How Uganda refinery will impact the region

The Uganda refinery was always a legacy project for President Yoweri Museveni. Immediately Uganda discovered crude oil in 2006, Mr Museveni pronounced that Uganda will add value to its crude oil through refining. Any attempt to argue contra-economics on the refinery viability did not crack his resolve for a refinery in Western Uganda.

In 2008, Mr Museveni pushed for an EAC (East African Community) study on regional refineries. The EAC summit subsequently endorsed a green-field refinery in Uganda, while also supporting the upgrade of the now closed Mombasa refinery.

The 2013 regional infrastructure pact between Presidents Museveni, Uhuru Kenyatta (Kenya) and Paul Kagame (Rwanda) actually listed the Uganda refinery as a “regional project” with the option of EAC countries taking shareholding. The pact also listed a Kampala-Kigali products pipeline, and a reverse-flow Eldoret-Kampala line to provide capacity for exports of the refinery production into the region. .

Currently, the two Uganda “first oil” projects are virtually committed. The crude oil export pipeline via Tanzania and the refinery are awaiting final investment decisions in the course of this year with completion timelines of 2022 for the pipeline and 2023 for the refinery

The $4 billion, 60,000 barrels per day (bpd) refinery will be developed by the Albertine Graben Refinery Consortium (AGRC) which includes YAATRA, Saipem Spa, Lion Works Group and Baker Hughes General Electric (BHGE). The Italian company Saipem will be the Front End Engineering and Design (FEED) and engineering, procurement and construction(EPC) implementing company.

The tentative refinery shareholding by the AGRC group is 50 percent Total 10 per cent, Uganda government 19.5 percent, Tanzania government 8 percent, Kenya government 2.5 percent, with Rwanda and Burundi keeping their options open. It is interesting to note the strong presence of US private business capital in this project.

The refinery was and remains predicated on Great Lakes countries petroleum products demands which include Uganda, Rwanda, Burundi, Eastern DR Congo, South Sudan, and to some extent Tanzania Lake region and western Kenya. The refinery will be competing with product imports from Middle East through the ports of Mombasa and Dar es Salaam.

My assessment is that the Uganda refinery will most likely use the product “netback” pricing basis to fix ex-refinery gate prices to ensure that delivered prices for Uganda market and regional exports are lower than delivered in-tank costs of Middle East imports.

The Uganda refinery production will invariably be advantaged by lower transportation costs for crude oil and products, making it possible to remain competitive with offshore imports, while also delivering a reasonable return to investors.

Kenya and Tanzania have existing and planned petroleum imports and transportation infrastructure with transit export linkages to the land-locked Great Lakes. Come 2023, the two countries will have to scale down their petroleum transit export business plans and expectations to accommodate the new Uganda refinery supply source. The Uganda refinery cannot be taken for granted. By 2023 it will be an integral part of regional petroleum supply and balance.

Specifically for Kenya, the petroleum authorities will have to contend with the strong possibility of Uganda products delivered prices to western Kenya being cheaper than those transited through Mombasa. The aborted Eldoret-Kampala products pipeline project may finally find new justification as this will provide flexibility to pump products either direction.

There are no indications that Presidents Uhuru and Museveni discussed the Uganda refinery last month, but it is possible that the subject will keep surfacing in the course of their renewed engagements on the SGR to Kampala. Kenya has yet to confirm their option on the 2.5 percent Uganda refinery shareholding.

Many keep asking me why Kenya is planning to export its crude oil from Turkana while importing products. Kenya closed down its Mombasa refinery in 2013, and the government has not announced any immediate firm plans for a new refinery anywhere in Kenya. But circumstances, fortunes, and economics do change, making a future refinery in Kenya a strong possibility.

Yes, Mr Museveni’s unbending stand on Uganda refinery will definitely prove him right on economic value addition to Uganda as the country becomes a regional inland oil export hub by 2023. However, chronic hostile inter-state politics in the Great Lakes can derail real gains if potential exports do not materialise.