Nairobi, Kenya | – Kenya will pay $13 million up front for its shareholding in the proposed Ugandan oil refinery even as the commercial viability of the multi-billion dollar facility remains unclear.
East African Community members have been offered a combined 40 per cent shareholding in the refinery, to be constructed in Hoima District, western Uganda, as part of a joint effort to support infrastructure projects that enhance regional integration. The remaining stake is reserved for private investors.
The project, whose cost is estimated at $4.3 billion, will be largely financed through debt (70 per cent), with shareholders expected to inject the remainder.
Kenya has so far committed to a 2.5 per cent stake, so it will put in a total $32 million as part of equity contribution. That could, however, rise to $103.2 million if Kenya increases its stake to the maximum eight per cent reserved for each EAC member state.
The five EAC members — Kenya, Tanzania, Uganda, Rwanda and Burundi — are expected to inject up to $516 million in equity capital into the project and private investors $774 million while $3 billion will be borrowed from financial institutions. Failure by a partner state to pay for its allocation would open the door for Uganda to take up the forfeited shares.
Kenya’s Treasury Cabinet Secretary Henry Rotich said the commercial value of the refinery has to be determined before any more investment decisions are taken.
“We have to evaluate the commercial value of that project to see if there is a need for a higher stake,” Mr Rotich told The EastAfrican.
Rwanda, Burundi and Tanzania are yet to decide on investing in the facility, which is expected to process an estimated 60,000 barrels of oil per day with an initial output of 30,000 barrels per day in 2018.
The refinery will be co-owned 60 per cent by private investors and 40 per cent by the EAC members, translating into an eight per cent shareholding for each country.
Whether the proportion reserved for the EAC member states will be fully taken up remains to be seen but the question of affordability and limited budgets facing member countries appear critical.
“The point really is how much you can afford because of the limited budgets we face,” said Davis Chirchir, Kenya’s Cabinet Secretary for Petroleum and Energy. “The participation by member countries in this refinery is more of a budgetary issue.
“Each partner state has been offered up to eight per cent stake in the refinery but in our case, we may not pick up all of it because of the budgetary constraints. If we had the resources we would take more, there is no question about that.”
Analysts contend that failure to realise adequate financing from the shareholders could mean taking up more debt to finance the project.
“Where the debt will be sourced from will prove interesting,” said Aly Khan Satchu, chief executive of RICH Management Ltd.
Uganda intends to construct the refinery to process its hydrocarbon reserves, estimated at 6.5 billion barrels, that lie on its border with the Democratic Republic of Congo.
At the recent 9th Summit of the Northern Corridor Integration Projects in Kigali, the EAC partner states were called upon to confirm their shareholding in the refinery. The deadline for the remaining members to confirm their equity contribution will be set at the 10th Summit.
According to the report of the ministerial meeting, all participating states will be required to confirm their shareholding in writing.
Kenya committed 2.5 per cent at the 8th Summit and formally sealed the deal in writing on November 24 last year. Rwanda is still consulting while Tanzania and Burundi are yet to declare their interest in the project.
The refinery project was mooted following a study of regional refineries that was commissioned by the EAC in 2008. A taskforce comprising officers from the petroleum sub-sector in the states was formed and mandated to undertake the study.
The taskforce advised that a refinery be constructed near the then recently discovered oil fields in Uganda. It also recommended acceleration of the upgrading of the Mombasa-based Kenya Petroleum Refineries Ltd and installation of additional storage facilities in Uganda to ensure strategic coverage at least 30 days of operation.
As a result, Uganda has accelerated its plans to build a refinery with the initial phase of the project expected to be completed in 2018. The country has concluded the request for final offers (RFFO) phase of the tendering for a lead investor to build the refinery.
A consortium led by Russia’s RT Global Resources won the tender to build and operate the crude oil refinery. Uganda is also expected to expedite the formation of both the National Oil Company (NOC) and the National Refining Company (NRC).
In the execution of the project agreements, Uganda will be represented by the NOC and its subsidiary, the NRC, will form a special purpose vehicle (SPV) together with the lead investor.
Uganda is also expected to conclude the acquisition of land for the project by June 2015. According to the report of the ministerial meeting during the recent summit in Kigali, the acquisition of the 29.57 square kilometres of land for the refinery and the requisite infrastructure in Hoima are in the final stages.
About 75 per cent of the project-affected persons (PAPs) who opted for cash have been compensated. Compensation will be concluded by June. Purchase of the 530 acres of land to resettle the PAPs has been concluded and physical planning for the new location, which includes construction of houses and other facilities, is under way.
Tanzania discovered gas in the Songo Songo basin, Mnazi Bay and Mkuranga, production of which started in 2004, while Uganda has made significant oil discoveries in some of the exploration areas in the Albert Graben. There are also exploration activities in the northern and Lamu regions of Kenya and Lake Kivu in Rwanda.
Studies have shown that the overall economics or viability of a refinery depends on the interaction of three key elements: The choice of crude oil used (crude slates), the complexity of the refining equipment (refinery configuration) and the desired type and quality of products produced (product slate).
Refinery utilisation rates and environmental considerations also influence refinery economics.
According to Canada’s Natural Resources Department, using more expensive crude oil (lighter, sweeter) requires less refinery upgrading but supplies of light, sweet crude are decreasing and the differential between heavier and more sour crudes is increasing.
Using cheaper, heavier crude oil means more investment in upgrading processes. Costs and payback periods for refinery processing units must be weighed against anticipated crude oil costs and the projected differential between light and heavy crude prices.
Crude slates and refinery configurations must also take into account the type of products that will ultimately be needed in the marketplace. The quality specifications of the final products are also increasingly important as environmental requirements become more stringent.
Other determinants of the viability of a refinery include additional costs due to stringent safety and environmental regulations, higher labour and land costs and taxation systems.
The strategy for development of regional refineries developed by the EAC Secretariat seeks a harmonised development of refineries and associated supporting infrastructure.
According to the strategy, East Africa, with only one refinery processing 70,000 bpd, has the lowest distribution of refineries in Africa, which has about 50 out of an estimated 689 globally.