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Oil & gas

Oil Refinery: Chinese Company Challenges Govt over Breach of Agreement

Oil refinery plant of petroleum or petrochemical industry produc

Dongsong Guangzhou Energy Group is challenging the procurement process government of Uganda undertook to select a consortium to develop the Greenfield oil Refinery to be located in the western district of Hoima.

Last week, the Permanent Secretary of Ministry of Energy and Mineral Development (MEMD), Dr. Stephen Robert Isabalija revealed that government has agreed core project terms for the Uganda Refinery Project with the Albertine Graben Refinery Consortium (AGRC).

Dongsong, in a statement dated August 8, wonders how this came about yet China Petroleum Engineering & Construction Corporation (CPECC); part of its consortium had been appraised as the best bidder with 83.38 percent.

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“We are taken aback by press reports indicating that the Government of Uganda (GoU) has purportedly selected a group known as the Albertine Graben Refinery Consortium to develop the Refinery Project. Incidentally, the same reports indicate that the DongSong-CPECC Consortium has been appraised as the best bidder with 83.38%,” reads in part the statement.

The company further dismisses reports that DongSong-CPECC Consortium withdrew from the selection process due to disagreements within the Consortium as was reported in two local publications.

The group says the “claims are not true,” adding that “none of our letters indicated the withdraw of CPECC or the Constortium from the selection process.”

Part of the story in one of the newspapers reads: “Given the secrecy amongst Chinese companies, it is hard even for most insiders to pinpoint what exactly happened. However, the generally accepted view is that CPECC was unimpressed that Dongsong, which is a much smaller player although it had been fronted as the consortium’s leader, wanted to have controlling powers on the project; including over finances. Sources say CPECC was not ready to accept.”

Government and DongSong Misunderstandings

According to a letter issued by Dongsong on a June 8, the Consortium (CPECC) sought clarification whether the GoU had a preferred and alternate bidder for the Refinery Project.

In the same letter, they also “requested for the term-sheet of the Project Framework Agreement (PFA) and the Implementation Agreement (IA), to enable the Consortium to prepare for meaningful negotiations with the GoU.”

Clarification on the rules that would apply to the selection process going forward was also sought.

In his response, the Permanent Secretary indicated that the process would be by way of conducting parallel negotiations, which were to be guided by a ‘model’ PFA and IA.

However, Dongsong notes, none of the above were attached to the Permanent Secretary’s letter dated June 12.

The group also asserts that whereas the Permanent Secretary “placed reliance on a process flow-chart that was sent to the Constortium prior to the due diligence in China, we must state that it was not clear whether GoU was to conduct parallel negotiations.”

The statement adds: “Further, our recordings of the due diligence engagements do not contain any statement to the effect that GoU was intending to conduct parallel negotiations.”

On receiving the letter, they (Dongsong) on June 13, wrote indicating that the government’s approach was contrary to the earlier understanding from the discussions between the two parties – government and DongSong-CPECC Consortium.

According to the agreement,  throughout the entire due diligence process the Consortium was informed and understood that it would meet all the requirements indicated in GoU’s letter of request for proposals if it were to were to be selected as the preferred bidder.

Basing on that, the consortium “worked tirelessly to put together a robust proposal; set aside the required USD100m for the pre-FID activities and provide all the information required, including agreements with all consortium members and a letter from the Industrial and Commercial Bank of China.”

CPECC says all the requirements were met.

It is against this backdrop that Consortium punches holes in “the abrupt change of course and introduction of superfluous parallel negotiations at the eleventh hour, which in their view “compromised the integrity of the procurement process and was intended to help non-complaint consortia to rectify defects in their proposals.”

More so, Dongsong maintains that in a June 30 letter, the government did not provide the Consortium with the term sheet for the PFA and IA so as to enable the latter to prepare for meaningful negotiation.

“Instead, the said letter requested the consortium to first execute a bid bond before the GoU core terms would be disclosed,” says Dongsong.

The above, to their surprise, was not attached to the letter, when “ordinarily, no serious investor would execute a bond before understanding the terms and rules of engagement.”

They have therefore noted that Dongsong-CPECC consortium has never disintegrated, remains strong and committed to invest in the development of Uganda Refinery Project, provided the concerns raised in the Consortium’s earlier letters are addressed.

About the refinery

The planned 60,000-barrel-a-day refinery will receive supplies from oil fields in the Albertine region.

Government expects to begin exploitation of the entire 6.5 billion barrels of crude resources by 2020.

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