Uganda: Looking to the upside

Despite the ongoing discovery of substantial oil reserves,

Uganda is still some way from moving into production mode and hopes to

avoid some of the political hazards

Judging by the scale of recent discoveries, there could be between 1.5bn to 2bn barrels of oil buried beneath Lake Albert and its Ugandan onshore region. This gives rise to some as yet notional estimates that oil production could generate $2bn a year for at least 20 years. This would more than double Uganda’s current export levels.

Uganda hopes to avoid disputes over oil that have bred instability in some African countries. “We don’t want to do things that are going to embarrass us,” deputy energy minister Simon Dujanga told The Africa Report. “We have had the advantage of looking at countries that have done well and also looking at countries that have made mistakes.”?

The plans include a law detailing strict revenue management procedures and a strengthening of the National Environment Management Authority. The government is also considering establishing a public corporation to run its oil business as well as earmarking oil profits exclusively for infrastructure development and, says Dujanga, “saving for the future”.

Patient capital required

Although civil-society campaigners say the government is pressuring the two leading companies, Tullow and Heritage, to start production by the time of the next elections in early 2011, any major oil production is still many years away.

“We would like to see oil produced next year, but it will be very small,” said Brian Glover, who heads Tullow’s Ugandan operations. “It may be five years before we can get to 15,000 barrels per day (bpd).”?

Reaching 100,000 bpd or more will take even more time plus massive investment of between $5bn-8bn, according to estimates given by the government and Tullow. For example, the move from exploration to production will require substantial road works. Additionally, the oil found in the Albertine basin will solidify when it reaches the surface and a costly heating system must be in place before crude can be refined or transported.

With so much capital needed, the global economic crisis is a big concern. “With the credit crunch, we may not be able to raise the kind of money that we need,” Dujanga said.

Tullow has so far had little trouble raising funds, partly because its Ugandan discoveries have continued to surpass expectations. “The number we had in our head at the start was 400m barrels,” Glover said. “We’re at 600m now and we know we have more to find.”?

As exploration continues, the government’s and the companies’ plans have begun to diverge. Tullow and Heritage have talked about exporting Ugandan crude to Mombasa for sale overseas, but the government has announced that for political reasons, it wants to build a large refinery in-country and to focus on regional exports. A large refinery would likely cost more than $2bn to build and would be more viable if both Democratic Republic of Congo and southern Sudan decided to refine their crude in Uganda.

Tullow, at least, has already discussed its plans to sell a major stake in its Uganda operations as it focuses on production on the Jubilee field in Ghana. Chinese state-owned companies have shown an interest in Tullow’s acreage, and Libya’s Tamoil has said that it could extend the Kampala-Eldoret pipeline that it is currently building to include Lake Albert and Mombasa.

For almost all purposes, current plans are subject to change. The advice coming from the companies is that the government cannot plan for large production, refining and exports until it is clear how much oil there really is. With the wild swings in crude prices and chronic instability in the Central Africa region, Glover has offered some cautionary advice. “Production in Uganda should be a stepped process,” he said. “We should start small and then learn.”