Kampala — President Yoweri Museveni's oil refinery project has once again suffered a major blow with a major Chinese contractor quitting. As has happened in many major infrastructure deals, frustration over in-fighting, intrigue and lobbying had already taken root with cabinet officials, President Yoweri Museveni's relatives, diplomats and senior technocrats at the Energy Ministry being cited in this case.
The Independent has learnt that China Petroleum Engineering & Construction Corporation (CPECC) in June wrote to the government indicating that it had pulled out of the deal. The departure of CPECC is a major set-back because it is affiliated to China National Petroleum Corporation (CNPC), the world's third largest oil company, and it is considered the largest company with specialties in oil engineering, manufacturing, construction, and contracting in China.
CPECC was part of a Chinese consortium put together by a well-known and highly connected Chinese group in Uganda; Dongsong Guangzhou Energy Group, that had following a June review emerged the best contender for the refinery project. That group had beat three others including an American consortium led by Yaatra/ Intra-continental Asset Holdings and including the renowned global manufacturing giant General Electric and Saipem; the Italian oil and gas contractor.
Insiders say the Dongsong win had everything to do with CPECC, which was being fronted as the Engineering, Procurement, and Construction (EPC) contractor or the main contractor in the consortium. Others in the group included China Africa Fund for Industrial Cooperation (CAFIC), Guangzhou Silk Road, East China Design and Engineering Institute, EXIM Bank of China, and Industrial and Commercial Bank of China (ICBC).
The Dongsong win appeared to have ended Museveni's long and convoluted search for the refinery constructor in the best possible way because it was said to have the money and expertise needed for the US$4 billion job.
"They had the money and the technical capacity to build the project," an official close to the deal told The Independent, "but they disagreed amongst themselves and the main contractor pulled out."
Given the secrecy amongst Chinese companies, it is hard even for most insiders to pinpoint what exactly happened. However, the generally accepted view is that CPECC was unimpressed that Dongsong, which is a much smaller player although it had been fronted as the consortium's leader, wanted to have controlling powers on the project; including over finances. Sources say CPECC was not ready to accept.
Matters are not helped by Dongsong's incapability to deal with a project of that magnitude. It is already struggling with the Usukuru phosphates project in Tororo, eastern Uganda, which requires only $620 million. President Museveni, sources say, had been warned about Dongsong's financial weakness but, for unclear reasons, he appears to rate it favourably most of the time. That is partly why the Dongsong deal went ahead.
Also, the Dongsong consortium defeated the competition mainly by claiming to have the financial muscle required.
In meetings with the ministry technical team, the Dongsong group provided their equity and debt financiers; China Africa for Industrial Cooperation and Guangzhou Silk Road, and EXIM Bank of China and ICBC, respectively.
The government team also noted that the Chinese consortium exhibited adequate assurance and availability of the required major contractors.
"The China Petroleum Engineering & Construction Corporation (CPECC) and the East China Design and Engineering Institute were presented as EPC and O&M partners respectively," a memo prepared by the ministry review team reads in part.
On the cost of financing the project, the China consortium also had the best offer. The consortium put the cost of borrowing for debt finance in the range of 4%- 7% and both the EXIM Bank and ICBC expressed interest in providing the debt funds for the project.
All appeared on course for the refinery as it also appeared to have good will from one of the major players in the sector--Total E&P.
Early this year, the French major offered to take a 10 percent stake in the project. 10 percent is easily over US$ 400 million, just $ 100 million shy of the $ 500 million government officials indicated was needed to kick start the project.
Total E&P's offer was important because it signaled a break from the past when the international oil companies--CNOOC, Total E&P and Tullow--opposed to the refinery. The oil companies were keen on the $3.55 billion pipeline, which hit a milestone with the signing on May 26 of a construction agreement deal between Uganda and Tanzania.
There was only a small glitch. ICBC, which intended to provide the debt finance for the project noted that for such type of financing, it would require a sovereign guarantee from the government of Uganda.
The technical team was concerned that the sovereign guarantee may involve the issuance of a financial guarantee from the Finance Ministry.
"This position is not desirable to GOU as it can expose the government to risks associated with debt repayment, especially if the consortium is inefficient," a confidential brief noted.
Apart from this, all else appeared fine. Dongsong Group had already committed to provide up to USD 100million of Pre-Final Investment Decision (FID) funds. They also noted that they are prepared to provide a bank guarantee to GOU to assure availability of the said funds.
The Dongsong consortium had also already interfaced with a number of Chinese state-owned financial institutions to interest them in the refinery project and obtained letters of intent from both equity and debt financiers, which, the technical team noted, "demonstrates readiness to finance the entire project". Up to this point, the deal appeared to be on track.
But now with CPECC out, the deal appears to have collapsed. This is because according to confidential documents seen by The Independent, the consortia were required to present among others; a co-signed letter of intent between the consortium financiers, a co-signed letter of intent between financier, EPC and Operations and Maintenance Company, conditions precedent for Pre-FID activity, proof of finances for pre-FID activity and proof of project financing.
The fall out, therefore, means the Chinese consortia cannot meet some of the necessary conditions.
Look at Plan B
The government might, once again, have to look at Dongsong's nearest challenger, an American consortium led by Yaatra/ Intra-continental Asset Holdings.
This group; The Independent has learnt, lost marks when it said it did not have confirmed financing but would procure it as soon as it was awarded the contract.
It appears the Yaatra camp had been riding on the GE name for extra clout. With assets worth over $300 billion, GE is one of the biggest companies in the world. In 2016 alone it made revenues worth $ 123 billion or five times more than Uganda's Gross Domestic Product (GDP). With the refinery deal requiring on US$4 billion, Yaatra's lobbyists hoped it would ride on GE's reputation to bag the deal.
However, when government's technical team held meetings with the lead investor and equity financier (Intra continental Asset holdings), they indicated that they will still need to go to the market to raise additional equity and debt finance for the project.
A brief to Museveni on their meetings with the Yaatra team, the Ministry of Energy officials noted several major weaknesses about Yaatra.
They told Museveni that the American consortium had indicated commitment to provide only between US$ 80-100million of Pre-FID funds and will need to go to the market to engage with potential financiers to raise additional equity and debt funds for the project once the Final Investment Decision (FID) is taken. They demanded a non-disclosure agreement with the Government of Uganda.
"However, this is likely to cause a delay in implementation in case there are any contentious issues during interface with the debt finance partners once FID has been undertaken," notes a brief seen by The Independent.
The consortium also did not agree with the government proposal of building a 60,000 bpd refinery in two phases starting with the 30,000 bpd pointing to the market and viability analysis.
Instead, they proposed to construct a refinery with capacity of 50,000 bpd.
But this, the technical team noted, may have an implication on the volumes of crude oil for export available to upstream companies during the initial stage of production.
The Yaatra team, therefore, did not present any of its intended financiers for the debt portion, did not provide adequate assurance of the availability of a company that will be responsible for operations and maintenance of the refinery, and did not provide an agreement or letter of intent from a potential operations and management partner. The Ministry officials said the Yaatra proposal lacked clarity and details on its intended debt financiers.
The Ministry officials, however, rated the consortium's refinery EPC contractor, Saipem, as highly reputable.
"The EPC contractor has adequate experience in the industry and capable of attracting private equity financing to the project," officials noted.
On the cost of financing, the American team also appeared more costly than the Chinese. Their indicative cost of borrowing for debt finance was mentioned to be in the range of 8%- 12%, unless backstopped by Export Credit Agencies.
The team expressed concerns that the cost of capital (interest rate) will have a bearing on the project's rate of return and implies that the Refinery Company (consortium of the lead investor and the Uganda Refinery Holding Company) will assume the risks associated with high interest rates.
The Intra-continental Asset Holdings consortium also hinted on the need for sovereign support during their presentations and noted that they were not ruling out the requirement for a sovereign guarantee. As indicated earlier, this position is not desirable to GOU as it can expose the Government to risks associated with debt repayment, especially if the consortium is inefficient.
Finally, when the due diligence team scored the two consortia (Dongsong and Intra-continental Asset Holdings), and the Dongsong Group led consortium was ranked as the best with a total score of 83.38% and the Intra-continental consortium was ranked second with a total score of 66.78%. But with Dongsong out, it remains unclear if the Americans will return.
Two years wasted
The government might also want to look again at some of the less attractive investors it had thrown out. Among these are Profundo Technologies Limited of United Kingdom, which had China Overseas Construction, Petrofac and Chimera Corporation.
The Profundo Technologies-led consortium was kicked out over incomplete membership after Chimera Corporation, which was the consortium's main financier, failed to appear for technical consultations.
Another contender, a Ugandan company, owned by a Canadian company, both owned by a one Eric Byenkya, are also interested in the deal. They petitioned Museveni claiming it had unfairly been locked out of the deal yet it had secured financing and all the right partners but was largely ignored and all the focus remained on the Chinese and Americans.
Government appears to be exactly back to where it was two years ago. At the time, it had picked Russia's RT Global Resources as the preferred bidder and South Korea as the alternate bidder.
Museveni favoured the Russians because, apart from considering access to weapons, the Ugandan leadership was also counting on Russia's world superiority as a counterweight to both the western powers; mainly America, and China.
The Russians pulled out and negotiations with the South Koreans also never took off.
With the Russians and the South Koreans out, Uganda appeared somewhat desperate. The Independent revealed last year that government was in negotiations with a shadowy international company registered in the British Virgin Islands (BVI), a major international tax haven, whose directors were not clear.
The Company, Burj Petroleum, had offered to invest 100 percent in the refinery, retain a stake of 80 percent and offer government 20 percent free of charge. This raised major concerns in the sector and the company was later dropped.
This time, since the Dongsong consortium emerged the best and had the money, it had expressed concerns about having an alternate bidder.
But even before they could conclude negotiations, the pull-out by their major contractor--CPECC--appears to be scattering what was seen as a solid deal.
With such disappointments, critics say government might have no choice but source funding for the project itself or revise its original stance that the refinery would reserve the right of first call on oil produced. This stance essentially meant that there would be no oil production without a refinery.
But with no cash to implement the project and investors jumping out of the deal at the last minute, opponents of the refinery say it is time for Museveni to ditch the whole project. This group has always said that a refinery will become another worthless but expensive liability on the government.
But proponents of the oil refinery, insist that apart from creating jobs, the refinery would save Uganda a yearly petroleum products import bill between US$ 1 billion (2.5 trillion) and benefit from regional demand of petroleum products, which continues to grow at over 7 percent. The problem is that with no capable investor on the table, the figures can only remain figments of imagination by the projects' proponents.
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