Dec 17, 2013

What you need to know about the firms interested in constructing your oil refinery

Many have said Uganda has been too slow in propelling itself into oil production after discovering oil in 2006. Others  - mainly oil companies – have insisted Kenya could be the first oil producer in East Africa. Pressure from the same oil companies – Elly Karuhanga, President Tullow Uganda – has been growing for government to issue production licenses. All that, understandable as it may be, is seemingly not going to let the government barge from it taking its time, including completing an oil refinery. Meanwhile, the expectations from Ugandans continue to grow. With all this, the government seeks to first get the refinery project off the ground. So as the compensation process goes on in the 29 square kilometer piece of land for the refinery, in Kabale, Hoima District, the final six firms and consortia bidding to build the refinery have been released. The diverse list is not dominated by Chinese companies as earlier speculated. So what? You may ask. Well, these firms want to be part of an infrastructure project, that if economical enough, could see a drop in fuel prices and propel Uganda to be self-sufficient, partly tilting the Balance of Payments. According to Bank of Uganda statistics, the value of oil imports in 2012 increased to USD1bn from USD800m in 2011. 

The China Petroleum and Pipeline Bureau (CPP) consortium was first on the list. Projections would indicate that this consortium at best, includes a host of Chinese companies involved in the petroleum production value chain. CPP, is also a subsidiary of the Chinese National Petroleum Corporation (CNPC) which is placing itself a global oil producer. CNPC has assets of over USD480bn more than twenty times the size of Uganda’s GDP. Chinese companies more often than not have the finances from their development banks to spend on big infrastructure projects. Cheap financing is understandable because it doesn’t weigh heavily on the refinery once completed. Notably however, refineries in Chad and Niger, all with a 40percent stake from Chinese companies, in 2012 were operating below capacity as government and the companies failed to agree on oil prices.

From Japan – Ugandans drive lots of Toyota’s from the country – is the Marubeni Corporation, which is the only firm listed on the six. In other-words, it is only the one single company that did not submit a bid as part of a consortium. Internet searches and the company website describe it as a major player in the construction, exportation and marketing of oil and gas projects. It is a conglomerate that has major investments in Health, transportation, industrial machinery, energy, mineral resources, ICT, Finance and Real Estate among others. It is currently part of refinery projects in Kazakhstan, Qatar and Kuwait. In 2012 however, the company was forced pay USD54m in fines after violating U.S. Foreign Corrupt Practices Act (“FCPA”) in a Nigerian LNG Plant construction project.

Ever heard of Petrofac? Well, Petrofac apparently spent $1.5m (£1m) on a private jet for the boss plus $189,000 on client entertainment according to a story written by UK’s Independent. That aside, Petrofac a UK company, registered in Jersey, USA, also submitted a bid with a consortium. Petrofac is involved in various infrastructure projects in the oil and gas sector in Algeria, Tunisia and Malaysia. Its strength is in the petrochemicals segment, which is usually an offshoot of refining. In September 2013, Petrofac led a consortium that won a deal to construct a petrochemicals plant in Kazakhstan.

Russia is a power house in the oil and gas sector. Its companies, like Roseneft and Gazpromm have proven to be major players in Europe. Well, it is rather not surprising that a consortium led RT – General Resources has also expressed interest in the Ugandan refinery. RT – General Resources is a subsidiary of the Russian state corporation – Rostec. Rostec, is also known to be involved in the businesses of firearms, and in October 2013, signed a USD1bn arms deal with the Angolan Government. They also service and supply Russian made helicopters. In Natural resources, they’ve mining activities in Zimbabwe. Interestingly of all the companies/consortia that placed bids for the refinery, RT – General Services is the only one that issued a statement eventually picked up by the news wires. Their consortium includes VTB Capital, the lending arm of the VTB Group a leading Russian financial services – including banking – provider. It is 60percent owned by the Russian Government. Tatneft, another Russian company, is involved in the entire value chain from exploration to marketing, is also part of the consortium. A point to ponder on though is a statement in the Russian media outlet RT, which reveals that Andrey Korobov, the General Director of RT – Global Resources said “The consortium aims to recoup the money spent on the project in a short time due to the high oil price.”

As South Korea ponders on the next move to be made the young North Korean leader, Kim Jong Un their companies have been making inroads in Africa. Samsung has pitted itself against Japanese Companies like Panasonic, Sony and Olympus on one hand and Apple on the other. This time, the largest oil refiner in South Korea SK Energy – a subsidiary of the SK Group - has also put in a bid with a consortium of companies for the Ugandan refinery. Korean media has been reporting declining fortune at home explaining why it has been looking for opportunities in countries like Australia. The SK Group has eight subsidiaries in just the petroleum value chain.

Know a country called Iran? Of course you do. Well, this has nothing to do with Nuclear Weapons but has everything to do with it. In September 2012, there was an EU embargo on Iranian oil imports; that limited any business performed by international companies with ties in the EU. In that month, Vitol a Swiss company, the largest and most aggressive energy and commodities trading company, admitted – well kinda – to have traded some Iranian oil. Okay, if that is complex, remember the famous Iraq UN oil-for-food-program? Vitol also in 2007 pleaded guilty to theft and paying kickbacks to Iraq under this program. It agreed to pay a fine of USD17.3m. So why are we talking about Vitol? It is also leading a consortium of companies that want to construct an oil refinery. Vitol [] is also vertically integrated – involved in the entire oil value chain.

As the Uganda government deals with compensation of Ugandans occupying the proposed refinery land, it now also has to go through a process of finding the best possible partners in the oil refinery. One of these consortia named above will have a 60percent in the refinery of about 60,000barrels per day. In an article I wrote for The CEO Magazine – Honorary mention in the 2012 ACME Oil and Gas reporting awards – a Norwegian expert told me:
 “Worldwide, there are more than 600 refineries with different solutions for state involvement based on history, economics and politics. Each situation must be evaluated  on its own merits, and I am confident that Uganda will find a solution which serves the  country well,” - Sverre Brydøy a consultant with IPAN [The International Petroleum Associates Norway (IPAN), a consulting firm with expertise in exploitation of oil and gas including refinery models.]

In the same article, Dr Keith Myers [previously worked for BP  and rose to the level of Senior Commercial Advisor until  2000, when he quit. He now offers advisory services through Richmond Energy Partners – which he founded – to investors and oil and gas companies.] also noted; 
“I assume that the GOU will wish to have its share of the capital costs paid by others. The providers of capital will want a considerable degree of control over how the refinery operates until their risk capital is repaid. The challenge comes in aligning purely commercial objectives with a political agenda that may compromise profits from the commercial partner's perspective. Refinery joint ventures between State Enterprises and commercial investors work best where objectives are aligned, but the relationships are never easy.”

Dec 6, 2013

On Umeme: let’s get back to the basics

It is the last day of November – 30th to be exact – in 2012. The sun is finding its way through the clouds. We are at the Sheraton Kampala Hotel. The same Hotel where everything was "Kwisha" in 1981. Fast forward to 2013, I once got served milk that had gone bad. I abandoned the cornflakes. Well, on this November day, Umeme had treated us to breakfast and a host of speeches. It was on this day Umeme got listed on the Stock Exchange. And yes, the trading floor was temporarily moved to the Sheraton. “They have been bought off,” they said. “Why are they not telling us the issues? Umeme is cheating us?” they added. Oh well, I wonder how breakfast could be a form of buying us off? But the company got listed, the first since 2009. The price has since appreciated by 36percent and now a share is worth Shs365. Good for the company and good for the USE. Such days are rare for the USE. 


The generators blare on. Downtown Kampala, traders along Nasser Road are listening to their Radios. Later in the evening they will watch NTV and on Newsnight, Andrew Mwenda will be talking about “daft MPs” trying to get the “Umeme contract cancelled.” We suffer from "lack of intellectuals" to analyse issues, he will say. The Umeme concession is in its 8th year – of 21years. When MPs made recommendations after an adhoc committee report on the electricity sector, one of them: terminate the Umeme contract as they claimed it was signed in bad faith. We got a bad deal. Additionally, Umeme lied. In defense of Umeme – and partly, I agree – Mwenda notes that Umeme has not breached any of the concession terms and in fact continues to invest in Uganda, achieving the targets set for it. They recently added a Shs485bn loan deal from IFC, Stanbic and Standard Chartered for further investment between 2015 and 2018. 

Yes the concession agreement is complex. You'd have to breakdown the key issues, one by one, including taxation. So let’s deal with the basics. Umeme is inefficient – sometimes. Bills are still estimated and the generators are dominant. In Kampala, we lack a smart grid. Sometimes the slightest of winds – even before the rains – we are plunged into darkness. They’re “trying to fix” the grid. It is not that easy – they say. Western Uganda is now expected to experience more than four months of load-shedding as the grid is upgraded. But what do we want? Electricity! Efficient supply of electricity. Where did all this start? Uganda Electricity Board (UEB) used to be the power distributor and generator. We had daytime and nighttime load-shedding. It was inefficient. It had suffered from elite capture. The same “elite” still running some of electricity bodies like UETCL, UEDCL and UEGCL – all replaced UEB. All these companies have a role to play in the energy sector. It is complex. UETCL undertakes most of the high level projects on behalf of government. If the transmission lines are inefficient, we have the right to blame them. 

We delayed power projects yet more people were added on the grid. Bujagali delayed. We blamed butterfly activists and Ken Lukyamuzi. Then desperately to keep our lights on, we brought in thermal generators – at a premium. Government decided to subsidise the tariff. Bujagali “went live” in 2012. We had excess electricity, an "un-smart" grid and an ad-hoc committee report. The company went public, the investor, Actis got back about Shs92bn returns on loans for “upgrading” the systems since 2007. 

With Bujagali and ESKOM – running Kira and Nalubaale – they want a power distributor that can make collections for them to get paid. The lending arm of the World Bank, IFC, and Germany’s KFW etc… are all investors in Bujagali. IFC is also a lender to Umeme and holds a 3percent stake in the company. IFC wants a return on the money invested in Umeme, they also want to make money from Bujagali. One Bujagali official notes that they prefer Umeme as a distributor, that way they get paid on-time to avoid creditors knocking on their doors. The pressure is on Umeme and Ugandans. If we generate more power, where does it go if we lose 24percent of it? Well, the tariff. We are going to have another huge Dam, Karuma. The Chinese will build and finance most of it. If you think the tariff will drop, well, unless UEB makes it back. To pay for all this energy, the tariff is likely to edge higher. If we get more industries, then, maybe then we won’t pay that much. So even with the tariff, Umeme has to collect the money. They have improved that to 94percent -2012. Then comes in bill estimation!! There is a planned roll-out of prepaid meters – already for some people in Kampala these meters can be seen. They are mandatory, you either get one or get abused by a sub-contractor. The roll-out for the whole country is expected to cost USD300m. Who will pay for it? You. While we pay our bills, some government agencies default. Remember what became of Uganda Airlines? The government racked up a bill that they didn’t pay, sometimes. This cost the airline and it is partly why it went under.  

Point here is, yes we need the FDI, but Umeme’s is not doing charity work, neither for themselves nor for us. We have to keep asking the questions, no matter how “stupid” they sound. If we stop asking, then who will, yet we are the ones who pay the price. If the elite can’t explain the basics, then who will? If they assume, “yeah, Ugandans suffer from lack-of-intellectualism-so-let-us-ignore-them” then how do "they" expect the apathy to go away? The more we discuss Umeme, the more open they become. A Ugandan SME needs efficient supply of electricity. 


The first thing any business reporter who wants to write about the stock market is told is: “buy shares.” That way you’ll understand how our small stock exchange works. So that way, you become an investor, sometimes, you forget you're a journalist. So yes, despite the "machinations" about Umeme, the demand for the shares of the company has been on a rise.The reason: Institutional investors. Institutional investors, mostly offshore [Mauritius] seem confident. Umeme Limited, Uganda, is 60percent owned by Umeme Holdings - managed and owned by Actis. For one,it has most sophisticated tax arrangements. The holding company that owns Umeme is domiciled in Mauritius [tax haven]. Prof. Guttorm Schjelderup calls this [tax havens] a facilitator of “sophisticated tax planning.” It is a listed company. Disclosure is not problem. Olympus is a listed company in Japan. Enron was listed on the NYSE. Listed banks have rigged Libor, been fined and the world moved on.