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Uganda: How will Total’s pipeline and oil money transform politics and the economy?

By Musinguzi Blanshe
Posted on Friday, 7 May 2021 13:14

A general view shows Hoima town, Uganda on 27 April 2015. REUTERS/James Akena

After years of fights with investors, Uganda now expects its oil production to begin by 2025. The revenue the government gets could harden the regime of President Yoweri Museveni against donor criticism and boost the economy, but activities worry about government corruption, environmental damage and security threats on the border with the Democratic Republic of Congo.

Uganda is expected to join the league of oil producing countries in the continent, following last month’s signing of a deal for the construction of a 1,440km crude oil pipeline from Uganda’s Albertine region to Tanzania’s seaport of Tanga. It will be the longest heated pipeline in the world. First oil export is planned for early 2025, Patrick Pouyanné, French oil company Total’s CEO said.

The government’s plans for the industry include the pipeline and a refinery. The deal for construction of the refinery was awarded to a consortium of US and Italian companies in 2018; but the project which has suffered several setbacks has not kicked off. The companies that got the refinery deal are yet to raise almost $4bn required for the project. The government has been promising that it will be complete the project by the end of 2023.

Oil and politics

British economist Paul Collier argues in The Bottom Billion that “the heart of the resource curse is that resource rents make democracy malfunction.” The sort of democracy that resource-rich countries tend to get, he says “is dysfunctional for economic development.”

Uganda will be joining countries such as Angola, Nigeria, Algeria, Libya, Egypt, Democratic Republic of Congo, Gabon, Equatorial Guinea, Chad, South Sudan, Sudan and Tunisia in the league of oil producers in Africa.

We were told jobs are coming, we are waiting for them,” says Emmanuel Mugarura, CEO of the Association of Uganda Oil and Gas Service Providers. “The number of welders and plumbers required is a drop in the ocean.”

These countries belong to various categories in the economic development ladder, but they all belong to the same group in democracy and governance rankings. They were ranked as ‘not free’ by Freedom House in the 2020 index and none, except Uganda (51.8) scored above 50 in the 2020 Mo Ibrahim Africa Governance Index.

Fredrick Golooba Mutebi, a political scientist, argues that oil won’t transform Uganda’s politics for the better. Uganda’s President Yoweri Museveni has been in power since 1986 and won another term in January, extending his stay in power to 2026.

Golooba says Museveni refused to leave power when Uganda had no oil money. “He could have other reasons for hanging on. I don’t think that his decision will necessarily be driven by oil production.”

Protection from donor pressure

Golooba predicts that oil money will give Museveni more room to do what he wants, regardless of what donors want. “Museveni won’t fear being sanctioned through withholding of aid,” Golooba says.

Following a violent election season, leading donor countries did not congratulate Museveni on his victory. The European Union (EU) Parliament condemned the election violence and noted that the poll was “not democratic.”

Last month, the US government slapped a visa ban on unnamed government officials who undermined Uganda’s democratic process during the election, which secretary of state Anthony Blinken described as “neither free nor fair”.

As criticism from donor countries grew during election season, Museveni suspended the Democratic Governance Facility, a fund backed by European governments that supports non-governmental organisations and some state agencies in Uganda.

Questioning how the finance ministry approved the fund without cabinet involvement, Museveni said: “This is not the financing of a private business but the funding of state and non-state actors to achieve the political objectives of the funders in Uganda.”

Museveni has had a bitter relationship with donors. After the 2016 polls, he also rebuffed criticism from donors.

Ahead of Museveni’s 12 May inauguration, only France’s President Emmanuel Macron has sent a message to Museveni.

Economic transformation

Museveni has for years insisted that Uganda’s oil must be the linchpin for the country’s economic transformation. He told The Africa Report in 2019 that it doesn’t matter even if oil stayed under the ground for many more years because the most important thing was to sign deals that would benefit Uganda.

During mid April signing of oil agreements, Museveni said it has taken 15 years for first oil to be produced because of a “divergent perception between us [Ugandan Government] and the oil companies”.

“The oil companies were biased in favor of exporting crude oil only. The compromise then was, let’s have both [exports and refined products for the local market],” he said. At first, he insisted on an oil refinery only, a proposal he had tried to sell to East African Community member states almost a decade ago.

It’s anticipated that about $10bn will be invested in the sector before first oil is produced in 2025, mainly on the pipeline, refinery and infrastructure. The government has been commissioning road construction in the region where oil will be produced, in Buliisa and Hoima districts, and an airport is also being constructed in the region.

Where are and jobs and opportunities?

Oil development activities will be concentrated in the refinery and pipeline. And Total — which owns 66.6% of shares in the oil fields — will be a key player in driving financing of the project while the rest of the shares are held by China National Offshore Oil Corporation (CNOOC). Total also owns 62% of the pipeline, which Uganda and Tanzania each own 15% and the remaining 8% is held by CNOOC.

In the past decade, many businesses have been positioning themselves to win contracts and supply the industry. The government and donor countries have financed programmes students for jobs in the oil sector.

Emmanuel Mugarura, CEO of the Association of Uganda Oil and Gas Service Providers, says: “We were told jobs are coming, we are waiting for them.” He isn’t optimistic that oil will create thousands of jobs for local communities, describing the sector as highly specialised. “The number of welders and plumbers required is a drop in the ocean,” Mugarura says.

The government is also due to set up a national content development fund, where businesses can get credit they can use to win and deliver on contracts.

Money saved

Museveni estimates that oil revenue can save Uganda almost $1.7bn from the annual petroleum products import bill. He also says Uganda’s oil can satisfy petroleum products demand of Lake Victoria basin countries (Uganda, Kenya, Rwanda, Tanzania, Burundi) plus parts of South Sudan, eastern Democratic Republic of Congo and south-west Ethiopia for 37 years at the current consumption rate. Museveni is also hopeful Uganda will discover more oil in the coming years.

If prices average $50 per barrel, the World Bank reckons that with estimated 1.38bn barrels recoverable of 6.5bn barrels oil reserves, oil benefits to Uganda economy are potentially large. The World Bank estimates that Uganda could earn $800m per year at the peak of oil production. Oil revenue could help to do the following:

  • offset current external financing, averaging 3%-4% of gross domestic product (GDP);
  • expand the country’s exports by 5% of GDP;
  • almost double the country’s current 4.5% economic growth rate.

But the World Bank warns: “The benefits are neither automatic nor guaranteed, as they depend on whether the oil is taken out of the ground and the resulting revenues are managed well.”

Undecided priorities

Uganda’s finance minister Matia Kasaija says it is too early to tell where the money will be invested. “We will first get it and then plan,” he says. Broadly, he says the oil money will be invested in sectors such as transport, health and education.

Kasaija says he is certain that it will not go paying debts. Legislators have been questioning Kasaija over Uganda’s public debt, which is expected to grow to 52% of GDP by the end of the 2020/2021 financial year.

For Julius Mukunda, executive director of Civil Society Budget Advocacy Group, the largest organisation promoting budget transparency in Uganda, the biggest concern is that the government is not well prepared to manage oil money.

In 2015, the government passed legislation to set up the Petroleum Fund, where revenue from all petroleum-related activities is to be deposited. Oil money is supposed to finance investment for the future generations, but the government has not followed this legislation. It often raids oil accounts to finance the budget. “I think our oil account is in the red because every money that gets in, we consume it even against the law which is very specific that oil money must be appropriated for infrastructure development,” Mukunda says. “Government withdraws oil money for general budget support.”

Security and environment concerns

The oil pipeline project continues to face backlash from local and international environmental activists, who say it will endanger wildlife and pose devastating climate implications in Uganda and Tanzania. Some environmental organisations have been lobbying banks not to finance the pipeline. Total has carried out environmental and social impact assessment to ensure the project respects international best practices.

Uganda’s oil fields are situated near eastern Democratic Republic of Congo, a conflict-ridden region. There are reports that Uganda might soon deploy 600 soldiers to the border to counter possible rebel threats. Uganda’s oil deposits are guarded the Special Forces Command, an elite unit that also guards Museveni. Deputy spokesperson of Uganda’s army Deo Akiiki says: “We have always maintained our presence on the western frontier due to Allied Democratic Front threat.”

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