By Spy Uganda
Kampala: Uganda’s decision to build a refinery has been discouraged on the basis that the facility is not only an expensive venture but also lowers the value of the East African Crude Oil Pipeline (EACOP).
This is according to a report by UK-based think tank Climate Policy Initiative (CPI).
READ ALSO: Thirsty For Oil As NEMA Swiftly Approves ESIA Certificate For East African Crude Oil Pipeline
“Because of the complexity required to refine Uganda’s waxy oil, capital costs of $4 billion for the Kabaale refinery are very high for a refinery which is of very small scale compared with the global market,” said the report titled Understanding the Impact of a Low Carbon Transition on Uganda’s Planned Oil Industry.
The report adds that building the refinery will result in a $1.8 billion loss of potential value to the upstream oil reserves at EACOP, with $400 million of the loss accruing to international investors and $1.4 billion accruing to the Ugandan government.
This is based on the fact that the refinery will buy crude oil at a netback price — the price that the oil would earn on its way to export at the point it enters the EACOP pipeline. In effect, this complicates the situation for upstream investors because of uncertainties on whether they sell to the refinery or to export markets.
The reserves risk a further value erosion of $10 billion at a time when the world is not only grappling with low crude prices at the international market due to Covid-19 impacts, but there is an aggressive push to limit global warming to well below 2 degrees Celsius.
Under a “business as usual” scenario that assumes the transition does not take place, Uganda’s upstream oil reserves would be worth $18 billion with first oil being produced in 2024 and the industry lasting between 25 and 40 years.
Considering that the country requires a staggering $13.6 billion to invest in its crude project — with $6 billion needed for upstream, $3.6 billion for the EACOP and $4 billion for a 60,000 barrel per day refinery — Uganda should expect peanuts in terms of earnings from the resource.
“By highlighting those risks, we aim to help Uganda avoid economic shocks from corporate losses, falling tax revenues, overextended borrowing and defaults,” said David Nelson, CPI Energy Finance executive director.
READ ALSO: Post COVID-19: EA Oil Pipeline Project To Employ 10000 Youths In Uganda-Min.Kitutu
The report reckons the country has since lost substantial revenues from its oil deposits because of delays that have hit crude production and investment in a refinery.
In 2006, when commercially recoverable oil was confirmed in the Albertine Basin, Brent crude prices hit $78 a barrel, peaking two years later at $143. At that time, the Ugandan government had high expectations that the valuable export commodity would lift its economy to middle-income status within a decade considering the 1.6 billion barrels of commercially recoverable reserves could have been worth $61 billion.
In the seven years since production licences were granted to Total and the China National Offshore Oil Company (CNOOC), the US shale boom and geopolitical shifts among the Organisation of the Petroleum Exporting Countries cartel have contributed to an oil price collapse over 2014-2016.
Prices collapsed again this year as global oil demand plummeted due to the Covid-19 pandemic and when efforts to decarbonise the global economy have accelerated and expectations for long-term oil prices and consumption are not where they were when Uganda’s oil reserves were confirmed.
It added the companies will try to renegotiate terms so that they can either gain a higher share of available economic value and/or de-risk their investments. However, a renegotiation would come at a significant cost to Uganda given its negotiating hand has weakened in recent years due to the changing market dynamics.
