Oil has been referred as the black gold for many years for it has transformed poverty stricken countries into rich nations. But it has also led to war and instability in others. Oil can therefore be looked as a curse or a blessing to a country that has it depending on whether it has the institutional systems and governance mechanisms that support its utilization for the benefit of the citizens. Accountable governments are therefore seen as perquisites for oil to meaningfully and positively transform a country from the proceeds. When Uganda discovered oil reserves way back in 2006, there was great expectation from both government and citizens about the better future prospects the country was to witness in a few years’ time. The country had 6.5 Billion barrels as of 2019 of which about 1.4 Billion could be recoverable. This places Uganda among the middle oil producing countries in Africa. There is a high possibility of recovering more oil as more areas are explored. Oil exploration was halted to first concentrate on the current oil find. In the near future however government could issue new licenses to exploration firms to reconnoiter the southern borderline on Uganda and Congo and up north in West Nile and the southern part up to Rukungiri District.
According to the ministry of Energy, the chances of discovering more oil wells are quite high. Outlook of oil production in Uganda. Uganda currently imports all its oil mainly through Kenya’s port of Mombasa. Only 10% of oil comes through Dar-es salaam, Tanzania. The total oil import bill for Uganda is approximately $250 million annually. It was hoped that the country would save this money by processing its own oil with the surplus being exported to the neighboring countries. There are several hurdles to jump for Uganda to get a refinery. The AGRC has overcome many challenges up to this stage but many more encounters are likely to come up. AGRC is supposed to discuss with Oil companies (especially Total) the Crude Oil supply agreement which will determine how much oil will be available to be supplied to the refinery and how much will be exported through the pipeline. The Oil companies are taking their time to commit to the supply agreement because they would wish to have as much oil exported as possible. The more oil they export, the more profits they make.
With the level of commitment shown by the refinery consortium, together with the support provided by government right from the president and cabinet, AGRC has better chances of delivering the refinery even when they are expected to renegade on the timelines as has already been witnessed. As to whether the refinery will operate profitable is a different ball game altogether. The amount of time that has been dedicated to the planning and strategizing, many observers are getting convinced that possibly the refinery in Uganda could be an exception and operate lucratively for many years unlike many other refineries on the African continent that have been run down. Only time will tell.
History of Refineries
The earliest oil refining is traced back in the year 1856 at a place called Jasha in Poland and was built by a Russian called Ignacy Lukasiewicz at the peak of Russia’s discovery of large amounts of oil a few years back. The main product of this refinery though was just Kerosene mainly used for lighting pharmacies and hospitals. Ignacy was later to be widely referred to as the greatest distiller who opened the new knowledge boundaries that scientists later built on to create some of the best oil refineries that produce what was to become possibly one of the most sought-after resource in the world. They say “Water is life, but Oil moves life”. That’s how important oil has been looked at for the last one hundred years. Observers predict that will not be completely replaced in the coming few more years. No resource has endured a special place in world economy as oil – not even Gold.
Background to oil
Refinery negotiations In 2010, Government of Uganda commissioned a comprehensive feasibility study to determine the viability of establishing an oil refinery. The Study was undertaken by the fabled Foster Wheeler Energy limited from UK, funded by the Ugandan government. At that time government was still ambitious and sought to establish 150,000 Barrels per day oil refinery. The study covered the location configuration and economic model. The report was however shelved and never implemented. One of the key findings was that the 150,000 B/pd was too ambitious for the country and that government needed to consider putting up a smaller refinery, if at all it had to anyway. Some advisors even suggested as small as a 20,000B/pd which the president flatly rejected. The compromise finally on 60,000 B/pd. On 7th February 2015, Government of Uganda majestically announced RT Global, a Russian firm as the qualified company to undertake the oil refinery construction project. RT Global has beaten SK Engineering and Construction from Republic of Korea. The latter complained bitterly that the process had been marred by irregularities throughout the procurement course. This was to be the first major hurdle for the refinery project.
The bitter exchanges between SK global and the Ministry of energy was quite rough to the extent it exposed the young energy sector almost completely bear with watchers wondering whether the budding industry will cope with the rough “high sea tides of Oil development given the amateurish behavior exhibited in handling the outbursts. SK Engineering later quietly exited the scene but was engaged in underhand maneuvers to regain the project it badly needed to execute at that time. No sooner had RT Global been given full authority to undertake the refinery, they dropped one of the earliest bombshell that was possibly to send shockwaves to the entire country including the President who had been instrumental in sourcing and supporting them. The President had personally travelled to Russia and had been assured of the technical competence of the firm to deliver the desired refinery within the stipulated time and resources. Given the experience of Russian in building refineries, the president did not have any reservations to support their bid. Their announcement of pulling out of the deal hardly six month after signing an agreement was not only a slap in the face of government. It sent confusion in the entire sector and caught both government and technocrat’s off-guard. RT global came off as an entity that lacks professionalism but it also the image of government in tatters. The media widely covered their malaise with consternation. Government did not allow the dust to settle, they invited back SK Engineering of South Korea back to negotiations since they had been the second best bidder. Like a jilted lover, SK Engineering flatly rejected government offer saying they had moved on. Government was back to square one. In fact it was in the negative.
Completely helpless and without any tangible replacement. It was time to put their act together. They had burnt their fingers for the first time. Would this lesson be enough? Possibly yes but they had more tests ahead. The road to establishing a refinery had hit the toughest bump right at the beginning. Did they have the capacity to check and tie the bolts in and know their shortcomings in identifying and dealing with the right investors? Time would tell. After the disappointment by the Russians, government once again sent out a call for proposals. A few companies responded but only two contenders made it to the final stage. One of them was Dong Song, a Chinese firm bankrolled by the communist government. On 10th April 2018, government announced the new investors called Albertine Graben Refinery Consortium (AGRC) comprising for firms namely Nuovo Pignone, Yaatra Africa, LionWorks and Saipem Spa from Italy. The consortium agreed to build and operate a $4 Billion 60 Barrel a day refinery at Buseruka Sub County in Hoima in Western Uganda. Government allocated 5Sq. Kilometers of land for the oil refinery facility.
The negotiations between government and AGRC had taken more than two years with back and forth talks about the PFA. Once again a new chapter had been opened. The refinery, according to the agreement, was supposed to be operational by the years 2022. International Oil Companies operating in Uganda Oil companies have vehemently opposed the oil refinery in Uganda ever since oil was discovered. President Yoweri Museveni had from the onset declared that Uganda would never export any crude oil because it fetches less money as compared to the processed one. He towed this line until he realized that whereas he is right, the economics of oil does not favour his assertion. At some point he had threatened that Uganda’s oil would rather remain in the ground than being sold unprocessed. He had not read the international oil dynamics where oil companies have the wherewithal to call the shots on who gets what of the oil proceeds irrespective of who actually owns the resource. He forgot that Uganda lacks the sills and technical competence to “harvest” the oil hence has to rely on external technical competencies to get the oil from the ground.
The international oil companies have the clout and resources to commit for long term. They are not in a hurry to reap from their investments. Although Museveni played the same card, he was soon to realize that the firms were more cunning than he had imagined. He grudgingly conceded to the EACOP, at first arguing that more oil should be reserved for refining and less for the pipeline. Although negotiations are incomplete, it seems likely that, in fact, more oil could be destined for export than what will actually stay in the country to be used in the refinery. Such is the complexity of oil crescendos in Uganda. In May 2021, Uganda and Tanzania signed an agreement for the construction of a heated pipeline that will run from Hoima in the oil fields all the way to port of Tanga on the Indian Cost. It will be 1450Km long and will be used to export crude oil.
The long awaited Final Investment Decision (FID) was finally announced in April 2021 which observers estimate that it will unlock up to $15 Billion worth of investments before the actual oil production. The News of FID was received in Uganda by both government and the private sector with a lot of excitement and renewed hope that the oil sector could finally get off the ground after almost twenty years of waiting. The national army and specifically the security that guards the president was deployed to guard the most sensitive areas within the Albertine graben ever since oil was discovered.
What AGRC has achieved so far
The AGRC composed of for different independent companies came together purposely to pool their capacities and create strong synergies to deliver the refinery. The technical side of the consortium is spearheaded by the renown Italian firm Saipem Spa which has over 50 years of experience in building refineries. The refinery land is located adjacent to Kabaale International airport which is currently under construction. The airport with a 5km runway (Longer than Entebbe International airport) is designed to accommodate large cargo aircrafts which will be bringing in logistics and large shipments. It is largely configured to mainly handle cargo and not passengers. According to the Ministry of works and transport, the airport will be substantially completed by December 2021. AGRC has so far carried out hydrological, commercial logistical and geological studies. They have also carried out a comprehensive Environmental and Social Impact Assessment (ESIA). As well as done studies to determine the products the refinery will yield (FL2) they are currently undertaking Pre- Front End Engineering Designs (FEED) which will hopefully mark the final lap before actual construction of the refinery is rolled out.
The refinery design is almost complete and the logistics handling and transportation have been considered. Most of the equipment is bulky and yet delicate. Most of it will be transported by road from Mombasa and according to preliminary reports, some of the equipment necessitate wide loading which will entail specialized transportation with maximum care and attention. During transportation, some roads could be completely closed to allowed passage of equipment because the trucks that will carry the load use the entire road space including the shoulders and pavements. Once completed, the refinery—which is to be equipped with the latest processing technologies and environmental controls and designed to process crude from Uganda’s oil fields currently under development—will produce kerosene, gasoline, diesel, heavy fuel oils, LPG, and other products for supply to the Ugandan and regional markets. Overall cost of the proposed refinery project is estimated at about $3-4 billion.
Oil Refineries in Africa
There are about forty (40) Oil refineries in Africa shared among 20 countries. The refineries vary in capacities and size ranging from very tiny ones to medium size and large scale. South Africa has the largest oil refineries (four) on the continent in terms of distillation capacity (Kb/d) per day. Sierra Leone has the smallest refinery processing only 5Kb/d while Dangote refinery is the largest single unit producing 650,000 barrels per day. Oil is a capital-heavy resource and investors are always on the lookout for any signals that would threaten their investments. Perhaps the greatest threat to any oil investments especially in Africa has been related to politics. Political stability and a conducive environment given confidence to investors to put their money well assured they will recoup back their profits. President Yoweri Museveni has kept a tight grip on the oil negotiations right from the time it was discovered through tax disputes with companies to oil pipeline negotiations and the oil refinery itself. He has at the same time allowed government agencies to exercise a limited level of independence while monitoring them from a distance.
In 2019 the tax dispute between government and oil companies threatened the budding oil sector further when Tullow sought to sell its shares to Total in a 900 million deal. The tax assessment on this deal was estimated at $167 Million. The case was arbitrated in London and Tullow finally agreed to pay $167 Million as Capital gains Tax after selling its interests to Total E&P at 575 million. The exit of Tullow was another blow to the oil sector. Government nonetheless downplayed it saying many more reputed companies were interested in coming on board. Previously, in 2010, Heritage, one of the pioneers companies had also tried exit the Ugandan market by selling its stake and government had imposed a $434 million capital gains tax which the company disallowed and paid $121 Million In the long journey towards commercial production of oil in Uganda, at every corner, there is always an unseen obstacle which makes the wait even longer.
Uganda’s debt has been growing ever since the discovery of oil on the backdrop that the country will use the oil revenues to repay the huge loans. Some economists have argued that the debt could wipe out most of the revenues by the time the first drop come from the ground. Currently Uganda’s debt stands at 14.69 Billion as of June 2021. If the current trend of borrowing continues, much of the oil revenues will have already been spent on servicing loans. It is anticipated at peak production (estimated at 180,000 Barrels), Uganda will be earning approximately $4.5 Billion annually. This figure however includes incomes for oil companies as well. Out of 40 refineries in Africa, majority of them remain inactive due to several reasons ranging from; lack of crude supplies, mechanical problems, while others are simply not economically viable. It’s not clear why most refineries in Africa run into problems a few years after set up. For example the Tema refinery in Ghana hardly operated for two years. Crude was exhausted in a few month soon after its commissioning and the refinery was shut down since it had been rendered redundant. In Kenya, the Mombasa refinery which was being run privately by Indians was loss making for many years until the investors sold it back to government. It has been nonoperational since 2013. Refineries in Zambia, Nigeria, Cameroon, South Africa, Egypt, Libya etc. are all not functioning currently, due to varying reasons.
A comprehensive study is required to understand the dynamics and operations of oil refineries in Africa and what ought to be done to salvage their formats. Africa is yet to get one refinery that has operated consistently and is profit making for at least twenty years. The fundamental question many investors ask themselves has been, “why do refineries fail in Africa? What does it take for Africa to have a meaningful business oriented refinery that is professionally run and makes business sense? Are governments in Africa responsible for the collapse mismanagement of oil refineries? How come even refineries that are run in purely private basis soon run bankrupt? These and many more questions linger in the minds of investors in the delicate oil sector on the continent. The Uganda oil refinery has had its fair share of “bumps” even before the plant is established. Will it wither the storm that other refineries have had to contend with?
Economic Model of oil market
It has been a long wait to get the crude from the ground on to both local and international market. The dynamics of international oil marketing is as complex as process of refining it. Refining oil is considered one of the most multifarious undertakings. It takes meticulous planning and strategic forecasting that simple minds would not fathom. It is one thing to discover oil. It’s another to harvest in a beneficial manner. The prices are volatile, and unstable which makes forecasting quite challenging The oil companies are never trusted anywhere and are always looked at as money hungry and only profit oriented even if it means destroying the environment and causing instability to the countries with oil. Upon the pronouncement of oil discovery in Uganda President Yoweri Museveni informed the country that Uganda would never export oil in its crude oil. From the onset he emphasized that the country would build its own refinery and export final products. He maintained this position for such a long time until he had to make some concessions to oil giants who too were not willing to support a proposal that would truly cut back on their profits.
Oil companies have never warmed up to the idea of establishing refinery in developing world. They were not about to do the same in Uganda. It is often argued that countries with stable and democratic governments are more likely to offer better conducive environments to invest in oil compared to autocratic and military controlled nation states. Uganda to a less extent enjoys a level of democracy but the current president keeps a strong grip on the country welding all executive powers and is almost unquestionable and a micro manager. Although this could have advantages since it removes bureaucratic tendencies in decision making, in the long run it could have negative consequences in case the current president is no longer in power. Is a refinery good deal for Uganda? Not until it is operational, for some time can one tell. As of now the government of Uganda has given the benefit of doubt to AGRC with high hopes that the consortium could pull off the magical feat that continues to elude many African oil producing nations. AGRC has assured government that one of the reasons why refineries in other parts of Africa fail is because they produce a few products specifically Petrol and Diesel. The investors say they have a range of products lined up which will guarantee good returns both in short and long run. One of the products they have talked about for instance is LPG for cooking which they argue has a ready market and yet will be produced cheaply compared to what is currently being imported into the country.