21 August 2017

Uganda: How Chinese Firm Dongsong Lost Lucrative Refinery Deal

As Uganda pushes ahead to deliver both a refinery and a pipeline to evacuate oil from the Albertine Graben finds by the year 2020, Chinese consortium Guangzhou DongSong Energy Group Co Ltd seems to have lost out on the deal despite being one of two pre-qualifiers for the next stage of negotiations.

Sources at Uganda's Ministry of Energy say that the Chinese failed to show up for a negotiation meeting, did not return a non-disclosure agreement (NDA) and failed to execute a bond with the government - critical steps for negotiations on the construction of the 60,000 barrels per day refinery.

The government is therefore proceeding with negotiations with the Albertine Graben Refinery Consortium (AGRC), the other finalist.

"We did not issue a call for bids, we received expressions of interest from at least 40 firms, from these we selected four to do due diligence; out of the four we selected two including DongSong to progress to the next stage

"But out of the two we did not have a preferred or alternate bidder -- we wanted to negotiate with both on the same terms," Energy Ministry Permanent Secretary Stephen Isabalija told The EastAfrican.

He declined to discuss the matter further only saying that as far as the Ministry was concerned it was making progress towards delivering the refinery within the agreed timelines.

"By 2020 we must have a refinery -- that is not stopping; we have a directive from the President," said Dr Isabalija.

Clarifications

In interviews with various sources at the Ministry who are familiar with the oil refinery project, The EastAfrican has established that on June 8, Lv Weidong wrote to Dr Isabalija on behalf of Guangzhou DongSong Energy Group Co Ltd seeking a number of clarifications from a letter by the Permanent Secretary that indicated the firm had been selected to progress.

"The Consortium notes from the letter that two consortia have been selected to progress to the next stage. The Consortium seeks clarification on whether there is a preferred and alternate consortia, and if so, whether the Government of Uganda will negotiate with the Consortium as the preferred or alternate bidder," the Chinese said.

Term sheets

DongSong also asked to be given term sheets for the project framework agreement and the implementation agreement "to enable it understand the terms offered by the Government of Uganda," warning, "It is not possible for the Consortium to prepare meaningful negotiations by June 26, 2017 without the term sheets requested above."

DongSong further wanted to know the "rules that will apply to the selection process going forward," noting, "clarification on the above matters is critical for the Consortium's next course of action."

The DongSong consortium had been notified of the progress on May 29.

Its members are Guangzhou DongSong Energy Group Co Ltd, Guangdong Silk Road Fund, China Africa Fund for Industrial Corporation, China Petroleum Engineering and Construction Corporation and East China Design Institute.

Ministry response

The Ministry was uncomfortable sharing the details without first locking the Chinese in by signing a non-disclosure agreement which had apparently been shared but not returned to it.

In response, the Ministry instead dug up the long process leading up to the two selected to progress to the next stage, a process dating back to March when due diligence visits to the four consortia that had been selected for that process were done.

The Ministry also stated that once two consortia had been selected from that process there was no preferred or alternate consortia.

The request for term sheets for the project framework and implementation agreements were also denied, to be signed only with the "consortium that offers the Government of Uganda the best terms."

The EastAfrican understands that the South African law firm Webber Wentzel was retained as an independent advisor to support the negotiations led by the government. The move, sources say was aimed at ensuring transparency at the negotiation stage.

With the Chinese pulling ropes, it is understood the Ministry opted to move forward with negotiations with the other consortia.

Information from the Energy Ministry indicates that the consortium has presented an acceptable proposal on financing and technical aspects of the project.

The AGRC consortium is made up of General Electric Oil and Gas, YAATRA Ventures LLC, Intracontinent Asset Holdings Ltd and Saipem SpA, in the role of Engineering, Procurement and Construction partner.

The agreement of the core project terms signals the start of government discussions and negotiations with the consortium on the project framework agreement.

The deal will detail the proposed solutions, validation of the solutions, risk mitigation measures and additional due diligence necessary for accelerating investments and financing for the project.

Trap

In not selecting a preferred and alternate bidder, sources intimate to The EastAfrican said government was keen to avoid falling into the same trap as it did in 2016 when it selected the Russian firm Rostec Global Resources as the preferred bidder, but it pulled out at the last minute of the process leaving government hanging.

While in the previous efforts to identify a lead investor for the refinery government opted for a competitive bidding process, this time around it called for expressions of interest which falls within the Licensing Act and not the Bidding Act.

The selected consortia were asked to execute a bid bond of $2 million. The EastAfrican understands that the Albertine Graben Refinery Consortium executed the bond through PTA Bank.

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