The Government of Uganda (GoU) is considering developing an oil and gas refinery

Question

The Government of Uganda (GoU) is considering developing an oil and gas refinery to process the produced crude oil resources. Uganda and its regional development partners have in the past experienced inadequate refining capacity and difficulties in transporting imported products inland raises cost and risks for petroleum product supply in the hinterland. With the Project, the GoU expects to make use of the country’s oil and gas resources to contribute to early achievement of poverty eradication and create lasting value to society through: enhancing energy security by reducing the need to import petroleum products; meeting Uganda’s growing energy needs for petroleum products and power; improving the balance of payment; and creating investment opportunities in other sectors. It has however been asserted that the prevailing oil resources discovered will provide adequate feed source for a local refinery whose proposed development is expected to commence in Uganda. Uganda’s strategic location within the region positions it as a gateway to capitalize on such development opportunities in East Africa. The proposed Greenfield refinery will be ideally placed to capitalize on this opportunity where the Ugandan government plans up to 40% of Project equity and has appointed a US based company to advice government in the procurement of a Lead Investor/Operator. The lead investor will be expected to contribute the remaining balance of 60% stake. The refinery is expected to be developed in two phases each up to a capacity of 30,000 Barrels Per Day (BPD). GoU began with an initial request for expression of interest (EOI) from interested investors by 2016. This was later followed by selection of a lead investor in 2017. Discussions for financial close are scheduled to start in the following year and the refinery development is expected to start by late 2018 to 2021. According to the government’s refinery development committee, phased production has been argued to reduce the project’s implementation costs. This implies that limited financial resources are less exposed to risks of project failures in case of unfavourable business conditions. Furthermore, the government believes that the phased development of the project will allow for absorptive capacity of the refined products to be confirmed for the market. Allowing time to study how the market consumes the refined produce creates avenues for strategic planning and future development of assets to meet continuous emerging needs of the market. The project will enable earlier energy security. It has also been confirmed that the refinery project is composed of two facilities namely the 60,000 BPD refinery in Hoima, crude oil and product storage facilities and a 205 KM long product pipeline to the distribution terminal in Kampala. Beyond Uganda and its western neighbours, additional outlets will be available within the larger product markets of Kenya and Tanzania. Earlier reports have indicated that the 3 entire East Africa has only one refinery at Mombasa, Kenya. The 70,000 BPD refinery in Kenya however runs at less than half its capacity with commercial issues causing frequent disruptions in output. Existing data reveals that ground transportation of imported products through Kenya is strained. Among other reasons, petroleum products are mostly transported by road due to limited pipeline reach and capacity. Uganda and its western neighbors frequently suffer serious supply disruptions in the event of logistical interruptions in Kenya. On the other hand, product Prices in East Africa are 30110% more expensive than in the US as of November 2010. The east African market is highly monopolised by Kenya which creates an unfavourable resource position for other regional states. According to the ministry of energy, Uganda’s crude oil resources have been characterised as sweet waxy with a 40°C pour point, a range between 23 – 33 API and 0.16 wt.% sulphur. Waxy and lowsulfur crude is more suited for onsite refining than pipeline transportation; products are environmentfriendly. Part of the GoU strategy in the short term is to use of crude oil from Extended Well Testing in cement plants, thermal power plants, etc. Until the refinery is operational, crude oil and gas produced will be used for power generation. In the medium term, the refinery will be designed to reach a maximum capacity of 60,000 BPD, commercialise gas produced, and develop a crude oil export pipeline. In the long run, the GoU will potentially expand the refinery and develop petrochemical and energybased industry. Adapted from Ministry of Energy and mineral development, Uganda Refinery Project, 2013. 4 Use the case study above to answer the following question. (Use examples where appropriate) a) Explain the primary objectives of the project. (8 marks) b) In terms of production and operations management, what type of process is being discussed in the case study? Give reasons for your answer. (6 marks) c) Identify the two main resource inputs and three outputs in the refinery project (5 marks) d) During the project planning process, explain how the following are involved: i. Contingency planning (8 marks) ii. Scenario planning (8marks) e) Does the idea of new product development apply to this case study? Justify. (6 marks) f) With the help of a simple diagram, explain refinery project schedule. (10 marks) g) What is the estimated capacity of the refinery at initial production? What is the reason behind this capacity decision? (7 marks) h) Based on the data provided, explain atleast four key factors that influenced the GoU decision to propose the development of the refinery in Hoima? (8 marks) i) At maximum design capacity, the effective capacity of the refinery is 40,000 BPD. If currently, the refinery is producing 54,000 BPD. i. What is the Refinery’s capacity utilization to both design and effective capacity? (6 marks) ii. Explain the significance of the values obtained (6 marks) j) Is it important to control the quality of refined petroleum resources before, during and after refining? Justify why. (10 marks) k) Which type of layout would best suit the refinery design? Justify. (6 marks) l) Would the refinery company use Economic Order Quantity? Why or Why not? (6 marks) END

Explanation / Answer

a) The primary objectives of the Project are:

- to help the country remove the crises of poverty by using the oil and gas resources- As Africa faces the crises of poverty this project aims to utilise its oil and gas resources and generating funds which will gradually eradicate the poverty issue from the country.

- minimising the need to import petroleum products from other countries and hence maximising the casting value to the society. As the resource of generating fuel products is found within the country the need of importing products from outside does not arise which results in increasing the value in the society.

- Fulfilling the needs for use of energy of Uganda in the field of petroleum products and power resources. Petroleum products and power resources are a vital need of any country. This project can help in satisfing the needs of the people in the country through the resources avalaible and hence help in saving time and cost of the same.

-helping other sectors of industry by creating opportunities of investing and thus improving their overall financial position. As oil and petroleum is a large money making market, its flourishment will help the other sectors of the industry also to grow hence bringing monetary growth for all of them and hhelping in development of country.

b.In terms of production and operation management the process discussed in the case study is conversion process. This is a process in which the raw material is converted into a finished product using resources avalaible and ultilised to generate funds from it. In this process the basic form of oil will be proccessed and converted into various different products to bring into ulitilisation in different ways as in used by society as well as exported to countries to bring financial upliftment to the country.

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