Why Uganda should pay attention to every call for a smaller or no Oil refinery


By Dickens Kamugisha…

On December 14, 2016, Daily Monitor carried an interesting article titled “Russia sets new terms for investing in Hoima oil refinery.”

It was interesting because over five months after the Russian consortium RT Global Resources walked away from protracted negotiations to construct Uganda’s proposed refinery, the country’s new envoy gave a glimpse into why this happened. And the reasons were similar to the concerns raised by a consultant hired by Afiego on whether it made economic sense for Uganda to build a big refinery, if any at all.

What did the Russian envoy to Uganda, H.E Alexander Dmitrievich Polyakov, say about Uganda’s proposed refinery and how did this echo the concerns of the aforementioned Afiego consultant? Polyakov said that in Russian investors’ views, Uganda needs a smaller refinery than the proposed 60,000 barrels-per-day (bpd) one.

He said 7,000 to 8,000 barrels per day would make better economic sense considering that Uganda might not be able to produce enough oil for even a 30,000bpd refinery in the short term. Thereafter, the refinery could be enlarged.

Certainly, the envoy’s suggestions have to be interrogated in order to ensure that Uganda’s, and not Russia’s, interests are taken care of. This is where the concerns of Afiego’s consultants come in handy.

In 2008/2009, a hot debate raged on whether Uganda should construct a 5,000bpd refinery or that of higher capacity. Government, under the Early Production Scheme (EPS), wanted to build a mini-refinery with a capacity of 5,000bpd.

To enable an informed debate, Afiego hired Professor Keith Mayers, a refinery expert from Richmond Energy Ltd, UK, who told stakeholder meetings that a refinery of less than 60,000bpd would not be economically viable for Uganda.

He informed Ugandans that it would not be good to build a refinery to produce more than what it can domestically consume. His reason was that a refinery in Uganda will not be expected to be efficient enough to produce cheap oil products in order to make profits. Despite being against a small refinery, he said that perhaps for national security purposes and to meet Uganda’s petroleum needs, a smaller refinery could be built.

“Just produce little that you can consume but don’t expect to produce for the foreign markets where more efficient refineries produce a variety of products at relatively cheaper prices,” he said.

At the end of the meetings, government harassed the expert, reasoning that he was trying to sabotage its programs. The professor cut short his stay in the country.

The above happened in 2009 and, a few months later, government abandoned the idea of constructing a 5,000bpd refinery. However, come 2016 and the Russian envoy is discouraging Uganda from building a bigger refinery and is, instead, advising us to focus on a small one of between 7,000 and 8,000 barrels per day.

What does this say about our oil sector? First, several voices – including expert ones – have cautioned against the idea of a refinery in Uganda because it does not make economic sense. In addition to the Russian envoy and the above refinery expert, companies such as Total and Tullow have been hesitant about and have said that a refinery is not the best oil development option for Uganda.

A top-level official with Kenya’s refinery also once told a meeting that if she could offer Uganda advice, it would be not to construct a refinery as no single refinery in Africa is operating at a profit.

In the face of the above, what should Uganda do? We should learn from our neighbours and heed the advice given by experts. Government needs to be open with Ugandans; it needs to tell us why, in the face of a number of opposing expert opinions, it is still insistent on constructing a refinery.

Government has said that Uganda’s refinery will supply countries in the region; but how is this possible with cheaper refinery products coming from large-scale producers with advanced technology? We need to have a serious informed discussion on whether Uganda can reap economic benefits from a refinery.

I think our planned investments in a refinery should be put on hold until impeccable evidence from government to convince us that a refinery is socially and economically viable for Uganda is given.

Indeed, between November 2 and 10, 2016, I was in Nigeria on an oil experience-sharing trip and I witnessed a situation where the 450,000bpd Nigerian refineries have, for decades, failed to produce competitive oil products for Nigerians.

On top of the refineries, Nigeria stills exports over two million barrels of oil per day. They use part of the money from the crude exports to subsidize the domestically-produced oil for the sake of keeping the domestic refineries in operation. This explains why on November 5, 2016, the Nigerian government was pleading with the World Bank for a credit of $30 billion to solve her current financial crisis.

All these are lessons and experiences new producers such as Uganda can learn from to make prudent decisions for the common good of all Ugandans, and avoid the oil curse that continues to characterise all African oil-rich countries.

Government should provide citizens with information so that Ugandans can best decide what size of the refinery, if any at all, is best. We should not sacrifice economics at the altar of politics.

The author is the chief executive officer of Africa Institute for Energy Governance (AFIEGO).

This article was first published by the Observer Newspaper in Uganda