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Uganda’s oil production delayed until 2018

Seven years after oil was discovered in inland Uganda, first flows are still in the distant future

When oil was discovered on the shores of Uganda’s part of Lake Albert in 2006, there were forecasts that production would start within five years or so. The reality, after years of disputes, is that first oil, together with the start-up of the inland refinery the government is insisting on, will not be achieved for another five years at the earliest.

In October, the government firmed-up its plan for a refinery with a call for a partner to operate and take a 60% interest in the facility, initially of 30,000 barrels a day (b/d) capacity but later to double, which is to be constructed near the oilfields, about 1,300 km from the coast (see box). The authorities’ schedule envisages selecting the partner in the first half of next year, starting construction work almost immediately and completing the refinery in 2017-18, when oil production will also start.

In late-September, the first production licence for a Lake Albert field was granted, to China’s Cnooc. The other two upstream operators, Tullow and Total, are to receive their licences within weeks, according to the ministry of energy and mineral development in early October.

The three companies, under Tullow’s leadership, have been locked in negotiations with the government since early last year over terms for the planned basin-wide development of the Lake Albert discoveries. Following the intervention of the president, Yoweri Museveni, earlier this year, Tullow said in July that “significant progress” had been made towards a commercialisation plan. But key aspects of the development, including the export pipeline and its financing, still appear to be at an early stage in the planning process.

The companies are claiming one key success. The government, after initially demanding the construction of a refinery large enough to process most of the likely crude output, now accepts that the majority of the crude will have to be exported, to provide a dollar-income for the project. This will necessitate the construction of a pipeline extending 1,300 km from near Lake Albert to the Kenyan coast, probably to Lamu.

However, events since Uganda’s fields were discovered have opened-up the possibility of the pipeline being developed as a regional export system for eastern Africa. With the continuing uneasiness between Sudan and South Sudan, and the high fees charged by the north for use of the pipeline to Port Sudan, the southern government wants its own export pipeline to the Indian ocean coast. A relatively short line south to the Lake Albert area, to connect with the pipeline carrying Uganda’s crude, would meet that objective.

More recently, Tullow has made substantial discoveries in the Lokichar basin of northern Kenya, which it compares in potential to the Lake Albert basin. Kenyan government officials are envisaging a rapid start to production, initially with oil moved by road or rail, but full development of the area will call for a pipeline. A link running south to join the planned line from Lake Albert to Lamu would provide an efficient export route.

Upstream ready

Figure 1: Gas and oil in Uganda

The delayed start to development work has, at least, allowed time for an extensive exploration and appraisal programme in the Lake Albert area. More than 60 wells have been drilled in the basin since 2006 and Tullow, which has operated most of them, estimates that basin-wide recoverable resources amount to 1.7 billion barrels. Other estimates run to 2.5bn barrels recoverable, or more.

Tullow, Total and Cnooc each have one-third shares in the main Lake Albert licences, Tullow operating EA-2, Total operating EA-1 and EA-1A, and Cnooc operating the Kingfisher and Kanywataba licences, carved out of EA-3A. Activity recently has focused on appraisal work and development planning – across the basin, in the first half of this year six appraisal wells were drilled and 11 flow-tests were carried out, together with additional seismic work and the drilling of two exploration wells.

Tullow said it has submitted applications recently for production licences covering the Kasamene, Wahrindi, Kigogole, Nsoga, Ngege and Ngara fields, and for an extension of the licence covering the Waraga field, all in EA-2. In EA-1, Total has submitted applications covering the Ngiri, Jobi-Rii, Mpyo, Gunya and Jobi East fields, and is scheduling more appraisal drilling, production tests and 3-D seismic work this year and next. Cnooc’s just-awarded production licence covers the Kingfisher field, which the ministry says will flow 30,000-40,000 b/d.

Another benefit from delayed development, some suggest, is that Uganda is having time to develop its capabilities for managing a new industry and a large new source of revenue. Many oil-producing states have suffered from a so-called resource curse, with existing exports being damaged by a strengthening currency and much of the population becoming poorer and alienated.

Bold plan for an inland refinery

Uganda has set out its plan to build a $2.5bn oil refinery near the Lake Albert oilfields, some 1,300 km inland from the east African coast. The facility, to be constructed in two phases of 30,000 barrels a day (b/d) capacity each, is seen as ending the shortages of oil products which have hindered the economic development of Uganda and neighbouring inland states.

The ministry of energy and mineral development said in October that it is seeking a lead investor and operator to construct the refinery and take 60% of the equity, with the Ugandan state to hold 40%. The governments of Kenya, Tanzania, Rwanda and Burundi – Uganda’s partners in the East African Community (EAC) – will be invited to take a combined 10% out of Uganda’s share. Officials hope to select the partner in the first half of next year, and are targeting the refinery’s first phase for start-up in 2017-18. The ministry has retained Taylor-DeJongh, a US investment consultancy, to advise on the structure and financing of the project.

The refinery is to be constructed on a site at Kabaale, in Hoima district, and the project includes laying a 205 km pipeline to take products to the capital, Kampala. Studies carried out by the EAC call for a products pipeline running southwest from Kampala to the capitals of Rwanda and Burundi. Also on the wish-list is a plan to link Kampala with Kenya’s state-owned products pipeline, which runs from the coast at Mombasa as far as Eldoret in western Kenya – with the flow reversed, surplus products from the refinery could then be exported from Mombasa.

The government’s case for the refinery is that it will supply a large inland market. Consumption in Uganda, together with parts of Rwanda, Burundi, South Sudan, eastern Congo (Kinshasa), western Kenya and northern Tanzania, is growing at 5% a year and is forecast to reach 232,000 b/d by 2020. Officials claim the refinery will be profitable, showing margins higher than international levels because product prices in inland Africa are relatively high and there will be no transport costs for the crude. A technical and financial feasibility study carried out by Foster Wheeler is said to have been positive, although it has not been made public.

There is only one existing refinery in eastern Africa, at Mombasa, Kenya, where India’s Essar and the Kenyan government have 50:50 interests in an ageing facility with a nominal capacity of 80,000 b/d but an output of less than 35,000 b/d. Just a few days before Uganda’s refinery announcement, Essar said it would exit from the Mombasa facility. The company is to sell its 50% to the Kenyan government for $5m, as provided for under its purchase agreement of 2009, when it paid $7m for the interest.

Essar has carried out studies into a modernisation investment at Mombasa, but said it had concluded that an upgrade is not economically viable. It is speculated that the facility will close – as has been called for by Kenya’s fuel distributors, which are obliged to buy from the refinery but say they could import products of better quality at lower cost. Much of eastern Africa’s products demand is already covered by imports, but inland distribution is unreliable.

The Ugandan government initially had wanted to link the construction of a large refinery – there were plans for a facility of 180,000 b/d or more – with the upstream investment. However, the idea did not appeal to upstream participants and financers, which wanted a dollar-income from crude exports. Separately, Cnooc is said to have held talks with officials over participation in the refinery, but a target of pre-qualifying potential investors by end-September was missed.

For international investors, the refinery plan presents difficulties. With every item of equipment having to be transported 1,300 km from the coast, over poor roads, the facility will be very costly to build – and costs will be raised further by the need for special metals, to withstand Uganda’s acidic crudes. Even if both phases of the refinery can be built for the estimated $2.5bn, the cost per b/d of capacity – an industry benchmark – will be nearly $42,000, or twenty times the typical second-hand value of European and US refineries, on the basis of recent sales.

With its small capacity, the refinery will not produce enough feedstock to support the construction of a conversion unit to crack heavy streams into transport fuels – although there are plans to use the heavy fuel oil for electricity generation, to address the country’s power shortage. Meanwhile, the income stream from products sold in Uganda and neighbouring countries will be in local currencies, making financing unattractive to international lenders. Product prices could also be subject to political pressures, to head-off complaints that the local population is not benefiting from oil production. 

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