Southern Sudan announced plans to build a 50,000 barrel per day refinery. This coincides with Uganda working on a feasibility study for a refinery, and Kenya promoting an extensive Lamu port development that includes similar plans. Who will get there first?
In an interview with Reuters, Southern Sudan’s Energy Minister John Luk stated that Southern Sudan was planning to build an oil refinery in Warap State, to serve all the states west of the Nile. It is estimated that the 50,000 barrel per day facility would require an investment of around USD2bn, and would take 36 months to complete. The tender details for what will be a joint venture with Southern Sudan’s state oil company Nilepet were currently being prepared, and the tender would be open to Sudanese and international firms. In addition, government spokesman and Minister of Information and Broadcasting, Paul Mayom Akech clarified in a written statement that the crude oil for the refinery would be extracted from Block 5A oilfield in Unity State, so the construction of a pipeline would also be required.
To date, oil exports depend on the infrastructure pipeline, refinery, and port that runs through the north. The semi-autonomous Government of Southern Sudan (GOSS) is keen to develop its own oil infrastructure: The GOSS has long accused the central government in Khartoum of not accounting truthfully for the oil revenues, an accusation that had recently been substantiated again in the Global Witness analysis ‘Fuelling Mistrust’ . As a consequence, the GOSS claims that it has received significantly less than the share of oil revenues that they are entitled to under the stipulations of the 2005 Comprehensive Peace Agreement (CPA).
This has been a key motivation in trying to take more control over oil production – with the exception of a few percentage points, all the south’s revenues come from oil. And of course this becomes even more relevant in a situation where the south might be cut off entirely, for example if the south decides to secede from the north, or, worse, should full armed conflict break out again. The GOSS therefore seeks to not only take control of oil production, but also to switch the transport route to its southern neighbour Kenya.
All Countries Must Have Refineries
GOSS is, however, not alone in planning a refinery:
- Uganda, where the ongoing exploration process has proven commercially viable reserves, and some estimates point towards 2bn barrels or more, a feasibility study for a refinery is in process. Uganda’s government had been very emphatic that the country would not export crude, but refine domestically for both local and regional demand.
- In Kenya, India’s Essar has, after protracted battles with the Libyans, managed to finalise their acquisition of 50% of the refinery in Mombasa and are expect to invest USD350m to USD400m in its modernisation and upgrade.
- In addition, Kenya’s government is currently trying to interest potential investors and funders in the Lamu-Addis-Juba-Kigali (LADJUKI) Corridor, an extensive development project at Lamu, Kenya’s northern coast on the border to Somalia. Centred around the construction of a new port at Manda Bay, the development also proposes to include a free trade zone, a pipeline, a railway – and a merchant refinery.
- Tanzania is reportedly also looking for an investor to revive the Tanzanian Italian Petroleum Refinery (TIPER), currently only operational as a bulk storage facility.
Perspectives
So will East Africa soon be a maze of refineries and pipelines?
It is unlikely: The regional demand is insufficient for 100,000 barrels per day (bpd) or larger refineries, and will stay insufficient even if GDP growth continues to remain strong. With the current transport infrastructure in East Africa – no pipelines from the oil fields, crumbling roads, and stalled progress in rehabilitating and modernising the Kenya-Uganda railway –, the costs to transport refined fuel to Kenya’s Mombasa seaport are so high that it makes the export of refined fuel unviable for any new inland ventures. Infrastructure investments are a priority across the East African Community (EAC), but even with continued public spending, and improved execution, the progress necessary to push transport costs down to a competitive level will take years. Inland refineries will also not be able to blend different kinds of crude.
Limited regional demand combined with weak transport infrastructure means that several refineries are not an efficient option. As a consequence, the commercial considerations will ultimately determine the outcome of this competitive pipeline planning. If the region cannot sustain several pipelines, then investor interests, i.e. the private sector, will eventually determine the final location. There may be some donor and soft funding for a refinery, but the scale of the overall investment volumes require the involvement of commercial investors – who would be unlikely to agree to non-viable investments.
At the moment, in the competition between Southern Sudan, Lamu and Uganda, the latter still has the first-mover advantage: The feasibility study for the refinery is ongoing, oil production on a very small scale – probably around 1,000bpd is anticipated to begin in 2010 for energy generation and local industry. A refinery of the right size – estimated between 10,000 to 50,000 bpd does make sense: Fuel may still be relatively more costly to produce locally, but there is demand in the neighbouring Rwanda, DR Congo and Southern Sudan. In addition, the supply disruptions in early 2008 after Kenya’s disputed elections and the outbreak of violence highlighted the importance of security and reliability of supplies.
The recent riots in Kampala show that Uganda’s political risk outlook has worsened. Power remains concentrated in the presidency at the expense of strong, meritocratic institutions, and entrenched corruption combined with a lack of succession options generate more and more frustration in the population. Oil production will increase the stakes in the political contest that many feel is neither free nor fair.
However, when compared to Southern Sudan, Uganda offers a more sophisticated and reliable investment environment. Insecurity in Southern Sudan has been deteriorating in the recent months, driven partly by revenue shortfalls after the drastic oil price decline, which brought traditional fault lines to the fore again. The north, with little interest in a stable and united south, has traditionally been adept at fostering and reinforcing southern divisions. There are indications of a growing readiness to return to armed conflict. State institutions, policies, regulatory frameworks and enforcement remain rudimentary, and in the oil sector in particular, the entry and exit of oil exploration firm White Nile offer a cautionary lesson.
Refineries require transport routes, so governments need to plan for this as well, whether it is roads, pipelines, railways or a combination. It is expected that the nascent oil industry in the region will give a marked push to infrastructure development as this becomes more driven by private-sector interests, which will have a positive impact on the wider economy. If a regional refinery is an unlikely prospect, it becomes increasingly clear that these infrastructure investments need to be planned on a regional basis – and that planners are looking a very complex scenario.
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