12 April 2018

Uganda: Investors to Fund Oil Refinery Venture

Photo: The Observer
Officials signing the oil refinery agreement at State House.

Kampala — The Albertine Graben Refinery Consortium (AGRC), the venture of American and Italian firms that were on Tuesday commissioned to design, finance, construct and maintain the proposed oil refinery in Hoima District, will pick the Shs14.6 trillion ($4b) capital expenditure, including government's share for the project, which will be recouped once it starts making profits.

The refinery is expected to be financed under the public-private partnership ratio of 60:40. The government's 40 per cent equity share was agreed to last December by the Finance and Energy ministries and the joint shareholders of the Uganda National Oil Company (UNOC).

Uganda's share will be carried through the Uganda Refinery Holding Company, a subsidiary of UNOC, which is mandated to manage the country's commercial interests in the oil sector.

Endorsed

Ministry of Energy Permanent Secretary Robert Kasande told this newspaper yesterday that as part of the refinery project framework agreement signed on Tuesday at State House, AGRC has agreed to "carry our share until when we can find the money or when it [project] starts making revenue which will be used to offset the debt."

Earlier estimates put capital expenditure for the refinery, including a 210km pipeline to transport refined products to the central processing facility in Buloba, Wakiso, at Shs14.6 trillion ($4b).

Mr Kasande said AGRC planned to finance the project "through a mix of debt and equity in ratios of 70:30" and during negotiations, had showed both technical and financial competence "to do so."

The Tuesday agreement paves away for AGRC to undertake, among others, market, configuration, logistics and the technical front end engineering designs, which will lead to reaching the final investment decision in the last quarter of 2019 after ascertaining that the project makes economic sense.

Refinery capacity

The venture proposed to construct a "commercially viable" refinery of 50,000 barrels per day capacity and a 200- megawatt power plant. This would be financed and operated by the private equity within the project finance framework.

AGRC is a special purpose vehicle formed by America's General Electric International Operations Company, Italy's Saipem SpA, Mauritius-based private equity fund Intra-continental Asset Holdings (IA), and Washington DC-based Yaatra Ventures LLC.

The venture was first announced winner of the refinery tender in August last year after a protracted inside battle among government officials and intense lobbying. The venture was rated in second place with 66 per cent, behind China's Guangzhou DongSong Energy Group by the 10-member due diligence team from the ministries of Justice, Energy, Finance, the Uganda Revenue Authority and UNOC.

The proposed refinery is expected to have a capacity of 50,000 barrels per day but construction is expected to start with capacity of 30,000 barrels per day to allow operations start as soon as possible.

UNOC's legal and corporate affairs officer Peter Muliisa told this newspaper that out of Uganda's 40 per cent share, government is "essentially looking for 19.5 per cent" in light of earlier commitments by Kenya to buy 2.5 per cent and Tanzania 8 per cent stakes in the project.

French oil major Total E&P, one of the international oil companies licensed to operate in Uganda, also offered to buy a 10 per cent stake despite its earlier slamming of the project returns as "marginal" and urged government to tread cautiously. Total E&P and its partners, China's Cnooc and Anglo-Irish Tullow Oil had since 2012 developed cold feet over the refinery but in February 2014, they signed a commercialisation framework for Uganda's oil in which they agreed to develop both a crude oil export pipeline and refinery.

The framework compels oil firms to feed the refinery with crude oil to run so that the investor recoups his money depending on its performance.

Equity consideration

Mr Muliisa said UNOC shareholders set the refinery equity in consideration of other costs such as acquisition of land-- 29sq kms in Kabaale Parish, Hoima District--to accommodate the refinery complex and its attendant infrastructure such as staff quarters, chemical treating plants, and other planned amenities.

AGRC's main strength, according to due diligence, included the reputable companies such as General Electric with an estimated turnover of $300b and Saipem SpA, affiliated to Italian oil giant ENI, which meant "good corporate governance and strong project risk management principles" capable of attracting private equity financing.

wThe venture also committed to raise $100m (about Shs355b) to undertake pre-final investment decision activities such as 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 engineering procurement and construction.

Added benefits

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

The company's shortcomings included failing to provide proof that the pre- final investment decision 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. The company was also yet to identify an operator and maintenance partner, and the potential risk of high interest rates between 8 and 12 per cent on the debt financing unless backstopped through intense negotiations.

In the mix of geo-political lobbying by the Americans/Italians and Chinese, Energy ministry officials and the company's commission agents, AGRC was eventually touted as most suitable for the job in interest of striking a balance of foreign interests in the oil sector. Already there are Chinese, French and English companies on the ground.

Mr Muliisa allayed fears of Uganda ending up with an expensive refinery, saying both AGRC and UNOC have agreed to further technical studies, which will gradually reduce capital expenditure from $4b.

"The good thing here is we are involved at every stage of the project, right from developing models for both capital expenditure (capex to the operating expenditure (Opex)," he said.

"Any variations to every model will be careful scrutinised and reviewed by other government actors. If we control capex and then get involved in the project management, then we can control the final costs. But one thing I can assure you is that the studies we have done over the last six months show that capex will go down," Mr Muliisa added.

Why refinery is important to Uganda

In 2010, government hired Foster-Wheeler, a British engineering firm, to study the viability and feasibility of the refinery.

The Foster-Wheeler report posited that the refinery is an economically viable investment with a net present value of $3.2 billion at a 10 per cent discount rate and an internal rate of return of 33 per cent, despite opposition by oil companies and analysts.

President Museveni has since stood ground, arguing that there is ready market in Uganda and a captive market in Rwanda, East DR Congo and other neighboring 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 7 percent per annum.

The planned refinery will produce liquefied petroleum gas, diesel, petrol, kerosene, jet fuel and heavy fuel oil.

Uganda's dream to have an oil refinery appears to be so close yet so far. The first attempt was to get a lead investor for the project.

The first search for a refinery investor started in 2013. More than 60 companies responded to a government announcement, seeking a potential investor to take build the $4b refinery. RT Global Resources was selected as best preferred bidder and a South Korean consortium led by SK Energy as the alternative, but all walked away in mid-2016, leaving government disillusioned.

Later in 2016, 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. Two ventures, IESCO and Profundo, pulled out, leaving the contest between the AGRC and DongSong ventures.

DongSong scored 83 per cent in due dilligence but was side-stepped on geo-political grounds and reports of having paid bribes to some government officials to get the deal.

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