The options for Uganda after oil discovery

by George Wachira

The predicament facing Ugandans is whether to export the recently discovered crude oil or refine it locally and export products into the regional market. President Museveni has been pushing for value addition of crude oil by refining and exporting products, while the International investors who include Tullow wish to export crude oil into the international market. It is understood that final decisions are yet to be finalised on the options.
As the quantum of oil reserves discovered in Uganda keeps increasing, the need for clear long term strategic decisions increases. Museveni we are sure is pondering the best options for Ugandans while Tullow and others are considering the most economic options for their shareholders and financiers.

Major impacts
While crude oil exports present the most straightforward and quickest route to realising returns for the shareholders, refining introduces other parameters that take longer to realise but which have major impacts in the region. It is not clear how Tullow and other investors could have committed so many resources without a clearly defined agreement with the authorities on how to dispose of oil once discovered and produced.
Exporting crude oil through Kenya (or Tanzania) is the easiest and quickest option for Tullow oil to realise a return on their investment. A crude oil pipeline would need to be laid all the way to Mombasa. Once crude oil is landed at Mombasa an option exists for the Mombasa refinery to purchase some of that crude oil while exporting the balance into the international market.

The arrangement between Ugandans and the refinery would be an arms-length arrangement that enables the Mombasa refinery to purchase the Ugandan crude oil depending on market economics. Alternatively it would take the form of a long term government to government arrangement that commits both parties to a long term crude oil supply and refining deal.
The option of sending crude oil to Mombasa would protect the existing status quo of the pipeline infrastructure and in deed encourage pipeline capacity enhancement efforts all the way into the hinterland of the regional markets. The Mombasa refinery would then commit to spend money to upgrade its capacity and incorporate other modern value adding processes.

If President Museveni decides, as he firmly seems to indicate, that the refinery will indeed be located somewhere in Uganda, the logistics and economics will change as the traditional destination for oil products becomes the source. Pipelines and road tankers would radiate westwards to Kenya and southwards to Tanzania and to other regional markets.
A new refinery will take about three years to construct from the moment financing is confirmed and committed. The refinery design capacity would be based on projected regional demand (Uganda, Kenya. Tanzania, Rwanda, Burundi, DRC and Southern Sudan) which is roughly 6.0 mm tons annually of which Kenya contributes about 3.0 mm tons. This converts to about 120,000 bpd if all regional demands were to be sourced from the new refinery. This would mean a refinery about twice the size of Mombasa.

The entire regional demand will of course not be captive to the new refinery in Uganda as Ocean served countries like Kenya and Tanzania will wish to maintain flexibility to source some of their requirements from other traditional sources. It is the comparative supply economics that will guide Kenya and Tanzania where to source from.
Uganda would therefore be wise to design the refinery to meet about half the regional demands initially and expand later as the demand and economics are proven. Uganda had initially planned to design a simple refinery to produce mainly fuel oil from the initially discovered very heavy crude oil to generate thermal electricity to replace the imported diesel power generation.

Much has since changed by the way of quantities and types of crude oil discovered, upping the plans to a fully fledged modern refinery. If the optimism on huge oil reserves materialises, then Uganda will still have the option to also export surplus crude oil production after meeting refining needs.
Uganda will then have realised the double success of being both a refiner and a crude oil exporter.

New refineries
A number of new refineries have been committed for construction across Africa including the oil producing Angola and Nigeria. A new refinery today anywhere in the world would have higher capital costs compared with the older established refineries, mainly due to higher depreciation charges and this would tend to put a strain on refining margins for a new refinery.
For Kenya and Tanzania to source products from Uganda it would mean reversing the existing logistics model. For Kenya Pipeline they would have to rethink their role and recast their planned infrastructure enhancements investments. The refinery at Mombasa would also have to re-model their investments to take into account the changed supply scenario.

Tanzania would have to reverse their plans for a pipeline from Dar going west. What is imprudent is for Kenyans and Tanzanians to proceed to commit new infrastructure investments as if nothing has changed. The changed Ugandan fortunes impact on the neighbours, and this calls for regional discussions and involvement in re-defining a new petroleum supply scenario.
It becomes quite necessary to open early exploratory discussions among the EAC neighbours on the future petroleum supply model for the region as this will prevent wasted petroleum infrastructure investments.

Oil discovery in Uganda and the resultant infrastructural activities will heighten the economic wellbeing in the region and should be given every chance to blossom. Refineries, pipelines for crude oil and products, enhanced railways will all be needed to support the new oil discoveries and this is in deed a blessing for the region.
Oil discovery need not be a curse as it has happened elsewhere. Proper institutional and regulatory framework for responsible and transparent extractive resource management and governance exist elsewhere and there is no reason why they cannot effectively work in Uganda and in the region.

Mr Wachira is a consultant with Petroleum Focus.