Uganda’s oil refinery sparks rush among world producers

By Independent Reporter

President Yoweri Museveni’s Independence Day announcement that Uganda is to build a mini-refinery for its recent but substantial oil finds has sparked a rush among oil producing companies.

Discussions on accelerating the management and institutional capacities of new oil discoveries and gas-producing economies were high on the agenda of a South-South High Level Meeting on Oil and Gas Management in the Kenyan capital, Nairobi this week.

Organised by Kenya and the Special Unit for South-South Cooperation of UNDP, it brought together representatives from oil and gas producing countries from Africa, Asia, Europe, Latin America, Pacific region, and the Middle East. With over two billion barrels of confirmed recoverable oil, Uganda is on the brink of becoming a major oil producing country in Africa.

Companies from Norway, Australia, Turkey, Iran, China, and the United States of America have all shown interest in ‘helping’Uganda exploit its oil.

London-based Tullow Oil Plc, which is the major player in the sector but whose exploration license expires this month, has announced it is looking for partners to bring the crude oil it has found to the surface.

There are reports that according to its agreements with the government, Tullow must start production within two years after the expiry of its exploration license.

The time bound nature of the agreements is added pressure for a rush among the major oil companies in the world for Uganda’s oil finds.

“We are looking very carefully at where those partners may come from,” a report by the Chinese news agency Xinua quotes Brian Glover, Tullow’s Uganda country manager saying. Britain’s Heritage Oil Plc, which operates and holds about 50% working interests in the discovered oil, has announced that a number of parties have approached it with a view to financing the large scale infrastructure programs needed and discussions are ongoing.

Compromise

Until Museveni’s October 9 announcement that the major oil companies had accepted it, Museveni’s plan for a refinery has been covertly opposed by leading investors in the regional oil sector. Most have invested in infrastructure in the region and the entry of a Uganda refinery could jeopardise their on-going businesses.

At a minimum, they have backed plans to export Ugandan crude for processing at the existing refinery in Mombasa, Kenya.

Although the capacity of this refinery is understood to be small, the financiers say it’s more viable to upgrade it and related infrastructure, like the Mombasa-Eldoret oil pipeline with a loop to Kampala.

Already, the Libyan-linked Tamoil, a private company is building the Kampala loop.

Transporting crude for export, however, poses the dual challenge of constructing the Mombasa-Kampala-Kasese pipeline to pump oil in reverse and ensuring that it is able to be heated up 39 degrees because the waxy crude, which is what Uganda reportedly has, solidifies easily.

The 2007 political crisis in Kenya which exposed rifts in the hitherto politically stable eastern neighbour represent the only major argument against Uganda depending on it for its fuel.

In Mid-September, Heritage Oil Plc while releasing its results for six months ending June revealed that it was discussing potential options with the government of Uganda for fast-track development and commencement of early production. Heritage said the options included an oil refinery, the possibility of utilising the existing railway network for a phased development under the so-called ‘Early Development Scheme’, and building an export pipeline to the coast.

Although President Museveni initially favoured a mini-refinery as part of an ‘Early Production Scheme’, he appeared to have shifted in favour of a full-fledged refinery as more oil was found. In fact, Tullow Oil chief executive Aidan Heavey on May 28 told shareholders at a meeting of the company that it had agreed to the building of a refinery to take oil from its huge Ugandan discoveries, with any surplus oil being exported.

He said initial plans were for a mini-refinery, but this was scrapped as Tullow and its partner, Heritage Oil, continued to chalk up discoveries in the region. President Museveni, an avowed opponent of exporting unprocessed raw materials, says he wants the oil resources to create jobs and for the oil money to stay in Uganda.

Uganda oil sector observers now say Museveni’s endorsement of a mini-oil refinery is, therefore, a compromise between the extreme nationalist demand for a full-fledged refinery and claims by oil majors that Uganda instead exports its oil as crude.

Challenges

A full-fledged refinery poses challenges about what Uganda will do with the refined products. Uganda alone consumes only about 11,000 barrels per day or less than 10% of the capacity of the planned refinery.

Museveni’s plan is to sell the rest of the refined product in the region.

But Kenya and Tanzania already have their own refineries and cheap sources of oil while Sudan is planning its own refinery.

Kenya is seeking to produce oil and has a number of exploration blocks licensed and drilling is expected later this year or early next year. Kenya may get a new supplier of crude following an agreement between its Vice President Kalonzo Musyoka and Venezuela Oil and Energy Minister Rafael Ramirez at the summit of African and South American countries on Margarita Island in the Caribbean.Under the deal, Venezuela reportedly offered to supply ‘affordable oil to Kenya from partners close to East Africa’.

Oil rich Venezuela’s President, Hugo Chavez, has agreements with over 20 companies to finance oil shipments at 1% or 2% annual interest through programs called Petrocaribe and Petroamerica.

But the Government of Southern Sudan (GoSS) is planning a refinery of its own according to an October 8 report by Reuters.

The report said GoSS has approved plans to build a US$2 billion oil refinery in the southern portion of the country at Akon, Warap State according to the Southern Sudan Energy Minister John Luk.

The minister said in an interview that the refinery will serve all the seven states west of the Nile. Confusion abounds over Uganda’s oil sector because of the secrecy surrounding it. Although Tullow and Heritage are listed companies on European stock exchanges and routinely disclose their operations to shareholders, they have consistently hidden behind confidentiality clauses and refused to reveal their agreements with the Uganda government.

Hopes of any transparency in the dark oil deals now lies in a proposed new law being drafted that will govern the management of oil revenues.

Based on publicly available information, therefore, the mini-refinery the President spoke about therefore appears to be the best option in the short-run as it will only produce Heavy Fuel Oil, paraffin and diesel.