{"id":973,"date":"2020-12-21T18:18:02","date_gmt":"2020-12-21T18:18:02","guid":{"rendered":"https:\/\/www.africa-press.com\/uganda\/?p=973"},"modified":"2020-12-21T18:18:02","modified_gmt":"2020-12-21T18:18:02","slug":"uganda-refinery-too-costly-cpi","status":"publish","type":"post","link":"https:\/\/www.africa-press.net\/uganda\/all-news\/uganda-refinery-too-costly-cpi","title":{"rendered":"Uganda refinery too costly \u2013 CPI"},"content":{"rendered":"

Africa-Press<\/a> – Uganda<\/a>. <\/strong><\/span>Uganda\u2019s 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).<\/p>\n

This is according to a report by UK-based think tank Climate Policy Initiative (CPI).<\/p>\n

\u201cBecause of the complexity required to refine Uganda\u2019s 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,\u201d said the report titled Understanding the Impact of a Low Carbon Transition on Uganda\u2019s Planned Oil Industry.<\/p>\n

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.<\/p>\n

This is based on the fact that the refinery will buy crude oil at a netback price \u2014 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.<\/p>\n

\u201cFor international upstream investors, building a refinery increases the cost per barrel of oil exports. If the refinery is built, fewer barrels of oil will be exported using the EACOP than would have been the case without the refinery,\u201d said the report released two weeks ago.<\/p>\n

It adds that considering EACOP costs are largely fixed, the decision to build the refinery means that the pipeline\u2019s costs get amortised over fewer barrels, meaning that the pipeline cost per barrel would increase.<\/p>\n

The report shows that market conditions for the global oil industry have changed so dramatically over the past five years that reserves of \u201ccheap oil\u201d may no longer be worth recovering unless the Ugandan government can strike a new deal with its foreign investors. From 2013 to 2018, Uganda\u2019s oil reserves have lost value by a massive 70 per cent from $61 billion to $18 billion.<\/p>\n

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.<\/p>\n

Under a \u201cbusiness as usual\u201d scenario that assumes the transition does not take place, Uganda\u2019s upstream oil reserves would be worth $18 billion with first oil being produced in 2024 and the industry lasting between 25 and 40 years.<\/p>\n

Considering that the country requires a staggering $13.6 billion to invest in its crude project \u2014 with $6 billion needed for upstream, $3.6 billion for the EACOP and $4 billion for a 60,000 barrel per day refinery \u2014 Uganda should expect peanuts in terms of earnings from the resource.<\/p>\n

\u201cBy highlighting those risks, we aim to help Uganda avoid economic shocks from corporate losses, falling tax revenues, overextended borrowing and defaults,\u201d said David Nelson, CPI Energy Finance executive director.<\/p>\n

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.<\/p>\n

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.<\/p>\n

This was based on the net present value of future cashflows based on CPI\u2019s long-term oil price projection from time of the original planned FID of 2015.<\/p>\n

\u201cBut by 2020, first oil has not yet flowed as decisions to invest continued to be delayed and global oil markets have changed after five years of turmoil and volatility,\u201d said the report.<\/p>\n

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.<\/p>\n

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\u2019s oil reserves were confirmed.<\/p>\n

\u201cThe returns that Total and CNOOC might expect to earn under the terms originally agreed with the Ugandan government now appear too low for the companies to take FID,\u201d said the report.<\/p>\n

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.<\/p>\n","protected":false},"excerpt":{"rendered":"

Africa-Press – Uganda. Uganda\u2019s 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). \u201cBecause of the complexity […]<\/p>\n","protected":false},"author":84,"featured_media":972,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,8,12],"tags":[233,234],"class_list":["post-973","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-all-news","category-homepage-english","category-policy","tag-africa-press","tag-uganda"],"yoast_head":"\nUganda refinery too costly \u2013 CPI - Uganda<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.africa-press.net\/uganda\/all-news\/uganda-refinery-too-costly-cpi\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Uganda refinery too costly \u2013 CPI\" \/>\n<meta property=\"og:description\" content=\"Africa-Press – Uganda. 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