The Business Case For Large Scale Ugandan Refinery

To go by the stories in the international business press, the Ugandan government has stonewalled oilfield development in the country largely because it prefers the crude to be refined in the country, rather than exported.

Tullow Oil, the most visible operator in the country, cuts the image of a hapless IOC trying to help a cash strapped economy earn money by developing and exporting its crude, but running into opposition instead of fawning gratitude.
“You can have both(refinery and a pipeline)”, Tullow’s founder and CEO Aidan Heavy said in June 2012. “But you cannot have an oil industry without a (crude oil export) pipeline”, he told the Ugandan Chamber of Mining and Petroleum Journal. It will take a 1,000km+ pipeline to transport Ugandan crude to the nearest export facility on the Indian Ocean. “If you are developing oil fields like the ones in the Lake Albert region, it is going to cost the oil companies about $12-14bn to develop the region. It might take 20 years to get that money back. This is a huge investment for a long period of time. If there is no market for the oil, they can’t finance it. If you have a pipeline, you can take the oil to the shore, put it on the ships and sell it so that you get your money back. But if you only have a refinery, you have to say how much oil can we sell to the refinery?”

Heavey’s gut feeling as  a businessmen cannot be dismissed. But we shouldn’t pretend that the benefits of a large sized refinery in the East African region are not significant.

If only everyone would stop for a minute and pay a little attention to details around those downstream opportunities, the Ugandan government would stop looking like the villain that a lot of people are making it to be. Uganda imports about 12,000 barrels equivalent of petroleum products day, according to the US Government’s Energy Information Administration(EIA). Most of the supplies come from the Kenyan refinery, located 1,000+km eastwards  in Mombassa on the edge of the Indian Ocean.

If Uganda can refine a significant volume of its crude it will stop importing and become the defacto supplier of petroleum products to East Africa. Kenya, the largest economy in the region, consumes 13Million litres of petroleum products every day, some of it imported. Tanzania imports all of its petroleum products(official figures: 1.7 million metric tonnes of petrol, diesel, kerosene and jet fuel a year), from South Africa and the Middle East. Its value reached $1.8Billion per year in 2010. Ethiopia imported 2,176,188 tonnes of petroleum products in 2011; its average import spend in the years between 20109-2011 was  $1.2Billion. Most of the supplies have come from Sudan, a country which shut in its crude oil production for most of 2012 and as such could not have met its obligation to supply Ethiopia. The Democratic Republic Of Congo, though quite unstable, can benefit more economically by importing fuel from  a Ugandan based refinery than what it currently does from South Africa and Tanzania(which itself is importing what it supplies to DRC).

“One of the key findings from a feasibility study (conducted by Forster Wheeler) was that development of a refinery presented better benefits to the country compared to the crude export pipeline”, the Ugandan government itself argues.

In late October 2012, the Government, sent a tender to companies bidding to be its transaction advisor for the development of an oil refinery. A Transaction Advisor shall advise Government on structuring the refinery project, developing a feasible project financing structure, planning and securing appropriate investment partners, development plans for the Refining Company including, but not limited to, preparation of the necessary legal documents for formation of the Refining Company and further detailed agreements and contracts with crude suppliers and petroleum products offtakers.

Uganda’s plan is to develop a 60,000 BOPD refinery that will later be expanded to 120,000 BOPD and then 180,000 BOPD. The strategy is to develop the 60,000 BOPD refinery in a modular manner starting with 20,000 BOPD delivered within three years. The engagement of the services of a Transaction advisor is being paid for by a grant from the Norwegian Ministry of Foreign Affairs.

So there. Tullow Oil and Partners can go ahead and export crude oil. Ugandan authorities and, or companies interested in building refineries will purchase the commodity from them at international prices and refine in the country.

The Ugandan government says that the Transaction Advisory team is expected to provide the following key expertise for the assignment:

  1. Experience in oil supply & refining contracts and agreements e.g. Joint venture/cooperation/ participation agreements, Crude oil supply contracts, Oil logistics (supply, transportation, trading and storage)
  2. Project management experience/competence in oil and gas
  3. Legal expertise and experience from international oil and gas
  4. Experience in valuation, incorporation and setting up manufacturing companies
  5. Experience/competence in financing of large investment projects


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