Uganda has enough oil reserves to transform its economy. But low oil prices and difficult negotiations have kept the landlocked country’s resource boom on hold.
When commercially viable deposits of oil were first discovered in Uganda’s Albertine Graben in 2006, it was hoped that production could begin as soon as 2009. But now, nine years since the find, there is still no certainty of when the oil will start flowing.
Uganda’s proven reserves of oil stand at around 2.5bn barrels, half of which the government estimates are recoverable. This would be sufficient to turn Uganda into a mid-tier African producer by the middle of the next decade with potentially transformative effects on the national economy. However, long-running disputes between upstream companies and the government over taxes and exports mean production remains some way off.
Officially, the government is optimistic that production can begin at its flagship Kingfisher field by 2018. However, the fall in world oil prices has left many independent observers doubtful that the necessary capital can be raised to bring oil online in this timeframe.
In its monetary policy report for April, the Bank of Uganda warns, “The global oil price outlook places severe question marks over the speed with which Uganda’s oil resources can now be developed, especially given that the country’s proven oil reserves are waxy, which increases the cost of moving them to the coast.”
It continues: “Whereas oil production had been projected to start in 2018, this date could now be pushed out even further, given that the profitability of oil investments could remain depressed in the foreseeable future.”
Oil prices, however, are not the only factor to have delayed production in Uganda. Of the three upstream companies operating in the country – China National Offshore Oil Corporation (CNOOC), France’s Total and the UK’s Tullow Oil – only CNOOC has been awarded a production licence. The delay in awarding licences to Tullow and Total is thought to stem from disputes surrounding tax and how much oil will be consumed locally or exported overseas.
For several years, President Yoweri Museveni has been adamant that a refinery be built in Uganda to feed the local market. This has been resisted by the production companies who fear they could become subject to price restrictions on locally consumed fuel. The government initially demanded a refinery with capacity for 180,000 barrels per day (bpd), but after much negotiation agreed in February 2014 to a much smaller facility of 30,000 bpd that would later expand to 60,000 bpd. The contract for the refinery project was awarded to a consortium led by Russia’s RT Global Resources in February 2015.
Importantly, the government also agreed to the construction of a pipeline that would allow the vast majority of crude that is not consumed locally to be exported overseas via Kenya. The construction contract was awarded to Japan’s Toyota Tsusho in November 2014, and the project is expected to take six years to complete.
As the principle outlet for Uganda’s crude, the pipeline is seen as vital for the three companies to invest the $14bn they say is necessary to develop the fields. But as of yet, none of the three has announced a final investment decision on their Ugandan holdings.
Meanwhile, local media has reported that both Tullow and Total have made substantial cuts to staff in Uganda since a peak of activity in 2013.
Tullow told African Business that “good progress” was being made towards the awarding of the production licences but was unable to give a fixed timeframe of when they would be awarded. It added that the company remains committed to operations in East Africa.
A bumpy roadmap
The government appears unperturbed by the delays. Speaking to African Business, the influential Permanent Secretary of Ministry of Energy and Minerals, Fred Kabagambe-Kaliisa, notes that the delays have given Uganda valuable time to build infrastructure to support the sector when production does eventually begin. “When I started mapping in the Albertine Graben five years ago, I used to park my car and walk 10 miles through the bush to [the oil fields] in the Rift Valley. Now there is a tarmac road,” he says. Other big infrastructure projects are also planned, including a $200m airport at Hoima, the main town in the oil-producing region.
Kabagambe-Kaliisa is adamant that production can begin before the export pipeline is complete. He argues that initial production at the Kingfisher field can serve the domestic market by feeding Uganda’s power stations and the refinery.
However, this assessment conflicts with the timeline laid out by the lead contractor of the refinery project, RT Global Resources. In a meeting of industry officials in Kampala on 30th April, Andrey Kozenyashev, the company’s East Africa representative, said it would take five years to build the refinery, meaning the earliest date for completion would be 2020. Furthermore, this timeframe is based on the assumption of an immediate agreement on how the project will be financed, which could be complicated by the depressed oil price.
“It is clear that up to now, the government has no clear plan for the development of the oil sector. [It] cannot talk of 2017–18 production timeline when there is no final investment decision for the reserves,” says Dickens Kamugisha, who heads the African Institute for Energy Governance, a Kampala-based campaign group. He adds: “The Permanent Secretary’s production timeline of 2017–18 does not disclose whether the refinery investor has already guaranteed to invest its money or whether the financial institutions are ready to finance the project based on Kingfisher reserves alone. So what makes him confident that the investors and funders will agree with his deadlines?”
These disputes highlight a much wider problem that investors face in poor landlocked countries, where domestic demand is low and the costs entailed in building a refinery and pipeline are huge. In recent years, several landlocked African countries have either built or are planning to build micro-refineries, the viability of which are questionable.
Chad completed a 20,000 bpd facility north of its capital N’Djamena in 2011, but this has been repeatedly shut down due to disputes with its partner, China National Petroleum Corporation (CNPC), around fuel costs. The refinery supplies the domestic market at prices set by the government, which CNPC has said are too low to cover the cost of crude. Fuel shortages and petrol rationing have continued to be reported in N’Djamena since the completion of the refinery.
CNPC has faced further difficulties in neighbouring Niger, where it opened a 20,000 bpd refinery in Zinder in November 2011. A third of the facility’s output was intended for the local market and the remainder would be exported to neighbouring countries. Throughout 2012, however, output was around half of intended capacity as Nigerien fuel proved too costly for the regional market, resulting in financial losses for CNPC. Uganda could face similar difficulties considering the costs involved in refining its “waxy” heavy crude.
Despite the delays facing oil production in Uganda, the government remains upbeat on the potential for expanding the sector. In February, Minister for Energy and Minerals Irene Muloni unveiled a licensing round for six new blocks in the Albertine Graben. At the time, she said 400 companies had expressed an interest in the new acreage.
The permanent secretary at the ministry, Kabagambe-Kaliisa, has since discussed a more subdued figure of 16 firms that had expressed an interest, of which just 10 had obtained the Request for Qualifications documents necessary to begin tendering.
The period of low oil prices has raised questions as to whether the government will be able to attract companies with the required resources and expertise to invest in the new acreage. The government has dismissed these concerns, saying it is only interested in “serious” investors who are willing to ride out the current price depression, rather than sell off their blocks as soon as the first discovery is made.
Future licensing rounds are also planned. Kabagambe-Kaliisa notes that the current bidding round and past exploration activity account for only 20% of acreage in the Albertine Graben. Other areas mooted outside that region, where the extent of reserves is less well known, include Lake Kyoga in central Uganda and Karamoja in the northeast. There is no doubt the Ugandan government has high ambitions for its oil wealth; if and when these expectations are realised is less clear.