9 August 2017

Uganda: Oil Refinery, Pipeline Deals Set to Transform Regional Outlook

Photo: The Independent
Tullow Oil plant in Uganda.

The laying of the foundation stone for the construction of the world's longest heated crude oil export pipeline from Hoima to the Tanzanian port of Tanga, on the day Uganda also announced that it had agreed project terms for an oil refinery, is a huge step in turning the region into an oil frontier.

The two projects, with a combined value of more than $8 billion, could turn around the investment outlook of the region, attracting capital into different industries.

On Saturday, President John Pombe Magufuli of Tanzania and Uganda's Yoweri Museveni set the stage for the construction of the pipeline, which, according to a press statement, is "a landmark event in the history of both countries."

On the same day, Uganda's ministry of energy issued a statement where it noted: "The government of Uganda has agreed core project terms for the Uganda Refinery Project with the Albertine Graben Refinery Consortium (AGRC) for the development of a greenfield oil refinery."

The ministry added: "The agreement of the core project terms signals the start of government discussions and negotiations with the consortium on the Project Framework Agreement (PFA). The PFA 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."

The statement pointed out that the consortium will have the benefit of exclusivity during this period of negotiations and should the parties agree on all terms, the consortium will be granted the rights and licenses to develop and manage the refinery as lead investor in a joint venture partnership with government.

The Project Framework Agreement, according to the statement, is expected to be concluded and signed within the next two months. Progress over the two oil infrastructure projects, however, offers little clarity on the timelines and project implementation, something that investors tend to look out for.

Also, there has not been an official communication on who the contractor of the pipeline is. Sources have, however, told us that Chinese firm Cnooc will be in charge of the construction of the pipeline.

Different sources said a number of staff from China have already flown into the country and are working intensely to have the designs in place in preparation for the construction of the pipeline.

Also, meetings between Total E&P and Cnooc - the two main joint venture companies - are said to have intensified lately as the they race to have a pipeline in place by 2020 at the earliest.

According to what our source told us, French firm, Total E&P, will mainly come up with the studies and the sourcing for the financing, while Cnooc will lead construction of the 24-inch diameter pipeline.

Tullow Oil, the third partner in this joint venture partnership, will be a non-operator and will only contribute its share to the financing of the pipeline.

The issue of Tullow's role is still not clear, especially after the company's changes at the top management. The company announced in May that Paul McDade, who has been at the company for 16 years, has replaced Aidan Heavey, 63, as the chief executive officer of Tullow.

Heavey has taken on a new role as the non-executive chairman of the company. Ian Springett, the chief financial officer, recently resigned from Tullow's board, citing ill-health. He has been replaced by Les Wood, who joined the company two years ago.

Heavey's departure from the most influential position in Tullow Oil could represent a change in the company's strategy, especially in markets such as Uganda's. Tullow is trying to complete the sale of 22 per cent of its stake in Uganda to Total and Cnooc.

But the deal could meet some resistance. It is not clear whether government will slap a 30 per cent capital gains tax on Tullow's $900 million sale.

Tullow has said that of the $900 million that it intends to get at the completion of the transaction, $700 million will be spent as part of its share in the project development cost for the crude oil pipeline and its attendant infrastructure.

On that basis, Tullow sees no reason of paying capital gains tax, and has effectively asked for a private ruling on whether the transaction should attract tax.

The shareholding structure of the oil pipeline is not clear. Uganda will hold a 15 per cent stake in the crude oil pipeline from Hoima to the Tanzanian port of Tanga, where this participation is bound to be interpreted as more of a state guarantee for the project, especially in accessing land, than a call to invest money.

During the recent signing of the inter-government agreement, which spells out a working framework between Uganda and Tanzania on the pipeline, Irene Muloni, Uganda's energy minister, said Uganda will participate through the country's national oil company.

"This level of shareholding is in line with the state participation stake in the upstream oil fields under the current Production Sharing Agreements," she said.

Uganda continues to consider the development of an oil refinery as its main priority. With the country facing a debt burden already as a result of the huge infrastructure projects going on, it is hard to see Uganda committing large sums of money to the pipeline.

Finding the financing option of the pipeline and the refinery will be one of the most closely-watched news over these two projects.

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