Kenya Oil Discovery – Is an Oil Refinery in Uganda Still Viable?

Tullow's drilling platform in Turkana, Kenya
Tullow's drilling platform in Turkana, Kenya

The discovery of oil in Kenya has raised a complex question – Is it still viable to build a refinery in Uganda or not?

Following Tullow Oil’s discovery of oil in the Ngamia-1 exploration well located in the Turkana County in north western Kenya, different schools of thought have cropped up with many claiming that Uganda’s oil sector may lose out to Kenya.

It should be noted that the discovery made in Kenya has not yet ascertained whether the oil is of commercial viability. That has not stopped skeptics though from doubting Uganda’s viability for building a refinery. For many the idea of a pipeline to the coast may have to be revisited.

The well in Kenya was drilled to an intermediate depth of 1,041 metres and was successfully logged and sampled. The oil found, according to a statement from Tullow oil, has similar properties to the light waxy crude discovered in Uganda, though Uganda’s is closer to the surface at around 800 – 900 metres.

One school of thought suggests that Kenya’s find may to some extent be a game-changer because the country already has a refinery, though old and currently operating at half capacity, and also has pipelines and other infrastructure in place.

The question many are posing though is whether Uganda still needs to build a refinery when the one in Kenya can just be upgraded to cater for the entire region.

This comes on the back of an agreement signed between the government of South Sudan and Kenya to have a pipeline directed to the Mombasa refinery. This, according to industry analysts, complicated Uganda’s desire to build a refinery because it (Uganda) had hoped to refine South Sudan’s oil.

Ms Irene Batebe, the Petroleum Officer-Refining at Uganda’s Ministry of Energy and Mineral development, however, disagrees saying that studies for the setting up of a refinery in Uganda that were done in 2010 had shown it was viable to construct a refinery in Uganda given the low refining capacity in the region. “The region’s total demand is estimated at 164,000 barrels per day and yet the region has only one 70,000 barrel refinery at Mombasa that is also operating at half capacity,” Batebe said.

“If you look at Uganda alone, oil consumption in 2010 was at 21,000 barrels per day and yet the supplies are expensive and often unreliable. A refinery in Uganda would save the situation,” Batebe told the press during the ministry’s interface with the media in Kampala last week.

Batebe also added that the refinery would be developed as a Public Private Partnership and that 29 square kilometers of land had been earmarked for the refinery.

“The study recommended a phased approach to the set up of the refinery and a small one capable of producing 20,000 barrels per day would be set up first at a cost of $600m, then later on one capable of producing 60,000 barrels per day would be set up at a cost of $2billion,” she said.

Mr. Honey Malinga, the Assistant Commissioner Geophysics in the Petroleum Exploration and Production department at the Ministry of Energy and Mineral Development, says the decision to have a refinery in Uganda was done after a joint discussion between the heads of state of East Africa.

“The issue of the refinery didn’t come up yesterday; it has been around for sometime. The heads of state of the EAC in 2007 agreed that in order to have security of supply, a study should be carried out. It was done by the EAC and it found out that we should have more refineries in the region. “Against that background, Uganda did a feasibility study. So it doesn’t matter whether we have two or more refineries in the region provided they are here to help us,” Malinga said.

The decision to have a refinery could have been appropriate at the time since Kenya had not yet discovered oil. One thing that is clear is that Uganda does not have money to build an oil refinery much as it would want one on its territory.

It is apparent that the same players in Uganda’s oil industry are also in Kenya oil exploration and it is highly unlikely that a company like Tullow or China National Offshore Oil Company (CNOOC) or Total would go ahead to build a refinery in Uganda and another in Kenya, assuming the later quantities are viable.

The Uganda case becomes complicated in that the amount of oil discovered so far would only last for some 20 or 30 years making it not feasible to build a refinery at a whopping $2 billion.

To make matters worse there is a likelihood that as peace returns to Somalia, many companies which had earlier been granted licences to explore for oil will throng the country and in the absence of infrastructure, the cheapest and easiest alternative is to ferry the oil by sea to Mombasa, get it refined and distributed to the market.

This then puts Uganda in a dilemma in that whereas Kampala may want a refinery on its soil, it has huge interests in Somalia since together with Burundi they have sacrificed a lot to pacify that country.

But at the same time Uganda would like to reap from the benefits of a prosperous Somalia, the way the united States has reaped from Iraq. But this could mean supporting a move to have Somali oil refined at Mombasa which is against Kampala’s interests.

One thing that is certain is that oil companies do not care about the opportunities a refinery would bring to Uganda or any country. They are only interested in getting profit and if we are to go by the rules of commerce, the more profitable venture would consequently attract more investment.

Then there is the issue of Southern Sudan. The world’s newest nation has already signed an agreement with Kenya to build a pipeline and transport its oil to Mombasa for refining.

This prospect together with the newly discovered oil (assuming it is viable) and the possibility of discovering oil in Somalia could warrant a new refinery in Mombasa.

The mere fact that Mombasa has the advantage of being an international sea port renders it a more viable venture for any investor.

But a section of industry experts have backed the idea of building a refinery in Uganda saying that transporting the oil to Mombasa would be very expensive because of the nature of Uganda’s crude (which is waxy) since it would require a heated pipeline.

Their argument is further strengthened by the fact that since oil exploration is being carried out on the DR Congo side of Lake Albert, a refinery in Uganda would provide her neighbour with a closer and cheaper alternative to have its oil refined.

Apart from a pipeline, Uganda could opt for a railway which would serve multiple functions including carrying crude to Mombasa.

Kenya still has advantage since it already has a refinery in place and is not landlocked like her East African counterpart. This means that if Kenya found oil of commercial viability, she would fast track her infrastructure ahead of Uganda. Kenya also has several options since it has proximity to a coastline and could opt to export oil as crude.

Malinga argued that the discovery of oil in Kenya would help the region share ideas and infrastructure from a wider perspective. “Kenya has been in this longer than Uganda and have drilled more wells than Uganda. We have been promoting ourselves as a single bloc and so as a region, we are happy that they have finally struck oil. We would therefore like them to fast track so that whatever infrastructure we have in the region can be shared,” he added.

Uganda’s oil and gas sector though remains more attractive to investors given the discovery rate is at 90%.

As the debate rages on whether to build a refinery, a pipeline or a railway in Uganda, it boils down to one fact; the money. Any investor would like assurances that they will get maximum value for their money. The mere fact that Uganda does not have the money to put up a refinery makes it more likely that Kenya may be the most viable option.

Their case is made much stronger in that a refinery in Uganda would be assured of business for some 20 or 30 years yet that in Kenya could still be useful even if the oil dried up in the entire region since it would still be needed to refine crude imported from elsewhere as the case is now.

But as the saying goes whoever pays the piper calls the tunes. It boils down to who has the money to decide where to build a refinery.

Simple economics seems to favour Kenya, but it will be Tullow to answer the riddle. To build the refinery in Uganda or not will remain the question.