A number of observers who either had not read, or fully understood, the 2010 Uganda refinery feasibility report by Foster Wheeler, discounted the Uganda refinery as unnecessary investment.
President Museveni on the other hand consistently kept his commitment to deliver a refinery that adds socio-economic values to Ugandans.
Justification and sustainability of a grassroots refinery usually stand on four key pillars. There must be sufficient and sustainable captive demands —availability of reasonably priced crude oil; refinery-gate product prices that can compete with alternative supplies; and finally project capital costs that both supports an optimum refinery configuration and delivers a good rate of return.
All these factors were confirmed for the Uganda refinery by the feasibility report.
But the key point of contest among stakeholders was how to prioritise commercialisation of already confirmed oil discoveries. The upstream investors who sought quick exports to recoup their costs argued against local refining, preferring to export the entire 200,000 barrels per day (bpd) which had been confirmed as recoverable.
The government went ahead to commit a phase one 60,000 bpd refinery as recommended by the feasibility report. Refinery investment partners have recently been selected, with the expectations of completing the refinery project by 2018.
My estimation is that by the time the refinery is commissioned in 2018, the “captive” fuel products demands of the Great Lakes countries (Uganda, Rwanda, Burundi, Eastern DRC, and South Sudan) shall have grown to the equivalent of 60,000 bpd crude runs.
If western Kenya opts to import from Uganda, the total regional 2018 demands from Uganda may exceed the refinery capacity. The Kampala-Kigali pipeline; the planned major oil terminal in Kigali; and the Eldoret-Kampala reverse flow pipeline are all distribution infrastructure projects that will support the Uganda refinery demands.
Let us now focus on the export of crude oil from Uganda, and assume a prevailing Brent crude oil price of $80 per barrel.
According to the Foster Wheeler report, the Uganda crude oil would incur a quality differential (penalty) of about $12 relative to Brent Crude Oil. This means that Uganda crude oil would have to post an FOB price of $68 at Lamu/Mombasa.
The same report estimates that it will cost Uganda investors about $13 per barrel to transport crude oil from Lake Albert oilfields to Lamu/Mombasa. This is mainly because of high energy inputs to improve flow of the waxy crude oil. If the $ 68 FOB price is netted back to Uganda, the crude oil would fetch about $55 delivered at the oilfields.
This is essentially the price the Uganda refinery would be obligated to pay the investors at the refinery entry valve.
It is the alternative net realisable price from crude oil exports. And in a depressed and glutted global oil market this may not necessarily be a very bad price for the investors.
Now at $55 per barrel, the Uganda refinery delivered products prices are bound to comfortably compete with import costs via Mombasa and Dar es Salaam.
Ideally the refinery would post ex-refinery product prices to be just slightly below the alternative imports landed costs at Kampala. This assumes no consumer price subsidy below alternative import costs.
Alternative products imports from large refineries in the Middle East and India are likely to be based on crude oil feedstock in the range of $80 per barrel.
The products importer from East Africa will have to pay ocean freight, trader/importer margin, wharfage and terminal costs at Mombasa/Dar, pipeline tariff and road transport to land products to the Great Lakes destinations.
The Uganda refinery is unlikely to experience any problem beating alternative imported costs and leaving enough margins for the refinery investor to make a decent return. And to crown it all, there will be additional jobs and increased commerce for Uganda.
The above are my “back of the envelope” calculations, and my gut feeling is that I will not be very far off from market realities—that the Uganda upstream investors may start eying the refinery as a project that can offer them critical market flexibility (especially during global oil markets volatility) may soon become a reality.
Many keep asking about prospects of local refining in Kenya. The Mombasa refinery can be considered to be irretrievably gone in the sense of crude oil refining.
A future refinery elsewhere in Kenya cannot however be ruled out, but it would have to be nearer the crude oil source and closer to the bulk of national products demands.
As of now I am not sure that Kenya has confirmed sufficient crude oil discoveries to justify a sufficiently sized refinery or a crude oil export pipeline (unless the production is piped jointly with Ugandan exports).
Refining or exporting Kenyan crude oil will also depend on the final routing of the Uganda/Kenya pipeline. I do not think the Lapsset route has received a final concurrence among investors and governments. Crude oil pipeline routing, I guess, will be part of the pipeline feasibility study that was recently awarded.
The Uganda refinery will be a game changer in regional petroleum supply logistics, and will directly or indirectly impact Kenya, Tanzania, and Rwanda.
I am not quite sure how the Uganda refinery scenario will specifically influence the shape of the ongoing Petroleum Master Plan study for Kenya.
Mr Wachira is director Petroleum Focus Consultants.