fuel/petroleum products imports as of last September averaged at 85 million litres with demand growing at seven percent per annum.

The planned refinery will produce Liquefied Petroleum Gas (LPG), diesel, petrol, kerosene, jet fuel and Heavy Fuel Oil (HFO).

Uganda’s daily consumption of petroleum products (petrol, diesel, kerosene and jet fuel) averages 6.5million litres, with demand growing at seven percent per annum, according to the ministry of Energy, hauled in almost daily which explains the high frequency of truck tankers on the road. One of the reasons for the daily haulage is national security-wise; the two major bulk fuel suppliers, Vivo and TotalEnergies, depots are situated within the central business district so they are never fully stocked.