16 April 2013

Uganda: Asian States Interested in Uganda's Oil Refinery

There is a slight change of plan within Uganda's oil industry. Fred Kabagambe-Kaliisa, the Permanent Secretary in the ministry of Energy and Mineral Development, says they expect to receive a report from Japan's Toyota Tsusho Corporation next month, showing whether it is reasonable to build an oil export pipeline all the way to Lamu in Kenya, especially after government agreed that the oil firms can export up to 120,000 barrels of crude per day.

He also said government was considering interest from some top Asian countries in the country's refinery project, as government prepares to issue a request for qualification for interested investors soon. Kabagambe's public remarks, made to a group of media editors yesterday, are the most solid references on just how far government has relaxed its position on agreeing to demands made by oil companies to export crude, and the shape Uganda's oil industry is expected to take.

"It makes economic sense," said Kaliisa, referring to the 120,000 barrels of oil that the oil companies will export. "We have always had issues with Mombasa [over the congestion there]. But Lamu is being developed as a port for oil exports," he added.

Uganda has discovered about 3.5 billion barrels of oil reserves. Of this, up to 1.2 billion barrels can be recovered, although with better technology, the amount can rise up to 1.7 billion. Kaliisa said the asset value of Uganda's oil industry, according to calculations within the ministry, was worth $150bn to date.

Toyota Tsusho, a company that has won the bid to build a crude pipeline between Lamu and South Sudan, earlier on proposed to Uganda's government to design a feasibility study showing the route that the pipeline will take from Hoima in the oil-rich region of western Uganda to Lamu. And the company said it would do all this free of charge. Kaliisa said unlike the refinery, government had no intention of spending any money on the pipeline.

"We shall only be regulators," he said.

The issue of the pipeline has been quite sticky in Uganda, and in some instances been a cause of frustration between the three major oil companies, Tullow, Total and CNOOC, and government. While the oil companies preferred an export pipeline, government remains hell-bent on having a refinery in place. The question of which of the two was better was answered by a feasibility study done by the Swiss engineering firm, Forster Wheeler.

According to Forster Wheeler, a refinery in Uganda will have a net present value - a calculation that looks at the profitability of an investment - of $3.2bn at a 10 per cent discount rate, and an Investment Rate of Return of 33 per cent. Using the same volumes of crude, the export pipeline would come up short, with zero, according to the report, which was released in 2010.

Even with findings from the Foster Wheeler report, the debate of the pipeline just did not go away. Speaking on the sidelines of a Tullow Oil-sponsored cocktail for the Uganda Chamber of Mines and Petroleum, a body that lobbies for a conducive working environment for both government and investors, in June last year, Aidan Heavey, the Chief Executive Officer for Tullow Oil Plc, said: "You cannot have an oil industry without a pipeline. The refinery is just an offshoot for the oil industry."

In a speech to Parliament in December last year, President Yoweri Museveni, however, said Uganda would lose money if it only exported oil.

"When it comes to a land-locked country like Uganda, there are additional losses we shall suffer if we just export crude. When crude is pumped through neighbouring countries to the coast, you pay what we call transit charges." he said.

There is also the issue of the quality of Uganda's oil. The oil solidifies quickly, meaning that the crude pipeline will need to be constantly heated to support the flow of the oil. Despite all this, and government's sentiments, oil companies never stopped to push for a pipeline. By early last year, the oil companies were already planning on how much they intend to spend on an export pipeline.

"The companies are currently studying the potential routes and design for an export pipeline, which is a critical element of the overall project," Tullow Oil wrote in its half-year statement in July last year, pointing to its oil plans in Uganda. The company added: "The total cost of the pipeline is anticipated to be $2.5 billion to $5 billion, depending on the route, design and throughput. The implications of Tullow's Kenyan oil discovery are being considered as part of this work."

There now appears some consensus between government and the oil companies over the refinery and pipeline debate. Kabagambe Kaliisa, however, said that for now, it was Uganda's oil resources, and not Kenya's prospects, that the oil companies should consider when planning for the pipeline.

"You cannot determine the pipeline on the economics of Kenya," he said. "You have to look at Uganda and South Sudan. [Kenya] is not part of the equation."

While Kaliisa said Kenya would eventually discover commercially viable oil, he said the country still had some work to do to get where Uganda is today. Nevertheless, a refinery is expected to bring immense opportunities to the country, especially in creating other products like Liquefied petroleum gas for cooking, and bitumen for road construction, among others. According to initial plans, government will start with a 30,000 barrels per day refinery at Kabaale in Hoima district, before ramping that up to 60,000.

"That will be developed unconditionally," said Kaliisa of the 60,000 barrel refinery.

This amount will be able to meet Uganda's demand, and a little bit of the region's. Uganda consumes roughly 27,000 barrels of oil per day. The country's import bill on petroleum products is estimated at $2bn annually, with much of the oil products coming in from Singapore and the Arabian markets.

Diesel accounts for half the products imported into the country, according to ministry officials. East Africa consumes roughly 200,000 barrels of oil per day, with the demand growing at seven per cent, according to figures from Uganda's ministry of Energy.

Uganda, the region's oil heavyweight, is expected to produce between 200,000 and 250,000 barrels of oil per day at peak. This amount is less than what the region will demand just over 15 years from now. In 2030, East Africa will demand 370,000 barrels of oil per day, according to ministry of Energy figures.

The reason as to why more oil will be exported out the country is because it only makes economic sense if the amount being transported out is bigger, according to Irene Batebe, the refinery manager at the Petroleum Exploration and Production department.

Kaliisa said investors from Japan, Korea, China, had shown an interest in funding the refinery project, which will cost $2bn, on a public-private partnership. The shareholding in the refinery will be 40:60 per cent in favour of the private investor.

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