No Cheap Fuel When Oil Starts Flowing

As Uganda embarks on the process of refining its oil, government has ruled out subsidizing locally-refined petroleum products to enable citizens enjoy the benefits of the country's most lucrative mineral discovery.
 
Robert Kasande, the Refinery project manager in the Petroleum Exploration and Production department (PEPD), says the government will not subsidize locally-refined petroleum products.
 
"It is wasteful expenditure and bad practice," Kasande told a conference at Sheraton hotel recently.
 
He explained that pump prices of petroleum products would be determined by global forces of demand and supply, with no government oil subsidies as it is in Nigeria. With confirmed reserves standing at 3.5 billion barrels, Uganda stands to join the ranks of mid-sized oil producers like Gabon, the Republic of Congo, Chad and Trinidad and Tobago. So far, proven reserves place Uganda 40th among oil nations.
 
But as the country moves into refining, the issue of subsidizing petroleum products is likely to become combustible. Ben Shepherd, in his report, "Oil in Uganda: International Lessons for Success," released last month, notes that pump prices of petroleum products could spark off a political deadlock.
 
"A local refinery may bring economic benefits, but also risks political problems – most notably over the pricing of oil-related products for local consumption," the report notes.
 
The report stresses: "It may not be obvious, for instance, why Ugandans should pay a world-market price for products flowing from a Ugandan refinery, using Ugandan oil."
 
According to the report, the resulting public pressure for cheap oil could push the government to impose price restrictions, thus hitting the profits made by oil companies and committing the government to subsidies.
 
Such circumstances, the report noted, precisely led to a refinery in Chad being closed by the operating company – the China National Overseas Oil Corporation – after the government imposed a low rate on its products.
 
Irene Batebe, a senior petroleum officer at PEPD, said Uganda's oil refinery would refine almost all petroleum products the country has been importing. "The refinery will refine diesel, petrol paraffin, jet fuel, and heavy fuel oil," Batebe told The Observer.
 
Refinery row
 
In the meantime, the row continues over whether the country should construct an optimal oil refinery or build an export pipeline. Oil companies continue to advocate that the country needs to construct an optimal refinery of 30,000 barrels per day for local consumption and export the rest to the international market.
 
They insist that an export pipeline would save government billions of shillings in building a bigger refinery. Such an export pipeline would stretch 1,350 kilometres to the port of Mombasa. Government insists that an export pipeline will only come in the picture if East Africa's market demand for refined products is fully met.
 
Reuben Kashambuzi, a former Commissioner in PEPD, in his book, The History of Petroleum Exploration in Uganda: A matter of Faith, sheds light on the value of having a refinery. "Exporting crude and importing petroleum products is very bad economics and an unsustainable strategy," Kashambuzi stressed. "Nobody, particularly oil companies, has convinced government that other options should be preferred," he explained.
 
According to Kashambuzi, the type of crude discovered is waxy and solidifies at room temperatures. "A pipeline to Mombasa would have heating stations every few kilometres [approximately five kilometres], making the pipeline very expensive.
 
"So, if for one reason or another, the heating failed, oil would solidify in some sections of the pipeline and this could pose some handling difficulties. No option should ignore this possibility," Kashambuzi explains.
But there is another matter to consider.
 
"Who will be responsible for filling the pipeline initially?" Kashambuzi writes. "The pipeline must remain full for the duration of its use and if it is owned by the government, the government will be responsible for the 'dead weight.'"