Posted on Tuesday, 12 May 2015 13:59

Uganda: From Russia with refining capacity

By Jeff Mbanga in Kampala

Uganda's oil sector has been slow to lift off, but plans for a Russian-built refinery are crystallising and talks on other essential infrastructure could soon make progress.


On 17 February, Russian state-run conglomerate RT Global Resources and its consortium partners won a $4bn bid to build an oil refinery in Uganda.

It is a sign of Moscow's growing interest in Africa as its companies face economic sanctions from Europe and the US because of Russia's role in the Ukrainian conflict.

RT Global – a subsidiary of the sanctions-hit Rostec group that manufactures the Kalashnikov rifle – and its partners beat off the South Korean competition.

As the conflict grinds on in eastern Ukraine, Russia's pariah status in the West has contributed to a refocusing of Moscow's economic partnerships with African countries.

Moroccan fruit and vegetable cargoes, for example, are now pitching up in Russia in greater numbers to replace those usually imported from Europe.

Kampala revs up

Uganda's oil industry has been slowed by infrastructure deficits and long delays in government decision-making.

But there are now signs that there could be an uptick in activity after the energy ministry announced on 24 February that it plans to award nine new exploration licences before the end of the year.

A previous licensing round was held nine years ago.

Discussions between the Kampala government and the members of the Russian consortium were due to start in the second week of March.

The consortium's other members are Telconet Capital Limited Partnership, VTB Capital, Tatneft JSC and GS Engineering and Construction Corporation.

RT Global and parent company Rostec are no strangers to Uganda's top officials.

The country struck an arms deal with Rostec for Sukhoi jets at a cost of $700m in 2011, which was a controversial outlay.

The parties have not agreed the shareholding of the refinery, but the Russian team can take up to 60%, with Uganda and other East African governments left to take up the remaining shares of what is set to be the region's only functioning refinery.

In its initial stages, the refinery will be able to produce 30,000 barrels per day, with its capacity later rising to a projected 60,000.

"Tax is one of the main issues we shall be discussing," says an official who will be part of the refinery negotiations.

Denis Kakembo, a senior tax manager with Deloitte East Africa, explains: "Experts have in the recent past highlighted the need to review some aspects of Uganda's tax policy – especially the VAT [Value-Added Tax] regime – that have the potential to derail project economics. The government must cede some ground, especially on the tax front, to facilitate a feasible commercial structure."

The official who will be involved in the negotiations plays down the impact of economic sanctions on Russia, saying "they do not affect operations outside Russia."

That may be an optimistic reading of events. Speaking to reporters in late February, US ambassador to Uganda Scott DeLisi implied that financing and "other issues" could yet scuttle the refinery deal, saying: "I would suggest that you wait and see how that all plays out."

Some analysts saw that as an implied threat that the US could cut off its aid to Kampala – which reached $700m in 2012.

The government estimates that investment of $12bn will be needed before first oil can be produced by the target of 2018.

However, the current international environment is not conducive to major investments in frontier oil territories like Uganda.

With a barrel of Brent crude trading at about $60 in early March, a number of companies, including Tullow – one of the upstream companies operating in Uganda – have had their share prices battered.

To ride through the storm of quick price changes, Tullow announced a cutback in capital expenditure early this year.

Uganda's Central Bank governor, Emmanuel Tumusiime-Mutebile, predicts companies might not be in a rush to commit huge funds.

"Most of the capital investments in the oil industry are irreversible, especially those involving large-scale infrastructure such as pipelines," Mutebile said at a workshop a week after the refinery deal was announced.

There are reasons for continued worry about Uganda's scheduled oil developments.

Industry watchers point to companies such as Tullow and Total, which have spent more than a year waiting for production licences.

"The government has so far only approved one production licence [to China National Offshore Oil Corporation (CNOOC)]. Progress with granting the others has been slow. Foreign investors will be aware of this," says campaign group Global Witness's George Boden, who covers Uganda's oil industry.

Export pipeline

Electricity provision is also set to hold production back. The refinery and other infrastructure will require additional power supplies.

The government recently stopped accepting requests for licences to produce electricity using gas and crude until it has completed a study of prospects for the industry.

The government estimates that there are 173bn cubic feet of associated gas in the oil-rich Albertine Graben, which should be enough to power a 50MW power plant for three decades.

On another front, Tullow, Total and CNOOC are expected to push ahead with their plans for building a crude export pipeline – which will also need to be constantly heated as Uganda's oil is waxy – to the Kenyan port of Lamu.

In December, the government contracted Toyota Tsusho to carry out a feasibility study for the pipeline, with the Japanese company expected to hand over its report before June.

The pipeline, which will stretch more than 1,300km, is expected to cost between $4bn and $5bn.

With the government's slow pace and the negative international price trends, the players in Uganda's growing oil sector will require patience and deep pockets to see their projects through. ●


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