Swiss study urges Uganda to build oil refinery


Support for an in-country oil refinery has gained momentum following the presentation of a feasibility study report to the Uganda government this month by Swiss engineering company Foster Wheeler.
Nationalists in the government have been insisting the country’s oil be processed locally, while the oil companies have let it be known they prefer a refinery in Mombasa and an export pipeline for surplus crude.

The Swiss consultants’ report shows that an oil refinery inside Uganda would create many spin-offs for the domestic economy in the form of direct employment and secondary industrial activities.

While oil companies want crude exports because they can thus recoup their investment faster, the Norwegian funded study shows that Uganda would be saving over a billion dollars annually if it were to build its own oil refinery and the economy would gain from the refining process through creating employment opportunities and taxes.

The Ministry of Finance has said it should be possible to develop the refinery at Hoima, not from its own coffers but with external funding, which was the least of the problems, an official said.
With the political will in place after President Yoweri Museveni declared his willingness to go it alone if need be, raising the funds for the refinery with scientific evidence now in will be quick and easy.

There are already willing partners in the shape of Iran, China, Libya and Norway. While China and Libya have shown interest in building an oil refinery in Uganda, Iran has indicated that it is ready to fund the whole value chain, adding value to the oil and building a refinery.
Norway, a partner since 2006, has been supporting capacity building, establishment of competent institutions and transparency in the oil and gas industry through its Norad oil and development initiative.
The Foster Wheeler study also shows that a mini-refinery with a capacity of 15,000 barrels per day, which is Uganda’s daily consumption rate, would cost $1 billion.

It is projected that Uganda can produce 350,000 barrels of oil a day by 2018, if the right development plan is adopted.

So far, estimates put Uganda’s explored oil reserves at between 1.7 and 2.5 billion barrels.
But transporting the crude oil by pipeline to Mombasa would, according to the report, cost $1.7 billion, while the southern route to Tanzania would cost $2.3 billion.

Libya’s Tamoil is in charge of the project to upgrade the Eldoret-Kampala pipeline while Noor Oil and Industrial Technologies (NOIT), a US-based multinational oil firm, won the contract to build a refinery in Dar es Salaam and a 1,500 kilometre pipeline to connect it to other landlocked East African countries.

The oil companies argue that it would not be profitable for Uganda to refine its oil in-country. But while they look at the quick investment returns, Museveni is looking at spin-offs like creating employment.

The need for employment is 400,000 jobs per year against less than a quarter that amount that are on the market. Whether a refinery would make a dent in that figure is debatable (see separate analysis).

At present, neither India-based Essar Group, which runs KPRL’s Mombasa refinery, nor Tanzania have the capacity to refine the Uganda crude oil, which the report says is waxy and heavy with sulphuric acids.

This peculiarity of the crude also means that using pipelines to either Kenya or Tanzania would be very expensive.
The waxy crude solidifies at room temperature, so the pipeline would have to be heated and at every 25 kilometres a “pig” station would have to be installed to remove the wax.

However, the report did not take cognisance of a recent announcement by the Essar Group that the Mombasa refinery will undergo a major upgrade from a processing into a merchant refinery, which can buy its own crude and process it.

President Yoweri Museveni has invited many oil experts, among them Canada’s Claude Landry, an engineer with the OPTEC refinery, who advised that refining the oil is economically viable.

US stocks rose which triggered local stocks to open higher on Tuesday, gains was expanded near market close given the strong A share market. Hang Seng Index finished the day 294 points higher at 23,763. H-share index gained 153 points to finish the day at 13,573. Market turnover dropped to HK$84.8bn. Local property plays were strong, Cheung Kong (0001) and SHK (0016) surged 3.1% and 2.4% respectively. Citic Pacific (0267) have seen buying interest, soared 7.4%. GCL-Poly climbed 5.4% on its encouraging 3Q10 operating figures. Resources play performed strong, Zijin (2899) and PetroChina (0857) gained 2.3% and 1.6% respectively.

Hong Kong shares ended lower Wednesday after global markets reacted negatively to China's surprise interest rate hikes Tuesday, with mainland resources and property firms leading the decline.

The benchmark Hang Seng Index fell 207.23 points, or 0.87%, to 23,556.50 after trading between 23,307.49 and 23,689.99.

Market volume jumped to HK$117.95 billion from HK$84.79 billion Tuesday.

Analysts said they expect local shares to come under pressure in the near term, but strong trading volumes suggest the downside will be limited and 23,000 should provide strong support this week.

'We may see some profit-taking near term, especially on recent outperforming sectors that are perceived to be negatively affected such as property and materials,' Goldman Sachs analyst Helen Zhu wrote in a research note, in relation to China's interest rate hikes.

'We would buy into any major market dips for the medium to longer-term upside as we believe that earnings are solid, valuations are reasonable, and the rate hike could actually remove a risk overhang.'

The People's Bank of China said Tuesday it was raising its benchmark deposit and lending rates by 0.25 percentage point, the first increase since December 2007. The unexpected move prompted worries a slowdown in the world's fastest-growing economy could cool global growth, which led to a selloff in overseas stocks, oil, commodities, gold and risky currencies.

In Hong Kong, Chinese property developers led the falls because of investors' concerns the rate hike will raise borrowing costs.

China Overseas Land fell 3.0% to HK$16.56 and China Resources Land ended down 4.1% at HK$16.00.

Credit Suisse analyst Jinsong Du said developers with high gearing will suffer the most from the interest rate hike.

'Since this news comes as a big surprise, especially right after a sharp rally in China property stocks on the assumption of no interest rate hikes, we expect downward pressure on the sector in the near term,' Du said.

Resources firms also fell, tracking declines in regional peers.

Aluminum producer Chalco fell 3.3% to HK$7.90 and Jiangxi Copper ended down 3.1% at HK$22.20.

In contrast, Chinese insurers rose as higher deposit rates will improve investment yields.

China Life jumped 3.2% to HK$36.00 and Ping An edged 0.2% higher to HK$85.55.

Chinese coal miner Yanzhou Coal Mining Co. (1171.HK) said Friday its third-quarter net profit more than tripled because of a foreign-exchange gain on a U.S. dollar-denominated loan taken by its Australian unit.

The Shandong-based company posted a net profit of CNY3.68 billion for the three months ended Sept. 30, up from CNY1.12 billion in the year-earlier period.

Revenue rose 63% to CNY9.35 billion from CNY5.72 billion.

Yanzhou Coal said earlier this month it expected to report a 100% rise in net profit for the nine months ended Sept. 30, because of an exchange-rate gain led by a stronger Australian dollar.

As of Sept. 30, Yancoal Australia Pty. Ltd. reported a foreign-exchange gain of A$243.8 million on a US$3.11 billion loan.

Yanzhou Coal is China's third-largest coal producer by market value and is listed in Hong Kong and Shanghai. To expand its overseas operations, it acquired Australia's Felix Resources Ltd. for A$3.54 billion last year.

Asian stock market rebounded, together with Shanghai Composite Index overcome 3,000, HK stock market performed well on Monday. The Hang Seng Index extended its gain after opening higher. However, it is capped by 23,800. The Hang Seng Index closed 110 points higher at 23,628 while H share index also rose 131 points to 13,626. Market turnover improved to HK$85.7bn. Commodity sector outperformed the market which is mainly driven by rally of A share commodity stock. Of which, Yanzhou Coal (1171.HK) 3Q10 net profit rose more than 2x with its share price rising 10.8%. Other segment performance is just average. Of which, after recent consolidation, HKEX(0388.HK) resumed its momentum and rose 4.9%.