9 August 2017

Uganda: $4bn Oil Refinery Deal Takes New Twist As Chinese Protest

Photo: Daily Monitor
An expert watches a flaring experiment at one of the wells in the Albertine Graben (file photo).

A Chinese consortium which was competing for the oil refinery deal has described as "unfair" the decision by government to choose Albertine Graben Refinery Consortium to build Uganda's $4 billion oil refinery project in Kabaale, Hoima district.

The five-company consortium says in a formal complaint to government they were appraised as best bidder and therefore "introduction of parallel negotiations with another bidder was not necessary and in bad faith."

The companies that constitute the Chinese consortium are Guangzhou DongSong Energy Group Ltd, Guangdong Silk Road Fund, China Africa Fund for Industrial Cooperation, China Petroleum Engineering and Construction Corporation and the East Design Institute.

Their complaint follows a weekend announcement by the ministry of Energy and Mineral Development permanent secretary, Dr Stephen Robert Isabalija, that government had decided to negotiate the deal with a joint venture made up of American and Italian firms.

These include General Electric [GE], Yaatra Ventures/ Intracontinent Assets Holdings and Saipem of USA and Italy.

The government's decision followed a claim that the DongSong-led consortium collapsed after government's preferred bidder, China Petroleum Engineering & Construction Corporation [CPECC] withdrew from the race.

However, in a letter dated August 8, 2017, which is addressed to the Energy minister Irene Muloni and copied to the Energy PS, the prime minister and the attorney general, the Chinese deny knowledge about CPECC's withdrawal.

"We are taken aback by press reports indicating that GoU [Government of Uganda] has purportedly selected a group known as the Albertine Graben Refinery Consortium to develop the refinery project. Incidentally the same press reports indicate that the DongSong-CPECC consortium had been appraised as the best bidder with 83.38 per cent," reads a letter written by Lv Weidong on behalf of DongSong-led consortium.

"We are also surprised and disturbed by reports claiming that the DongSong -CPECC consortium withdrew from the selection process due to disagreements in the consortium. These claims are not true. None of our letters indicated the withdrawal of CPECC or the consortium from the selection process," the letter adds.

"The purpose of this letter is to inform you that the DongSong-CPECC consortium has never disintegrated; [it] remains strong and committed to invest in the development of Uganda Refinery project provided the concerns raised in the consortium's earlier letters are addressed," the letter adds.

Such disagreements have far-reaching consequences that could further delay the project, especially if the DongSong group decides to go to court.

The letter further notes that if their concerns are not addressed, the consortium reserves the right to challenge the procurement process that led to the selection of any other consortium.

CORRUPTION CITED

Speaking to The Observer yesterday, an official linked to the DongSong-CPECC consortium said the only reason they were denied the deal was because they are close to President Museveni.

"DongSong is suffering because it is close to the president. There is no way it can give money to people involved in the selection process," the official said adding, "Previously, when ministry of Finance officials tried to ask for money from DongSong, they were arrested. So, we were edged out because they know we can't give them money," the letter said.

According to a ministry of Energy's due diligence report, a copy of which this newspaper has obtained, the DongSong Group-led consortium was ranked as the best consortium with a total score of 83.38 per cent and the Intercontinental Asset Holdings-consortium came second with 66.78 per cent.

These emerged from a group of ten other consortia which were whittled down from more than 40 firms that expressed interest in constructing the refinery.

The report notes that since the termination of the negotiations with Russian RT Global Resources consortium and the alternate bidder that had been given the deal, government received expression of interest from over 40 companies.

The report notes that the DongSong Group-led consortium demonstrated that it has capacity to handle the project as one of its firms, CPECC, a subsidiary of CNPC, had demonstrated a high level of organisation and has built and operated four refineries in Africa [Sudan, Algeria, Chad and Niger].

"Given CPECC's experience in refinery development and operation, Uganda would benefit a lot from their expertise and innovation," the report further adds. On the Intracontinent Asset Holdings Ltd-led consortium, the report notes that it demonstrated a thorough process for establishing the viability of the project using market driven analytics to settle on a plausible 50,000 barrels per day refinery.

It adds that the consortium also has a very experienced Engeering, Procurement and Construction contractor [Saipem].

"They expressed commitment to availing the required pre-FID development costs but did not submit proof of the said funds," the report notes, adding, "The consortium did not provide the identity of some of its intended financiers for the debt portion."

However, the report notes that neither of the two consortia that were assessed is in position to realize the Uganda Refinery project without government support.

ISABALIJA LETTER

After the due diligence report, on May 29, Isabalija wrote to DongSong informing them of the government's decision to progress with them to another stage.

"Following our government of Uganda visit to your consortium and financiers offices in China in April 2017, we are pleased to confirm you the GoU's decision to progress your consortium to the next stage of Uganda Refinery Project," Isabalija wrote to DongSong's Weidong.

He added that the main undertakings of the next stage were technical and financial negotiations that would lead to the signing of a Project Framework Agreement [PFA] and the Implementation Agreement [IA].

"The PFA and IA will be signed with the consortium that offers the GoU the best terms. Negotiations will begin on Monday, 26th June in Uganda. Details of the meeting will be communicated nearer the date," the letter added.

DONGSONG RESPONDS

Ten days later, on June 8, Weidong wrote back informing Isabalija that they discussed among consortium members and were seeking clarification on whether there is a preferred and alternate consortium of the two consortia and how government was going to negotiate with them.

"The consortium further notes from the letter that the negotiations will be on technical and financial matters leading to the execution of the Project Framework Agreement [PFA] and the Implementation Agreement. [IA]. The consortium requests for term sheet of these agreements to enable it understand the terms offered by the Government of Uganda," Weidong's letter says.

It added that without the term sheet requested, it was not possible for the consortium to prepare for meaningful negotiations on the date provided by government.

"The consortium also seeks clarification on the rules that will apply to the selection process going forward. Clarification on the matters is critical for the consortium's next course of action," Weidong said.

We were unable to establish whether there was any further communication between government and DongSong before it finally awarded the deal to the American-Italian consortium.

Ministry of Energy PS Dr Stephen Isabalija told The Observer in a text message yesterday: "Unfortunately, I haven't received the letter [of DongSong protesting]." Dr Isabalija added: "However, we went through a verifiable process that is open for scrutiny and we are still following the same."

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