16 April 2018

Uganda: Govt Grapples With Oil Pipeline, Refinery Funding

analysis

Kampala — Last week's signing of an agreement for the proposed oil refinery between government and Albertine Graben Refinery Consortium (AGRC), a vehicle for US and Italian firms, was undoubtedly a key milestone.

It is the farthest government has gone in its self-assured plans to realise the project.

While the agreement doesn't necessarily mean that AGRC will soon start construction, it signals that at least now government is the lead investor for the project.

The refinery is expected to be financed under a Public Private Partnership arrangement, with AGRC taking a 60 per cent stake and government taking 40 per cent.

The project will be implemented under the guidance of Uganda National Oil Company (UNOC), the agency that is charged with handling Uganda's commercial interests in the oil sector.

The agency was incorporated in 2015 as a private company wholly owned by government.

In November last year, during the annual general meeting, UNOC shareholders capped government's stake in the refinery at Shs2 trillion ($500m), in consideration of earlier ground work - acquisition of land - over 13 villages in Hoima District to accommodate the 50,000 barrels per day refinery complex and its attendant infrastructures.

UNOC shareholders also set Uganda's equity stake in the proposed crude oil export pipeline from Hoima to Tanga Port, Tanzania, at $200m (Shs710b).

Both the refinery and oil pipeline, key requirements for commercialisation of Uganda's crude oil, are currently pegged to capital expenditure of $7.5b (approx.Shs27 trillion).

Both projects will be financed through a mix of debt and equity.

The big question, however, is where will Uganda get the money for its share for the projects?

For Uganda's 40 per cent equity in the refinery, UNOC says the country is "essentially looking for 19.5 per cent" in light of earlier commitments by Kenya to buy a 2.5 per cent and Tanzania 8 per cent stakes in the project. Total E&P also offered to buy a 10 percent stake.

For the stake in the pipeline, UNOC's chief legal and corporate affairs officer Peter Muliisa, explained that it could be either $205m (Shs752b) if the equity to ratio is structured at 60:40 or $157m (Shs576b) if the ratio is 70:30.

"But these are discussion that are ongoing," Mr Muliisa said at the weekend, adding: "Where is the money going to come from, still that is a conversation we are having with all our stakeholders."

However, he added that once it becomes clear how much Uganda is supposed to put on the table Ministry of Finance will be putting in its budget provisions for these investments because the plan is to "as much as possible reduce the financial risk exposure."

Besides the refinery and oil pipeline, UNOC is also in charge of the planned Kabaale Industrial Park in Hoima and the proposed finished products terminal at Buloba in Wakiso District, among others.

The capital expenditure for developing the oil fields is approximated at $6.7b (Shs24 trillion) but UNOC's stake, including investment, is currently being borne by the oil companies up to sometime in the future when the agency has gained the financial muscle.

Some experts have suggested that government borrows at the prevailing market interest rates, say 7 per cent, for the projects than investors injecting the entire capital expenditure which has a risk of returning expensive projects or borrowing in future to pay back.

This, Mr Muliisa admitted, is another option they are weighing.

Large debt

Bank of Uganda has put the "provisional total public debt (at nominal value) as at end of December 2017 at Shs37.9 trillion.

Economists have already warned that with the escalating borrowing, with the current GDP of $25.5b for 38 million people, even if economic growth was 73 per cent to get Uganda to GDP of $40b, the earliest the country can obtain lower middle income of $ 1,086 (about Shs4m per capita) would be 2025 even on account of oil revenues.

Some critics, however, blame UNOC's strategy as being "textbook" - in essence, "trying to bite more than it can chew".

However, Mr Muliisa, says that whereas they fully appreciate and understand such concerns, "what we are trying to do is good for the country in the long run".

"Note that we are not getting in alone. We are going in with investors such as the joint venture partners (oil companies) in the upstream which reduces our technical and financial risks."

Several African national oil companies such as Ghana, Algeria, South Africa and Cote d'Ivoire, among others have had big ambitions but the absence of substantial infusion of capital has made the ambitions hard to reach.

Some have managed to expand their asset portfolios and transitioned into world-class operators while others are still holding on, which means there is no blue print that works for all.

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