Uganda seeks a refined place in the oil world
The other day in Kampala my boda-boda swerved around a truck headed west on a highway in the city’s outskirts. The trailer had PETROLEUM FOR EXPORT stenciled in faded letters on its side. As we shot past the big transporter barreling down the road, I wondered – Uganda isn’t producing oil yet. What is it doing exporting… oil?
As I learned later on it’s not such a big mystery. Not yet exploiting its own reserves, Uganda imports more oil than it needs from Kenya and then exports the extra barrels to its land-locked neighbors to the west, Rwanda and Burundi, and to the eastern DRC. It makes economic sense: pull in some cash by selling oil you don’t need at a price markup down the supply chain.
But all this will change in the next few years. Before Uganda begins production, the government wants to build an oil refinery with a capacity of upwards of 150,000 barrels per day, or about ten times domestic demand, and then transform Uganda into east and central Africa’s main refined products supplier. The oil companies, who would foot the biggest part of the bill, are balking. They’re willing to build a refinery big enough to satisfy domestic demand, but want to cheaply export the rest of Uganda’s oil by pipeline to the sea.
So the truck my motorcycle taxi flew past actually foreshadows a complex political economy. As non-producing Uganda re-exports oil it buys from Kenya, the oil companies in Uganda are squirming to begin production, and the government insists that no oil will flow before the refinery impasse is resolved. But the government faces mounting pressure to make something work, with Uganda hungry for the development oil money could bring. Now that the oil law has passed, the refinery is the missing piece in the equation – so why do both sides refuse to budge?
The government’s argument is mainly strategic, partly political: building Africa’s fourth-largest refinery is Uganda’s chance to enhance its position in the competitive jostle of East African economies, especially against its long-time rival Kenya.
The region’s main refinery, at the Kenyan port of Mombasa, has a capacity of 70,000 barrels per day but is only producing at half that level. East African regional demand is at 200,000 barrels per day and growing at 7 percent. So in addition to the lure of bragging rights over Kenya in the “who’s got the bigger…” refinery race, the government sees an opportunity to fill the regional supply gap and make a good chunk of change in the process.
Uganda may also be trying to cut into Kenya’s piece of the pie from South Sudan, which is reportedly producing oil again. Ugandan President Yoweri Museveni said during the Sudanese production shutdown that he wanted Uganda to process some of South Sudan’s oil, which was relying entirely on infrastructure belonging to its belligerent northern neighbor. South Sudan has already entered into agreements with Kenya and Ethiopia to export oil via another Kenyan port, Lamu. But Uganda’s planned refinery at Hoima is about half the distance Lamu is from South Sudan’s oil-producing areas, and Museveni may look to tempt South Sudan into giving Uganda a closer look.
The companies, for their part, seem sick of all the posturing. Like the government, Tullow, Total and CNOOC know time is money; but the companies seem tired of waiting for the green light to produce. Unlike the government, they still need to recoup billions of dollars in investment. On top of that the government is seeking financing for 60 percent of the $3-5 billion a refinery of the size it wants would cost. The companies’ response, so far, has been a beleaguered: hell, no. Tullow, especially, is nervous because it is smaller and doesn’t have the financial cushion giant partners Total and CNOOC do. And, anyway, Tullow has built its reputation as a wildcatter, not a refiner: its specialty is exploration and it won’t necessarily feel comfortable wading deep downstream.
It seems to me that, right now, the government has the upper hand. Both sides need the oil to come out of the ground, but the government has the advantage of time. Museveni faces re-election in 2016 (his thirtieth consecutive year in office, by the way), but until then his sway over the government institutions he more or less built will probably go unchallenged. Strong-arm politics have worked for him so far in any case.
Tullow, meanwhile, has stakeholders to satisfy, and it’s getting harder to justify “first oil” in Uganda getting delayed year after year. Tullow discovered oil in Ghana after it did so in Uganda and Ghana is already producing, the company’s national subsidiary president has lamented. Eventually Tullow might have no choice but to bow out, with Total, CNOOC and some newcomers coming in to pick up the pieces.
This scenario might be easier for the government to engineer thanks in part to Uganda’s geological good fortune. Of the 77 wells that oil companies have drilled in Uganda, petroleum commissioner Ernest Rubondo has said, 70 have encountered oil and gas. Compare this 90 percent drilling success rate to the global average of 10 percent, plus the fact that only about 40 percent of Uganda’s oil-rich Albertine Basin has been explored, and you see why, if Tullow leaves, Museveni could probably wait feet-on-desk in his office for other eager oil companies to come knocking.
Uganda won’t be producing oil for a few more years. But once it does, if the Ugandan government gets its way, refined oil exports will be more than just a few trucks can carry.