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Why gov’t picked Russian firm for oil refinery

Minister Irene Muloni shows the location of the oil fields

Government yesterday picked a Russian-led international consortium led by RT Global Resources as the preferred bidder for the construction of the country’s oil refinery.

 

The other company which lost out, SK Engineering and Construction Co. Ltd from the Republic of South Korea, was retained as the alternative preferred bidder. RT Global Resources is a subsidiary of Rostec, a Russian arms manufacturer. Members of the consortium include; VTB, Capital Plc, a subsidiary of VTB, the second largest Russian state-owned bank, Telconet Capital Ltd Partnership, Tatneft JSC and GS Engineering Construction Corporation (South Korea).

While members of the SK Engineering and Construction-led consortium include: SK KDB Global Investment Partnership, a private equity fund, China State Construction Engineering Corporation Ltd, Haldor Topsoe A/S and Mastro Oil and Gas Solutions (MOGAS).

The selection of a preferred bidder for the refinery follows the submission of final offers from the two companies in January 2015, which were evaluated by a team of Ugandan government officials led by a multisectoral steering committee and Taylor DeJongh, government’s transaction advisor. Taylor DeJongh is a US consultancy firm.

Announcing the preferred bidder, Irene Muloni, the minister of Energy and Mineral Development, said the exercise of selecting the preferred company was transparent.

“The process of selecting a lead investor for Uganda’s refinery project has been highly competitive. We are pleased that the two bidders responded to the Request for Final Offers from which RT Global Resources emerged as the selected preferred bidder. We have confidence that we will execute the project agreements and go ahead to develop Uganda’s refinery,” she said in a statement.

The selection of SK Engineering and Construction as an alternative preferred bidder could limit the possibility of  the Koreans running to court to challenge the award.
However, experts have raised questions over the award of the deal to the Russians. George Boden, Global Witness’ campaigner, Uganda oil team, said the award could come with grave repercussions if poorly handled.

“The commercial viability of the refinery is a hotly-debated issue and eyebrows will inevitably be raised at the decision to select RT as the lead investor,” he said in an email to The Observer, before adding: “The refinery contract is absolutely critical to how much money Uganda will make from its oil over the next 30 years or so.”

Boden added: “A good deal could add value to Uganda’s oil, generate jobs and boost development. A poor deal could leave the state subsidising an inefficient refinery and the people in the oil region counting the environmental and social costs. Transparency is key to the success of the refinery project.”

Boden advised government to “publish the contracts, the bidding documents and the financing arrangements so that Ugandans can see what kind of deal their government has got and why this particular company was selected.”

According to the statement, government will right away proceed to hold negotiations on the principal agreements with RT Global Resources with the aim of reaching an agreement within 60 days.

Fred Kabagambe-Kaliisa, the permanent secretary in the ministry of Energy and Mineral Development, explained that the objective of these negotiations was to conclude project agreements to the satisfaction of both the government and the lead investor.  After completion of the negotiations and agreements, the lead investor will constitute a refinery company – a special-purpose vehicle - that will undertake the project.

“The SK Engineering and Construction-led consortium has been a strong competitor throughout the selection process, leading to the final offer. However, they came short on the key requirements of government, including contribution to the private share and operating plan,” Kabagambe-Kaliisa said.

Incase government is not satisfied at the end of the negotiations with RT Global Resources, it may exercise its option to commence talks with the alternative preferred bidder - SK Engineering and Construction Co. Ltd.

The lead investor is expected to own a 60 per cent stake while government will own 40 per cent in the oil refinery. East African partner states are expected to own 10 per cent of the 40 per cent allocated to government. Some of the EAC partner states such as Kenya and Rwanda have already expressed interest in buying a stake in the refinery.

The refinery will produce 60,000 barrels of oil per day; there will be development of product storage sites as well as the construction of a 305 kilometre product pipeline to a terminal in Buloba, Wakiso district.  The first phase of the refinery, according to government, is expected in 2018.

Commenting on why government preferred the Russian firm ahead of the South Korean company, a source conversant with the negotiations said in addition to RT Global Resources offering a competitive bid, there was also geopolitics at play.

“This is a sensitive project and very big. Government had to give it to a friendly country of course subject to a competitive bid. You can’t separate politics from oil,” a source who preferred anonymity said.

He also said RT Global Resources had a convincing technical, commercial and legal bid document and also strong proposals on local content.

ssekika@observer.ug

 

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