Making sense of Uganda’s 60,000 barrels per day oil refinery project

Seven years since  Uganda’s oil discovery and production has still not commenced. A two year deadlock, orchestrated by the Ugandan government’s resolve to have a refinery before production gets underway, as opposed to oil producing companies’ demand for a pipeline, partly explains the hold up.

A refinery solidifies Uganda’s ability to tap into the neighbouring markets by providing cheaper petroleum products. Oil companies are, however, more likely to recoup their investment and yield returns if they access the much larger international crude market  making a pipeline the more attractive option . This comes as no shock considering the pre-production investment by oil companies is expected to surpass the USD 12.0 billion mark.

Under current agreement, despite not getting the desired, but avoidable, 180,000 bpd refinery, Uganda will have a more appropriate  60,000 bpd facility constructed in two phases. An initial 30,000 bpd facility will be erected before being  scaled up to 60,000 bpd.  This refinery’s capacity is not only middle ground but also seems ideal for the Ugandan economy.

Uganda undoubtedly has the upper hand geographically because it is landlocked  with five borders,and all its neighbours are potential markets for its oil products. Uganda alone currently consumes 27,000 bpd, with an annual import bill estimated at USD 2.0 billion. Uganda, Rwanda, Burundi and Eastern DRC combined consume more than 34,000 bpd. Uganda’s prospective markets have an aggregate demand of 150,000 bpd  projected to expand to 370,000 bpd by 2030.

addressable product demand by country

As illustrated in the graph Ugandan demand for oil products is estimated at anywhere between 80.0 and 90.0 per cent of the refinery’s initial 30,000 bpd capacity with her western neighbours accounting for the other 10.0 to 20.0 per cent.  It is however no secret that Uganda’s relationship with Kinshasa is not a very rosy one, with Uganda accused of backing the M23 rebels.   This could have ramifications on the former’s ability to access the latter’s market. So in the event of not being able to tap into some of the neighbouring markets, a refinery this size would meet the Ugandan demand and operate at more than 90.0 per cent of her capacity something that cannot be said about the underutilised Mombasa refinery.  Besides in this case the allure of cheaper fuel, more secure supply and shorter delivery times compared to Mombasa oil products could outweigh political relations with Uganda.

In view of the preferred 180,000 bpd refinery being exorbitantly expensive and a risky investment in a market that could before long have four refineries: Mombasa, Isiolo, Hoima and potentially South Sudan, the agreed 60,000 bpd is a better fit for Uganda. Demand for oil products is definitely bound to escalate with growing economies as is the competition for the East African market with more suppliers. With production expected to peak between 200,000 and 250,000 bpd, both Uganda and oil companies win since even after refining 60,000 bpd there would still be more than 140,000 bpd of crude for export.

Kenya’s 70,000 bpd refinery is insufficient for a market that already consumes 150,000 bpd with demand on a skyward curve. A refinery for East Africa’s third largest economy  guarantees a more secure supply of oil products and the prospect of profiting from breakdowns at Mombasa that have previously led to fuel shortages and subsequent astronomical fuel prices across the region.  It is also no secret that the Mombasa refinery requires modernising to deal with the different types of crude like Uganda’s which contains sulphur for example.

The executive has avoided a white elephant that could have cost over and above USD 7.0 billion (almost twice Uganda’s national budget) with an agreement in place for a better suited 60,000 bpd refinery. It is a landslide victory for not only government and oil companies, but also for the tax payer. Pending is an agreement on the capacity of the pipeline and production levels. There is clearly an end in sight and production could well begin in 2018. China’s CNOOC has already secured the first oil production license to start development of the Kingfisher Field in Lake Albert basin. This being Uganda, the entire process is not exempt from issues of political meddling and vested interests and corruption. Therefore while 2018 remains the ideal year to start production, one or two extra years could still be a more achievable projection.

Further reading

Museveni, investors fight over refinery

Executive style- Vouching for refinery and pipeline

Uganda refinery project

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