Inside Shs15 trillion oil refinery hurdles

The Americans pushed so hard for the $4b (Shs15.1trillion) refinery deal. They got it. Then, like the Russians before, whom they wished nothing but streak of bad luck, it slipped out of their hands.

The Russians, through RT Global Resources, a consortium led by Rostec, a defence and technology corporation whose business include weapons manufacturing including the AK-47 Kalashnikov rifles, were a surprising choice—considering the stack of sanctions slapped on President Vladmir Putin’s cronies in response to Moscow’s annexation of Eastern Ukraine in 2014—when the announcement was first made in February 2015.

Besides Rostec, RT Global Resources had under its wings, Russian oil producer Tatneft, VTB Capital, the investment banking unit of Russia’s second-largest bank, and GS and Telconet Capital Partnership from South Korea.

With the tender in tow, the consortium ran into a brick wall as a result of sanctions—asset freeze and barring US companies from dealing with—slapped on Rostec’s chief executive officer, Mr Sergei Chemevov, a former Russian spy agency-KGB officer, and close ally of Mr Putin.

The Ministry of Energy had additionally retained South Korea’s SK Engineering and Construction Group as fallback position but the consortium decided against the offer to design, finance, and construct Uganda’s proposed 60,000 barrels per day (bpd) refinery.

Fast forward to present times, the American-led consortium, which bided for the tender in 2016/2017 as Intra-Continental Asset Holding (IA) and later became Albertine Graben Energy Consortium (AGEC), the red flags during due-diligence notwithstanding, industry sources told Daily Monitor ran into strong headwinds foamed in their own backyard: the anti-fossil fuels storm that has compelled several international lenders to run for the hills.

“Being an American company they were looking at mobilising financing at home or in Europe,” insiders intimated, adding: “But you know too well that it is in America and Europe where the anti-fossil fuel agenda is spreading fast.”

AGEC is a special purpose vehicle of American and Italian firms: Yaatra Ventures LLC, and LionWorks Group Ltd, both Mauritius-domiciled private equity firms, buttressed by Italy’s Saipem p.A alongside Nuovo Pignone International Srl, a subsidiary of Houston-based Baker Hughes with vast business in oil and gas worldwide.

It is this same polarising fossil fuels-climate change debate that forced several American and European banks and insurance companies to frantically distance themselves from the East African Crude Oil Pipeline (EACOP); the 1,443km duct that will transport Uganda’s waxy crude oil from oil fields in Hoima to the Indian Ocean Port of Tanga en route to the international market. The capital expenditure for EACOP is around $3.55b (Shs13trillion).

With the involvement of two major oil companies, France’s TotalEnergies SE and China’s CNOOC, in EACOP, it was initially thought that closing project financing would be a walk in the park but as the project took shape from 2018 so were the growing embers of “the stop financing oil projects” campaign.

Given the uncertain future political climate, several international banks that once displayed appetite for EACOP waltzed off at the eleventh hour.

Even the World Bank, which indicated previously had dished out $15b (Shs56trillion) to oil and gas projects since the landmark Paris Agreement, the binding international treaty on climate change was adopted at COP21 in 2015, announced stopping oil financing after 2019.

Red flags ignored
The oil-climate change nexus debate aside, some insiders, delightfully point to the red flags about AGEC that were raised seven years ago but were disregarded. The need to balance foreign interests in Uganda’s oil—bringing in Americans and Italians on top of French, Chinese, and Anglo-Irish’s Tullow (exited in 2021)—was a key factor in awarding AGEC the refinery tender.

In its bid, the consortium committed to raise $100m (approx. Shs379b) to undertake pre-Final Investment Decision (FID) activities such as Front-End Engineering and Design (FEED) to look at the technical aspects of the refinery, project capital and investment costs estimations and Environmental and Social Impact Assessments (ESIA), paving way to actual Eengineering, Procurement, and Construction (EPC).

Saipem SpA, would even bring to Uganda globally acclaimed refining technologies used by other refinery operator market leaders such as US based Universal Oil Products and France’s Axens.

However, AGEC could not provide proof that the pre-FID funds (the $100m) are available; was yet to interface with potential debt financers let alone going to the market to raise additional equity and debt funds for the project; and was also yet to identify an operator and maintenance partner.

The other red flag was the potential risk of high interest rates between 8-12 percent on the debt financing unless backstopped but which would similarly require intense negotiations.   The risk this posed is Uganda getting an expensive refinery project.

AGEC scored 66 percent during diligence behind China’s Dongsong with 83 percent which proposed to avail relatively cheaper capital with interest rates between 4-7 percent on debt from commercial banks, but was already saddled in the local politics.  Regardless, insiders told this newspaper that the consortium “presented a model that seemed plausible to mobilise financing from the capital markets but along the way it became challenging.”

This became clear in late 2022 when the company could not raise $8m (Shs30b) payment to Nema before submitting its ESIA report. The fees were eventually waived.

With the Project Framework Agreement (PFA) signed on April 10, 2018—the main contractual agreement spelling the rights and obligations for both sides---extended twice owing to the Covid-19 pandemic, the government elected not to renew it after June 30, 2023 when it expired.

The Ministry of Energy maintains that they are “still in talks” with AGEC. Moreso, because the consortium still retains rights to the  FEED, refinery configuration designs, and ESIA reports.

The newly announced player could purchase these to move fast considering the so much lost time, almost 11 years, since the refinery was penciled in the February 2014 commercialisation framework government signed with the oil companies--or could opt for a fresh start.

Once beaten, twice shy
In choosing a consortium from the United Arab Emirates (UAE), Alpha MBM Investments LLC, which was announced by the Ministry of Energy last week on Tuesday, sources indicated that ability to raise capital—equity and debt—with ease was a key consideration.

The consortium consists of Alpha MBM Investments, a private investment company led by Sheikh Mohammed bin Maktoum bin Juma Al Maktoum, a member of Dubai’s royal family, with investments spread out in aviation, technology and real estate according to the company’s website; SKA Energy FZE, also Dubai-based, and SPEC Energy DMCC.

SPEC Energy DMCC is a US-based, Houston, Texas, EPC contractor branches in UAE, Pakistan, Qatar and Yemen. “The company provides engineering studies, complete process and detailed engineering designs; manufacturing of production equipment and complete assemblies; total system testing prior to shipping, project management, start up and commissioning to the oil & gas industry,” reads in part the company’s bio on Linkedin.

Representatives of the consortium jetted into the country mid-month for week-long talks held at Petroleum House, seat of the Petroleum Authority Uganda (PAU), the oil sector regulator, in Entebbe before the announcement was made.

In response to our inquiries, the Ministry of Energy Permanent Secretary, Ms Irene Bateebe, said: “The consortium had two major strengths: technical and financial; demonstrated knowhow and capability to develop the project, and on the second aspect MBM demonstrated capacity to mobilise equity with ease.”

She added: “Financing is a key adjustment this time around, and Alpha MBM has exhibited financial muscle—readily available equity, then it is easy for debt to follow for the EPC.”

The refinery, a key component in commercialising Uganda’s 6.5billion barrels stock tank of oil in place, will be financed through a mix of debt and equity in ratios of 70: 30.

Uganda’s 30 percent will be carried through the Uganda Refinery Holding Company, a subsidiary of Uganda National Oil Company (UNOC).

The Ministry of Energy is currently looking for $480m (Shs1.82 trillion) as its 30 percent stake in the project.

“We have allocated some money to UNOC this financial year for the project and we will scale it up over the coming financial years,” Ms Bateebe noted.

The East African Community (EAC) countries, Rwanda, Kenya, and Tanzania--at the height of good romance among Heads of State--were previously reported to be interested in investing in the project on part of Uganda’s equity. So were the oil companies, now TotalEnergies EP and Cnooc, who always second guessed the project economics but often displayed dismal appetite as a bargaining chip

Ms Bateebe indicated that currently only Tanzania “still has interest in the project” while the oil companies are still “evaluating their interest.”

Energy transition puzzle
President Museveni and his technocrats have variously argued that there is a ready market in Uganda for the locally refined petroleum products, and in Rwanda, East Congo and other neighbouring countries—making Uganda’s refinery viable.

Uganda imports petroleum products of the magnitude of 2.5 billion litres per annum valued at about $2b (Shs7.6 trillion), according to the Ministry of Energy, with demand growing at 7 percent per annum.

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

A research paper titled “Uganda’s Oil Refinery: Gauging the Government’s Stake” published mid-this month by the Natural Resources Governance Institute (NRGI) reechoed that while Uganda’s planned refinery will have several benefits for the country, including for its security of fuel supply and balance of payments and could be reasonably profitable; generating an internal rate of return of 13 percent with an average price of $54 (Shs200,000) per barrel between 2025 and 2050, refinery economics are notoriously difficult to get right.

“Many refineries in sub-Saharan Africa have struggled: often operating intermittently and below capacity and generating a loss,” the NGRI paper suggests, citing Nigeria’s refineries operated at an average of 15 percent capacity between 2010 and 2018, and have been closed since for rehabilitation, Ghana’s 45,000 bpd refinery currently only operates at around 30,000 bpd, and is not only struggling to secure funds for maintenance and repairs, but also to procure crude, while Niger’s refinery, constructed in 2011, has struggled to pay back its loans.

“Although Côte d’Ivoire’s refinery is viewed as  one of the better performing in sub-Saharan  Africa, it has also been facing financial challenges over the last decade. In addition to  these historical challenges, refineries are now  facing new or increasing downside risks as the  global energy transition accelerates,” the study reads in part.

Energy transition
With the global energy transition expected to result “in a structural decline in the oil market in the next few decades, the paper underlines that “the pace of this transition is uncertain; even before governments unanimously agreed at COP28 to transition  away from fossil fuels, the transition was accelerating.”

The just concluded annual UN Climate Summit COP28, in Dubai was heralded as the “beginning of the end” of the fossil fuel era. The 200 parties gathered underscored the science that indicates global greenhouse gas emissions need to be cut 43 percent by 2030, compared to 2019 levels, to limit global warming to 1.5°C, which scientists say is required to prevent a “climate catastrophe”.

While COP28 stopped short of calling for an end to fossil fuel projects financing, new or planned projects like Uganda greenfield refinery face such the onward current.

Some pundits have described as unfair the idea to completely halt new oil projects in the poorer south, in Africa and Latin America, for the sake of avoiding mistakes committed by north/developed countries during the 1960s, 70s and 80s which partly contributed to the current climate disaster manifested through rising water levels, erratic forest fires, erratic weather, and fast melting glacier in the polar zones.

The Ugandan government, too, continues to chart its energy transition plan while insistent on developing its oil resources buried under the Albertine rift valley that lies at the parallels of Uganda and DR Congo, but the anti-fossils fuel agenda is key obstacle that will continually set back investment in the nascent oil sector.

Since February 2022, when the government and the joint ventures—TotalEnergies, CNOOC, UNOC, and TPDC—announced Final Investment Decision for the $10b Uganda oil project, environmentalists, buoyed by international media, intensified a conservation campaign bordering on opposition.