After bowing to pressure and agreeing to have a crude oil pipeline alongside a refinery so as to fast-track the commercialisation of its oil, Uganda must now shift its attention to how the two projects will be financed.

It is emerging that the oil companies, which had preferred a pipeline as the government insisted on a refinery, want all other unresolved issues, such as the capacity of the refinery, extraction rate and development of road infrastructure, to be addressed before they can start talking about financing the multibillion-dollar projects.

“It is premature at this time to discuss funding, since the final discussions on the overall development plans have yet to be concluded.
At this stage, the authorities have not yet issued any call for tender. Therefore, no specifications have been issued,” said Ahlem Friga-Noy, Total E&P corporate affairs manager.

However, the oil companies — Total, China’s CNOOC and Tullow, each owning 33.3 per cent of the oil fields located in the Albertine Rift Valley — say they require $20 billion for the overall development of the upstream infrastructure and a pipeline that will transport crude from source to the Port of Mombasa and to overseas markets.

Total and CNOOC invested $1.5 billion to acquire their stake from Tullow. In their view, an appropriate-sized refinery and an international crude oil pipeline provide the best deal for Uganda. But there is one contentious issue: The capacity of the refinery, which has implications for the crude oil pipeline.

READ: Tullow may exit Uganda over refinery dispute

Uganda prefers to develop a refinery in a modular manner, starting with a 30,000 bpd capacity and gradually peaking at 180,000 bpd in 2022. The small 30,000 bpd capacity refinery will cost $4.27 billion.

The government plans to enter into a private public partnership to raise finances for the refinery. It hopes to take 40 per cent shares in the project, of which 10 per cent will be floated to the East African Community member states. Private partners will take up controlling shares of 60 per cent.

“The government has hired a transaction advisor to advise on the aspects of the refinery, especially guiding government in identifying the investor for the refinery and project financing,” said Energy Ministry Permanent Secretary Fred Kabagambe Kaliisa.

This is likely to delay the signing of the memorandum of understanding on building the refinery and pipeline, in effect delaying oil production.

Oil investors say the production timeline is already two years behind schedule. With everything in place, production could start at end of 2017 or early 2018.

READ: Oil majors and govt dispute threatens production

The government favours extraction of the resource in smaller volumes, which will spread it over a period of time, delaying its depletion while enabling the macroeconomic management of the revenues.

By doing this, Uganda will be avoiding the Cameroon scenario where Elf, an oil company, massively extracted the resources and drained the wells in a short time.

While the oil companies are agreeable to a 30,000 bpd refinery, they are uncomfortable with increasing its capacity later.

But the government argues that the refinery is meant to satisfy regional demand, which is projected to grow to 370,000 bpd by 2030 for the EAC countries, up from the current 200,000 bpd.

The region has only one refinery in Mombasa, with a 70,000 bpd capacity but currently operating at half that capacity. That is why, in 2008, EAC member states approved construction of a second refinery.

“The growing national and regional demand is one of the key drivers for the refinery size and designs options,” said Irene Batebe, petroleum officer in charge of the refinery.

The government and oil companies also differ on extraction rates, with the state arguing that drawing too much crude affects the underground pressure, which limits the amount of crude recoverable as the pressure drops significantly, in addition to fast depleting the resource.

In an earlier interview, Loic Laurandel, Total E&P general manager, said that with the current 3.5 billion barrels of oil in place and about 1.8 billion barrels recoverable (crude oil that can be pumped to the ground surface), the country has enough reserves to guarantee production of 200,000 to 230,000 bpd.

Although the companies are reluctant to explain their preference for massive extraction — as talking about it now may jeopardise ongoing discussions — sources said that minimal extraction will disadvantage the pipeline, whose investment rate of return begins at 120,000 bpd.

The fear is that there will hardly be enough crude oil for the pipeline if Uganda sticks to peak production at 180,000 bpd. Interestingly, the government had expressed the same fear in its opposition to the pipeline.

After years of haggling, political and domestic economic pressures compelled President Yoweri Museveni to give in to the demand by the oil companies to have a pipeline alongside a refinery in commercialising Uganda’s oil.