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Pipeline, refinery or both? Oil majors and govt dispute threatens production

Saturday October 06 2012
tullow

Tullow workers at a rig in Buliisa, Uganda. Photo/Esther Nakkazi

A disagreement between Uganda’s government and oil companies over the method of selling the country’s oil is threatening to further derail production timelines.

The EastAfrican has learnt that the government favours building of a refinery while the oil firms want both a refinery and a pipeline to take crude oil to the port for export.

At the heart of this haggling is the economics involved: Uganda, inexperienced in the sector, is afraid to lose revenues since it does not understand the marketing dynamics involved, especially after the crude oil leaves the port of Mombasa for overseas markets. A refinery at home is a safer option.

The oil companies, on the other hand, say having both a refinery and a crude oil pipeline will offer better deals to both the government and oil companies investing in the production.

“To complement the commercialisation plan, partners think that a pipeline will be needed. This will be a combination of an export pipeline and a refinery, which will provide the best deal for Uganda.

This will also provide acceptable returns for the investor,” said Loic Laurandel, Total E&P general manager.

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Not enough volumes

A source in the sector told The EastAfrican that a pipeline would disadvantage the development of the refinery because oil volumes may not be big enough for both the refinery and crude oil export.

Oil companies, however, say the country has enough oil reserves to deliver production of 200,000 to 230,000 barrels per day.

Data from the ongoing well appraisals show that the country has 3.5 billion barrels of oil, up from 2.5 billion barrels estimated earlier on, of which 1.8 billion barrels is recoverable.

The companies — Total, CNOOC and Tullow — each own 33.3 per cent shares of the oil fields located in the Albertine Rift Valley.

Total and CNOOC paid $1.5 billion each for the acquisition of their shares from Tullow. In their view, an appropriate sized refinery and an international crude oil pipeline provide the best deal for Uganda.

“We understand the government’s need for a refinery and its strategic value for Uganda and we think that an international crude oil export pipeline, combined with an optimally sized refinery, will provide the maximum benefit to the wider Ugandan economy.

We believe it is the best development scenario for Uganda,” said Mr Laurandel.

The parties have been engaged in a series of meetings to reach a compromise on the issue, with the next meeting slated for mid-October.
But the government seems to have taken a firm stand against the pipeline.

“We have never considered it, but it remains an option. If in future we find that we have excess crude, then we shall have to build a pipeline linking to Mombasa, but at the moment it is not our priority. Our priority is a refinery,” said Simon D’Ujanga, junior energy minister.

Developing such a pipeline will also be expensive because Uganda’s oil is not suitable for crude export as it is waxy and solidifies at 39 degrees. A constant heating system for the pipeline would, therefore, be required.

Uganda, it is understood, will only consider a product pipeline, a project being considered under the East African Community after Tamoil lost the deal for non-performance.

READ: Kenya wants Libya’s Tamoil out of pipeline project

Kenya already has an oil pipeline from Mombasa to Eldoret, which makes it easier for Uganda to develop a reverse pipeline, expected to also connect Rwanda and Burundi.

Oil companies however argue that a crude oil pipeline offers flexibility, especially during repair and maintenance of refining machines.

In 2010, the Energy Ministry undertook a study to come up with the most viable option between a pipeline and refinery and learnt that a refinery was more economically feasible.

The benefits include being able to add value to the crude oil resources and, therefore, supply local and the regional demand for petrochemical products.

The study also found that, in addition to job creation, a refinery would improve the country’s balance of payments by gradually eliminating the petroleum products import bill.

Local capacity

The junior Energy minister, in an earlier interview, had explained that the country needed a smaller refinery to help build local capacity and expertise in operating refineries, and thus plan for better operations in the bigger refinery.

The government plans to go into a private-public partnership to set up a 60,000-barrels-per-day refinery that will later be expanded to 120,000 and 180,000 barrels per day, in a modular manner, starting with 20,000 barrels, delivered in three years. The small refinery will cost $4.27 billion.

READ: Uganda floats tender for $2b refinery

In 2008, EAC states approved a regional refinery development strategy that aims at harmonised planning and development of refinery and sustainable utilisation of crude resources in the region.

Estimated regional product consumption is about 200,000 barrels per day, with a growth rate of seven per cent.

Oil companies are in favour of higher figures standing at 200,000 to 230,000 barrels per day by 2020.

Oil production is expected to start, at the earliest, in 2017 if all the negotiations end well and all the upstream and downstream infrastructure is put in place within 36 months.

Once refining begins, government expects to produce liquefied petroleum gas, gasoline, kerosene, fuel oil, sulphur and power.

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