By Deep Earth
Uganda’s oil refinery project has taken a major step towards becoming a reality following the signing the of the Implementation Agreement at State House Entebbe, in a ceremony presided over by President Yoweri Kaguta Museveni, the main proponent of the project.
A Ministry of Energy and Mineral Development (MEMD) statement called the signing a “landmark step towards the commercialization of the country’s oil and gas resources.”
The agreement was signed by the MEMD, the Uganda National Oil Company (UNOC), and joint venture partner, Alpha MBM Investments.
An Implementation Agreement is a formal document which outlines the terms and conditions for putting a project plan into action, ensuring the project’s successful execution and deliverables. The legally binding framework defines the roles, responsibilities, timelines, and deliverables for a project with key elements including project scope, responsibilities, timelines, incentives, payment terms, and conflict resolution.
The signing of the agreement will lead to the incorporation of the refinery company, the commencement of early civil works, and Front-End Engineering Design (FEED) activities, with Final Investment Decision (FID) expected within the year, the statement noted.
The Implementation Agreement, therefore, paves the way for the design, construction, and operation of a 60,000-barrel-per-day refinery, which is meant to be built in Kabaale, Hoima. The project is expected to take three years to complete, with UNOC and Alpha MBM Investments serving as the key partners.
“We are delighted to have a partner with the financial and technical capacity necessary for the development of the project. Work on the refinery will commence immediately,” said Ruth Nankabirwa, the Minister of Energy and Mineral Development.
It is hoped that the refinery will reduce Uganda’s dependence on imported petroleum products and meet both local and regional fuel demand.
The project is part of Uganda’s broader efforts to commercialize its oil and gas resources, which include the construction of the East African Crude Oil Pipeline (EACOP).
Checkered Past
Despite opposition from the international oil companies including Total E&P (now TotalEnergies), Tullow and CNOOC, who preferred to only export crude oil and therefore register a quicker return on their investment, President Museveni insisted on having an oil refinery in Uganda too, since adding value would lead to the growth of subsidiary industries, such as petrochemical and fertilizer production at the Kabalega Industrial Park.
This would not only mean more returns but it would also see many more jobs created for Ugandans, Museveni argued.
President Museveni (M)
However, with the international oil companies (IOCs) steering clear of the $4 billion valued refinery project, it was left to the state to seek partners.
In 2015, Uganda announced the selection of RT Global Resources, a Russian consortium to build the proposed 60,000 barrel per day (bpd) oil refinery, with South Korea’s SK Engineering, identified as an alternative bidder. However no headway was made with either, amidst numerous challenges.
As such, Uganda moved on, to sign with the Albertine Graben Refinery Consortium (AGRC) in 2018. However, the project framework agreement (PFA) with the AGRC expired in June 2023 after the developers struggled to raise financing, leading to the entry of Alpha MBM Investments.
Initially to be funded through a debt-to-equity ratio of about 70:30, the financing of the refinery project will instead be equity funded going forward with Alpha contributing 60% and Uganda 40%, as we reported last month. Kenya and Tanzania that had initially wanted to invest in the project have long lost interest, meanwhile.
The remodelling of the financing structure of the oil refinery at a time when Uganda’s debt levels are worryingly close to the East African cap of 50% of a country’s gross domestic product (GDP) will most likely see the project miss its 2027 commissioning target. The refinery construction will at least require three years.
The change in the financing model is also likely to see both parties struggle to mobilise internally-generated funds for the refinery, considering the competing needs for money; causing further construction delays.
Any delays in the commissioning of the refinery has a major effect on the exploitation of Uganda’s oil resources. Under the policy directives that Uganda has passed in the oil sector, the refinery has the first call on the country’s oil resources, ahead of the EACOP.
However, this condition is only applicable if the oil refinery is in place. Short of that, the pipeline has the right to ship out crude oil at its full capacity.
The oil pipeline is expected to be commissioned in 2027, and it will have a capacity to move 246,000 barrels of oil per day, an upgrade from the 212,000 that had been agreed earlier.
So far, Uganda has discovered 1.4 billion barrels of recoverable oil. If the crude oil pipeline is to ship out this entire amount at full capacity every day, the oil would be depleted in 15 and a half years. That is a short window if one considers the emergence of an oil refinery.
Uganda, therefore, will have to promote the exploitation of other oil fields if the co-existence of the pipeline and the refinery is to make sense, and limit any tension that might arise as a result of the limited availability of oil resources.
Meanwhile, the Crude Oil Supply Agreement which will ensure the refinery has a stable supply of the 60,000 bpd of crude oil it needs, is the other crucial document that is not yet signed (between the crude oil owners – the upstream JV partners – and the refinery company}.
What is your reaction?
