Govt changes strategy to salvage oil refinery dream 

Uganda’s government has started the process of salvaging its oil refinery dream after it ran out of patience with delays by a consortium of international companies to make a final investment decision for the project.

In cutting the Albertine Graben Energy Consortium (AGEC) loose, Uganda’s government has decided to become the main developer of its proposed oil refinery – a fundamental shift from the faith it had in private companies. Nonetheless, the government is inviting private companies to participate in raising capital for the project, which is estimated at about $4 billion.

Time is of the essence. Uganda faces the disturbing prospect of witnessing all its crude oil shipped out through an export pipeline to the Tanzanian port of Tanga if it delays to find the money – and contractor – to build the oil refinery.

Uganda insists on building an oil refinery with a capacity to produce 60,000 barrels of oil per day at peak – a project government says will create spin-off industries and create employment opportunities for its burgeoning youths.

Under the law and the agreements Uganda’s government signed with TotalEnergies and Cnooc – the operators of the Tilenga development area and the Kingfisher development area respectively the refinery has the first right of call on the oil resources. However, that right is dependent on the country having an oil refinery.

Short of that, TotalEnergies and Cnooc have the right to export all the oil through their proposed oil pipeline. Uganda is scheduled to start exporting oil by April 2025, although that timeline is quite ambitious, while government expects to have an oil refinery in the year 2028.

Just over one billion barrels of the discovered oil have been determined to be commercial. The oil companies, through the East African Crude Oil Pipeline Company Limited, will export 212,000 barrels of that oil at peak from Hoima to the Tanzanian port of Tanga.

This financial year, Uganda’s government is likely to start early oil refinery project works, such as site clearing, at Kabaale in Buliisa district, and acquire more land as a parallel lobby for a private partner goes ahead.

Uganda has been courting Algeria which has a public-financed oil refinery of its own, as a partner for its refinery project. A newspaper advert for a call of expression of interest for the construction and management of the Buloba finished products depot – which forms part of the oil refinery project – was recalled after President Yoweri Museveni and his team visited Algeria in March 2023.

Already, Algeria and Uganda are discussing how to execute the refinery together. The government now feels that a public-led strategy is the best solution to dealing with the bottlenecks of tedious negotiations with the oil upstream companies, amidst a tight global credit market that has come under heavy pressure from environmentalists over such projects, according to an internal government memo that we have.

“…any private sector financiers/ investors with interest in oil and gas projects like the refinery in Uganda are likely to require elaborate and time-consuming negotiation processes for various incentives, investment protections, project guarantees, commercial agreements and other government concessions in order to participate in the project – which will further delay the commissioning of the refinery project,” the memo notes.

The memo then adds: “…it is proposed that, today, a public sector-led strategy is the most feasible path forward to developing the 60,000 barrel a day refinery in Uganda.”

A government-steered refinery project, the memo estimates, will save Uganda $868 million in perceived country risks that AGEC had built into its overall expenditure cost. This is expected to knock down the turnkey project cost of the refinery. In deciding to take on the burden
of financing and developing the oil refinery, Uganda’s government is in a race against time.

It is clear that the collapse of the first private sector-led attempt by Russia’s RT Global in 2015, and now the most recent setback, have cost Uganda precious time, considering the progress being achieved by the crude oil export pipeline project. France’s TotalEnergies and China’s Cnooc have made it clear that exporting Uganda’s crude remains the best option to attract investments that can be channeled into developing the country.

On the other hand, Uganda’s government feels that some of the oil must be refined in-country. To realise its refinery dream, Uganda’s government needs to incorporate a refinery company, and negotiate with the upstream international companies for a crude oil supply agreement, among other things.

But in the immediate term, Uganda’s government needs some of the studies that the Albertine Graben Energy Consortium (AGEC) had done. Among the studies that AGEC did include the Front-End Engineering Design, the Final Refinery Configuration report, among others.

While the Environmental and Social Impact Assessment was done, AGEC did not submit it to government for approval. To access these reports from AGEC, government will have to make a financial offer, we have been told. It’s not clear how much.

Other studies that government will have to do include a report on the lumpsum turnkey price for the project, a security and risk analysis report, an Operations and Maintenance Plan, a National Content Development Plan, and a financing plan, just to mention a few.

While the studies might take time to be completed, there are certain components that are of immediate concern. Government needs to incorporate a refinery company, which, ideally, should negotiate with the oil companies on certain aspects. A shareholders agreement must be negotiated to clearly stipulate the terms and conditions of the owners of the refinery company.

The refinery company, of which the Uganda National Oil Company, and a private investor will be the main shareholders, is supposed to negotiate with the oil companies for the crude oil supply agreement, one of the most important agreements needed to be signed. For now, Uganda’s ministry of Energy and Mineral Development is negotiating with the oil companies.

The crude oil supply agreement is meant to guide the different parties on how much oil being drilled at the Tilenga and Kingfisher fields is channeled to the refinery.

The refinery company is also supposed to negotiate the Implementation Agreement, which anchors all the other agreements of the refinery. The timelines for the conclusion of these agreements are still not clear. In whatever way, every minute now counts if Uganda is to build the refinery.