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[2008-06-26] Kenya to lose oil market as Uganda builds own refinery
Kenya’s petroleum industry, which has been making super profits riding on the wave of regional economic growth, is bracing for hard times following a decision by Uganda to build its own refinery for the oil it recently discovered close to its border with the Democratic Republic of the Congo.
Ugandan authorities confirmed that a decision had been made to build the refinery, which is expected to start processing crude in the second half of next year.
The country plans to gradually reduce its dependence on Kenya’s refinery for petroleum products, said Mr. Daudi Migereko, Uganda’s Minister of Energy and Mineral Development on the phone from Kampala.
Topping plant
“We intend to add value to our oil by processing it in a local refinery. A topping plant for paraffin and heavy fuel oil should be complete by the end of the third quarter of 2009,” he said.
The United Kingdom’s Heritage Oil is understood to be searching for financial arrangers for the project, to be built through debt financing.
The move is expected to have a huge impact on the volumes of petroleum products processed at the Mombasa-based Kenya Petroleum Refinery Limited and marketed in the region.
Landlocked Uganda is the biggest consumer of Kenya’s petroleum exports, taking in more than 30 percent of all exports — most of it pumped through the pipeline.
As Uganda drills and processes its own oil, it is expected to significantly reduce its intake of imported petroleum products, wiping out a huge market for KPRL and Kenya Pipeline as well as owners of trucks which transport the oil from depots in western Kenya to the neighbouring country.
Kenya’s refinery processes 1.6million tonnes of crude oil annually to produce a wide range of petroleum products for local and regional markets.
Key exports include unleaded premium gasoline, regular petrol, industrial diesel, fuel oil and special products such as bitumen and grease.
Total demand of petroleum products in East and Central market, which includes Kenya, Uganda, Tanzania, Rwanda, Burundi and Eastern Congo, stands at five million tonnes. Most of these products are imported in processed form and transported by road, railway and pipeline.
Additional wells
Though Uganda’s known oil deposits are still considered small, ongoing exploration is expected to yield additional wells that could usher the country into the club of petroleum exporters in the next decade, which raises the possibility of Kenya losing the Rwanda, Burundi and the Democratic Republic of the Congo markets that consume a sizeable chunk of her petroleum exports.
Uganda’s decision to go it alone on its oil is seen to be informed by recent political turmoil in Kenya that nearly brought its economy to a halt because of inability to access petroleum products.
The Ugandan refinery, to be built close to the oil wells, requires heavy investment in cracking the heavy black oils into high value white oils including diesel, kerosene, gasoline and naphtha.
Initial findings show that the crude oil discovered by Tullow Oil at Mputa adjacent to Lake Albert in western Uganda will be heavy, waxy and of low sulphur content. The new refinery is expected to process 4,000 barrels per day (bpd).
Part of crude oil from Mputa wells will be processed through an Early Production System (EPS), which uses simple atmospheric distillation method to produce fuel oil (3180 bpd), diesel (500 bpd), kerosene (120 bpd), naphtha (180 bpd).
Uganda says its refinery will produce 1,800 bpd of fuel oil to be used to generate 50 MW of electricity for the national grid. The balance of its products will be trucked to Kampala for domestic consumption and export.
Petroleum industry experts said the EPS could start producing diesel by end of 2009. This means that Uganda could go big on diesel generated-power by end of next year. The country has been steeped in a power crisis for nearly three years and has been using imported oil to generate additional electricity it needs to power its fast-growing economy.
Oil transporter Kenya Pipeline is further expected to lose the opportunity to get a piece of Uganda’s oil cake after the neighbouring state ruled out the possibility of exporting it through the Mombasa port.
Mr. Migereko said Uganda’s oil will mainly be for domestic consumption with very little chance for export. Initially, it was expected that Kenya Pipeline would partner with Ugandan authorities to build a parallel line that would be used to transport the crude to the Mombasa refinery for processing and export. The refinery currently processes about 33,000 barrels of crude oil per day short of its design capacity of about 70,000.
An ongoing plan to upgrade the refinery was expected to expand its capacity to process Uganda’s crude oil which has a different composition. Industry players say it takes about four years to develop and fully exploit new oil wells.
Uganda’s move is a challenge to Kenya’s petroleum industry players particularly for KPRL and Kenya Pipeline managers who have to review their investment strategies in view of the new developments, said Mr. George Wachira, the chief executive for Kenya’s Petroleum Institute for East Africa (PIEA).
Managers of the refinery are, for example, expected to revisit capacity issues since loss of Uganda and possibly Rwandan markets will leave it with the domestic market as the major consumer of its products.
It may also ease an ongoing battle between multi-national oil giants OiLibya of Libya and India’s Essar for control of the Mombasa refinery. Plans are underway to upgrade the facility at a cost of KSH25 billion.
Capacity problems
KPC is also expected to review its investments in the pipeline that has recently been suffering capacity problems as Uganda and Rwandan economies take in more oil. The company has been particularly under pressure to increase its capacity to pump oil to western Kenya for onward transportation to Uganda and Rwanda.
Uganda’s move also puts into doubt the planned extension of KPC’s pipeline to Kampala — a project for which a contractor has been identified and a tender awarded.
Last year, Kenya exported 216,000 tonnes worth KSH6.7 billion of oil products, a 27 percent increase from the previous year.
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