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African refineries: Barrelfulls of empty economic promises?

A recent joint communiqué issued during the state visit by President Uhuru Kenyatta, the president of Kenya, by State House, resurrected the debate about how economically sound it is to invest in a refinery in Africa.

How astute is it for Uganda to construct a refinery? If one is to judge by experiences elsewhere, and if one is to consider Uganda’s landlocked nature, limited access to technology and technical expertise, and limited capital for investment, one could safely say that the refinery project is best approached with caution, with Ugandans taking keen interest in how the project intends to benefit them.

Experience has shown that refineries in Africa are dogged by mis(operation), unprofitability and production below capacity. Take Nigeria.  The West African country’s four refineries were designed to refine 450,000 barrels per day (bpd).

But because of corruption and poorly-maintained infrastructure, Nigeria’s refineries produce less than half their capacities. Even worse, the oil products from within Nigeria are more expensive than imported ones. They rely on subsidies for competitiveness.

Kenya is another country whose Kenya Petroleum Refineries Ltd (KPRL) produced below capacity until it ceased production in September 2013. The products coming out of KPRL were also reported to be of poorer quality and more expensive. Kenyan oil marketers, who are mandated by law to buy 40 per cent of their fuel products from the refinery, complained about them!

A report by the East African newspaper said that KPRL, which is currently unproductive and is acting as a store for crude oil, “earns an average of Ksh10 million ($111,111) for [storing] LPG, petrol, diesel, dual-purpose kerosene and fuel oil but the amount cannot meet all expenses as KPRL has about 300 employees.”

Refineries in Africa are of small capacities, making them unable to enjoy the economies of scale that large-scale producers such as those operating 11-million barrels-a-day enjoy. For this reason, it has been argued that African countries cannot meet the fuel needs of their citizens.

In our case, Uganda is a landlocked country and because of the long and more expensive supply chain, her products are likely to be uncompetitive on the international market due to the high transportation costs and production.

Refining her products on land, Uganda will also incur extra costs such as those of hiring security and land compensation. It is also important to note that the price difference between a barrel of unrefined oil and that of a refined one is small on the international market.

The price difference is even smaller in Africa where most of the oil producers lack sufficient domestic skills and must rely on expatriates. They also rely on expensive loans to develop the infrastructure where they guarantee returns on investment before assessing the level of profitability.

Why would Uganda invest in a refinery then? It has been said that the refinery puts Uganda in a good strategic position and that it will create 650 permanent jobs. But is a $3bn investment worth investing in when one considers the (mis)operations of refineries in Africa?

Chad is a good example whose 20,000-barrels-a-day N’Djamena JV refinery has not been properly managed. While the refinery began full operations in 2012, these operations have not been without hitches. Chad and China National Petroleum Corporation (CNPC) International have engaged in disagreements over unprofitable prices set by Chad which have led to the N’Djamena JV refinery ceasing operations on occasion.

Chad’s fuel consumers have borne the brunt of ceased production as fuel had to be rationed. Chad even had bigger problems following the World Bank’s withdrawal of funding for the refinery project; the country forked out taxpayers’ money to pay back the World Bank loan while the refinery remained unproductive.

As citizens, we have a right and a noble obligation to demand from the government to present to us her comprehensive plan on how Uganda’s refinery will succeed where other African producers have failed.

What is the economic rationale for investing in a refinery and a pipeline at the same time considering our current low reserves of 6.5 billion barrels? Finally, what should Ugandans expect in terms of economic, social, environmental and human rights befits and trade-offs from of each of the two development options?
Ugandans need these answers and much more.

dkamugisha@afiego.org

The author is the executive director of the Africa Institute for Energy Governance.

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