Uganda has rescheduled the completion date for its planned crude oil refinery plant in Kabaale, Hoima district, by two more years after a lead investor pulled out of the project at a crucial stage of its kick-off, raising questions on the viability of the public-private partnership model in the running of oil refineries in East Africa.
Energy Minister Irene Muloni told The EastAfrican that owing to the last minute collapse of talks with the Russian consortium Rostec Global Resources, which had won the tender to finance, build and operate the refinery, the completion date has been pushed from 2018 to 2020.
Ms Muloni said the government has started discussions with other interested investors, with expectations of concluding the negotiations by the end of the year.
“We are looking at 2020 because construction of a refinery cannot take less than three years,” she said.
RT Global Resources had been selected in February 2015 as the preferred bidder for the financing and construction of the $4 billion greenfield oil refinery after a bidding process where it beat three other contenders — South Korea’s SK Engineering & Construction Group, China’s Petroleum Pipeline Bureau (CPPB) and Japan’s Maruben Corporation.
At the same time, The EastAfrican has learnt that the French oil giant Total SA, parent company of Uganda’s Total E&P, has acquired a 10 per cent shareholding in the proposed refinery, in which Tanzania and Kenya have agreed to take up eight per cent and 2.5 per cent stakes respectively.
The five East African Community member states had been allocated a combined 40 per cent shareholding in the refinery, with 60 per cent of the shares reserved for private investors. However Kenya only took 2.5 per cent while Rwanda and Burundi are yet to commit to the investment.
The exit of the Russian consortium from the refinery deal has left energy consultants divided on whether governments should participate in crude oil processing activities, with some arguing that state involvement should be through special purpose vehicles that are designed to run refineries purely on a commercial basis, instead of direct involvement.
In June, Kenya saw off its last co-shareholder, Essar Energy of India, in the running of the Mombasa-based Kenya Petroleum Refineries Ltd (KPRL) after seven years (2009-2016) of strained relations.
Essar Energy became a shareholder in KPRL in July 2009 through the acquisition of shares from Shell Petroleum Company Ltd, BP plc and Chevron Global Energy Inc.
The inefficient KPRL, which has for the moment been taken over by the Kenya Pipeline Corporation Ltd, closed down on September 4, 2013, costing oil markets an estimated Ksh3.5 billion ($33.97 million) in yield shift.
“I think refineries cannot be run properly through the PPP model. They have to be fully state-owned or be run on a completely economic basis through special purpose vehicles,” said Patrick Obath, an energy consultant and former chairman of the Kenya Private Sector Alliance, adding, “The state is in the business of providing social services to its citizens and not to engage in commercial activities.”
According to George Wachira, an energy consultant and director of Petroleum Focus Consultants, refineries are essentially a “private investor affair,” where the business model and profitability are positive and the government gets involved only where there are other national considerations and interests such as security, supply, opening up of marginalised areas and value addition.
“A PPP is always a good investment vehicle as it reduces government capital requirements while providing technical expertise. Private investors provide technology and management while the government provides guarantees and incentives to private investors if profitability is marginal,” said Mr Wachira.
Globally, oil activities are executed by governments through fully-owned special purpose vehicles or national oil companies that are independent, for instance Petronas, a fully integrated oil and gas multinational wholly owned by the Malaysian government, which deals with among other things, the refining and marketing of petroleum products.