April 15, 2013 / 3:15 PM / in 4 years

UPDATE 1-Uganda agrees to small refinery so oil output can start

4 Min Read

* Taxes, refinery wrangles have held up commercial production

* Government has said wants 40 percent stake in refinery

* Total says hopes for agreement on commercialisation this year

By Elias Biryabarema

KAMPALA, April 15 (Reuters) - Uganda agreed with France's Total and China's CNOOC to build a much smaller refinery than it had wanted, in a compromise removing one obstacle to commercial output of the country's oil.

The Ugandan government said on Monday it agreed with the two energy companies on an initial processing capacity of 30,000 barrels per day - well below the 200,000 bpd it had earlier advocated.

Rather than build a major refinery in Uganda, Total and CNOOC have favoured a pipeline to export most of its crude via Kenya's Indian Ocean coastline, saying there was insufficient local demand for a refinery of the size Uganda wanted.

Explorers struck oil in east Africa's third largest economy in 2006 and Uganda estimates its crude reserves at 3.5 billion barrels but wrangling over taxes and the viability of a local refinery have since stalled production.

"The two parties however agreed to start with the refinery size of 30,000 barrels per day," said a statement published by the office of President Yoweri Museveni after he met executives from Total and CNOOC.

Museveni stressed he wanted a final deal quickly, in the form of a memorandum of understanding that would include the construction of a pipeline to neighbouring Kenya for exports.

"We have wasted too much time. We are now with the issue of oil for seven years. We need to make our final decisions," Museveni told the oil companies and government officials.

Total and CNOOC entered Uganda's petroleum sector early last after both took up a third each of British explorer Tullow Oil's exploration assets for a total $2.9 billion.

A Total Uganda spokeswoman said that during the meeting they had stressed the need to combine a refinery and a pipeline to achieve the maximum value from Uganda's oil.

"We are hopeful that we will soon reach a convergence of view with the Ugandan authorities and that 2013 will mark the agreement and sign-off of the development and commercialisation scheme with the Government of Uganda," the Total spokesperson for exploration and production, Ahlem Friga-Noy, told Reuters.

"Such achievement will then pave the way to necessary steps to be taken to reach the final investment decision which will be the launching point towards construction phase and first oil."

Uganda has said it wants a 40 percent stake in the refinery. A U.S. investment firm, Taylor-DeJongh, is helping the government get financing for the project, Ugandan officials say.

Museveni wanted to refine crude locally to boost domestic earnings, help fund new infrastructure and provide cheaper energy.

The president still targets a refinery with an eventual capacity of 60,000 bpd, projecting that demand in the local market will keep rising, according to the statement.

"This agreement is a win for Total and CNOOC as a lack of approval for the consortium's development plan was the key hurdle preventing production from coming on line," said Clare Allenson, Washington-based Africa analyst for political risk consultancy Eurasia Group.

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