22 July 2012, Sweetcrude, Kampala, Uganda – A yet-to-be selected private firm will get a 60% stake in the country’s oil refinery, leaving the government as the minority shareholder (with 40%) in what is probably Uganda’s largest infrastructural project ever undertaken, The Observer can reveal.
The refinery, to be developed under the public -private partnership (PPP), will be constructed at Kabaale in Hoima district on a 29 square kilometre tranche of land, which the government has already secured.
The information about the nature of the shareholding is contained in the ministerial policy statement from the ministry of Energy and Mineral Development for financial year 2012/2013, tabled before Parliament last week.
According to the same statement, the government could cede another 10% to partner states of the East African Community (reducing its stake to 30%) — provided they contribute to its realization — as agreed at a regional summit in Burundi last year.
“This arrangement is designed to provide confidence for the investors who are expected to not only provide most of the funding, but also operate the industry,” the statement notes.
Initial estimates by the government put the cost of constructing the refinery and related infrastructure at between $3bn and $5bn (Shs 7.4tn and Shs 12.5tn) — a colossal figure that in present terms, would constitute atleast 65% of Uganda’s national budget for the financial year 2012/2013, which was Shs 11.1 trillion. It is anticipated that the refinery will take five years to construct.
Some analysts, however, caution that this uneven arrangement, while understandable under the circumstances, could put the government at a disadvantage.
“These companies usually borrow money from external sources and the government guarantees the loans. If the project fails, it is government that has to pay,” Dickens Kamugisha, the executive director of African Institute for Energy Governance (AFIEGO), which closely monitors developments in the oil sector, told The Observer yesterday.
He advised that Uganda should follow Norway’s example, where after every three years, the country increases its stake in the ownership of the refineries, which are also run by private firms. Bukenya Matovu, head of communications in the ministry of Energy and Mineral Development told The Observer on Tuesday that no conclusions regarding the shareholding arrangement had been made — meaning that the figures in the ministerial statement are tentative.
“We have not even selected the company that will work with government to put up the refinery, and even when we do, so many things could change, depending on the outcome of the negotiations,” Matovu said.
Nearly all oil producing countries on the continent have settled for the public private partnership for construction and operation of oil refineries, but the shareholding arrangements vary. In Nigeria, which produces an estimated 2.6 million barrels of oil per day (largely crude oil), the government controls 60% of oil operations including the refineries. The country nationalized the oil sector in 1977.
In Sudan, the government and the private developer (China National Petroleum Corporation) each own a 50% stake in the oil refinery at Khartoum. The Uganda government projects that oil production in the country will start in 2017 and Uganda will be in position to churn out 20,000 barrels of oil per day.
Matovu said at 20,000 barrels of oil per day, the refinery will be processing oil products for only the domestic market. Later, after the capacity of the refinery has been expanded to produce 60,000 barrels of oil a day, the country will be in position to export some of the oil products.
Meanwhile, a host of international firms have started intensely lobbying to be considered for the multi-billion dollar oil refinery, sources in the oil industry told The Observer. Sources said Chinese firm, the China National Offshore Oil Corporation (CNOOC) Uganda, which is undertaking exploratory works at Kanywataba block along Lake Albert, is leading the pack that also includes the China National Petroleum Corporation (CNPC), which constructed the oil refinery in Khartoum in 2000.
Interestingly, both CNOOC and CNPC are state-owned companies, although this has not stopped them from competing against each other. Others said to be lobbying for the deal include French firm Total, as well as companies from Russia, Turkey and Iran. In trying to get ahead of each other, some of these companies have enlisted the help of powerful brokers, especially politicians and prominent businessmen, to help unlock the doors leading into the corridors of power.
Sources told us that in the last four months, officials from CNOOC have met with senior government officials, including President Museveni, to assure them that the company has the financial muscle to undertake the project. CNOOC-Uganda’s publicist, Wei Chai, however, dismissed the reports as unfounded.
“Generally, we do not comment on market rumors,” Chai told The Observer via email on Wednesday.
Since Uganda discovered oil in 2006, there has been a lot of excitement and hope that the resource will push the country towards the middle income status it aspires. In the same vein, some analysts have expressed pessimism that the oil resource, if not well managed, could turn into a curse, as has been the case in other oil producing countries.