Uganda’s Oil Refinery: Gauging the Government’s Stake

• Uganda’s planned oil refinery will have several benefits for the country, including for its security of fuel supply and balance of payments.
• The refinery could be reasonably profitable, generating an internal rate of return of 13 percent in a baseline scenario.
• The government is planning to take a 40 percent stake but may ultimately pay a higher price for this equity than it expects. Even if it borrows to cover its upfront contribution to costs, it will need to divert around $330 million in present value terms from the national budget for loan repayments in the 2030s.
• This price will increase if downside risks, such as cost overruns or lower global oil prices, materialize.
• The government can take several steps to increase interest from other investors, including by reducing the risk of cost overruns, ensuring deregulated product prices continue, and providing less risky forms of state support such as tax incentives. These should reduce the need for the government to take a large stake.

French supermajor Total and Chinese state oil company CNOOC are currently developing Uganda’s first oil project. As part of this, they are constructing the East Africa Crude Oil Pipeline, which will have the capacity to export 216,000 barrels per day (bpd) of oil. The government is also pursuing construction of a refinery that will process 60,000 bpd when built.

The refinery will have several benefits. It should address Uganda’s problem with fuel supply, with current import routes from Kenyan and Tanzanian ports having suffered several disruptions. Fewer petroleum product imports will reduce the country’s foreign exchange needs. The government hopes that the refinery will also stimulate the birth of a petrochemical industry and generate thousands of jobs.

The key question for the government now is when and how the planned refinery will go ahead, including in relation to its planned equity stake. The government canceled its agreement with the Albertine Graben Refinery Consortium (AGRC), the companies selected to construct and operate the refinery, in June 2023 after AGRC failed to secure sufficient financing within the agreed timeframe. The government has been planning to take an equity stake of up to 40 percent in the refinery through the Uganda National Oil Company (UNOC). But the challenges with AGRC could encourage the government to take an even larger stake to ensure the project proceeds.

There is limited clarity on the price that the government might ultimately pay for its equity stake. To provide further clarity and thereby inform government decision-making, this paper's authors have analyzed the refinery’s economics and the implications for the government stake.

The authors’ modeling suggests that the refinery could be reasonably profitable. With their baseline assumptions, it generates an internal rate of return (IRR) of 13 percent.

With a construction cost of $4.5 billion and assuming debt financing of 70 percent, a government stake of 40 percent requires the government to contribute around $540 million. This is equivalent to about $440 million in present value terms (assuming a real discount rate of 8 percent). Given budgetary constraints, the authors expect that the government will borrow this money to avoid this upfront cost.

But borrowing is not a silver bullet. While UNOC ultimately makes a profit over the lifetime of the refinery in the authors' baseline, the government needs to divert around $330 million in present value terms from the budget to contribute to loan repayments in the 2030s.

The price that the government ultimately pays for a 40 percent stake will be impacted by a range of factors and uncertainties that affect the profitability of refineries. The authors analyzed five factors that will affect the profitability of the Ugandan refinery: construction cost, feedstock volume, global oil price, product prices and regional exports.

The government will pay a very different price to what it expected even if only some of these downside risks materialize. Taking a large equity stake could therefore generate substantial challenges for Uganda.

Given that the refinery will have considerable benefits for Ugandans, the government may decide this is a risk worth taking, and a price worth paying. However, the government may not need to expose the country to this amount of risk. It is unclear whether the failure of AGRC to raise sufficient financing relates to the refinery’s profitability or other reasons, particularly given the refinery is profitable in the authors' baseline. If the government can establish and address the reasons for AGRC’s fundraising failure, other investors may still be willing and able to provide most, if not all, the investment.

In this paper the authors identify several steps that the government can take to increase interest from other investors and thereby reduce the risk that the refinery hinders rather than helps Uganda’s development.