Rival groups fuelling death of infant oil industry

Lack of transparency and failure to set up laws to manage the country’s oil industry has left Uganda vulnerable to vultures, writes DANIEL K. KALINAKI.

A couple of weeks ago, Energy Minister Hilary Onek received a text message on his cell phone. The message informed him that six million Euros had been paid into Mr Onek’s account in ‘Emirates Bank’ somewhere in the Middle East.

It was not the first time Eng. Onek was being accused of allegedly taking money over the oil deals. President Museveni was reportedly told that his minister had taken $2 million from Eni, the Italian oil firm, to help it muscle its way into the Ugandan oil industry. It was alleged that Mr Onek had spent the money on a hotel he is building in northern Uganda.

Mr Museveni initiated his own investigations and found that the $2 million bribe story was false and that the energy minister had actually borrowed over a billion shillings for his hotel.

Cash flows
Mr Onek’s troubles started when Heritage announced last November that it had agreed in principle to sell its stake to Eni. A senior cabinet minister with high-level government connections was fronting for Eni and had sent another senior female minister to Italy to meet officials from the company. With the help of the two ministers, Italy’s foreign minister Franco Frattini met President Museveni at State House Entebbe on January 15 to support Eni’s bid.

A few days later, Cabinet met in Kampala to discuss Eni’s proposed entry into the country. At this time Tullow Oil had indicated that it intended to exercise its pre-emptive rights and buy out Heritage’s 50 per cent stake in block 1 and 3A, the same stake that Heritage had agreed, in principle, to sell to Eni for $1.5 billion.

Eng. Onek and his permanent secretary, Mr Fredrick Kabagambe-Kaliisa, attended the meeting and Mr Kabagambe-Kaliisa told Cabinet that it was not desirable to have a monopoly in Tullow or any other oil firm.

Mr Onek went public with this position on January 21 and announced that the government would support Eni’s bid in order to avoid having a monopoly. Angry Tullow officials sought the audience of President Museveni and protested against the position. Mr Museveni telephoned Eng. Onek who was on leave in Kitgum to find out the basis of his position. The minister informed the President that it was the position of the ministry and had been discussed and endorsed by Cabinet.

Because of Tullow’s pre-emptive rights, the President and Mr Onek agreed to allow Tullow exercise its right as long as government’s concerns about the monopoly were taken into consideration. Mr Onek directed state minister for energy, Peter Lokeris, to withdraw a letter Onek had written to Tullow and Heritage blocking the proposed takeover of the latter’s assets by the former.

Although Eng. Onek had communicated a ministry position that had been defended in Cabinet by his permanent secretary, word started going around that he had received money from Eni to push its bid and had acted arbitrarily.

While the allegations against Eng. Onek were never proven, Eni’s entry into the picture sparked off a war of influence peddling as ministers, technocrats and other power brokers sought to push either Tullow’s interests or those of the Italians.

Hole of shame
The influence peddling that has characterised the negotiations over the country’s young oil industry has often allowed officials to connive with foreign firms and put personal gain above national interest.

Early this year, a government delegation, which included the ministers of energy, finance and foreign affairs, as well as other technocrats, visited Abu Dhabi in the United Arab Emirates and met with government officials there.

The officials in the oil-rich host country were stunned to learn from the Ugandan delegation that the cost of drilling an oil well in Uganda was between $20 - $30 million, compared to $7 - $10 million in other parts of the world, including the Middle East.

The Abu Dhabi officials offered the Ugandan delegation $6 million to carry out a technical audit of what exactly the oil firms prospecting in Uganda are doing and why it costs so much.

More than six months later, the government is yet to take up the offer because, sources familiar with the matter say, such an audit could expose the true cost of Uganda’s oil exploration programme – and those officials who are benefitting from the apparently inflated costs. Heritage claims it spent $150 million in its exploration work in Uganda – although documents in the Energy ministry indicate a lower figure of $125 million.

Tullow Oil, whose drilling operations were fewer than those of Heritage, says it has spent significantly more money – $500 million – in the process. Under the Production Sharing Agreements, the oil firms are entitled to recover these sums.

An audit done earlier by Ernst & Young raised some queries about the verification of the sums that the oil firms claim to have invested but a technical audit, which certain government technocrats are reluctant to do, would help set a benchmark and a reference point for future oil well drilling activities.

Vultures ahead
None of the officials in the oil firms, the energy ministry, Uganda Revenue Authority or other government officials were willing to comment on this matter, citing its sensitivity. Those officials who spoke to us did so on condition of anonymity in order not to jeopardise on-going negotiations between government and the oil firms.

Our investigations, however, reveal that the absence of strong institutions and predictable government positions has allowed personal interests to interfere with government policies and positions.

Several months after a Petroleum Bill was drafted to set up a National Oil Company as well as the relevant laws to explore, produce and refine the country’s oil resources, it is yet to be discussed and passed by Cabinet – and is likely to be pushed to the back-burner during the silly election season.

The lack of these institutional safeguards has left decision-making vulnerable to the clash of egos and personal interests. It has led to the government sending out contradictory positions and left Uganda’s young oil industry vulnerable to the vultures. And it appears that you either join the vultures or risk being devoured by them.

Remember the text message sent to Eng. Onek’s cell phone? Well, security sources investigating the matter told Daily Monitor that the account number and bank named in the text message do not exist. The phone used to send the text has been switched off since and the matter has all the markings of a malicious hoax.

Ugandan oil timeline

* 1997 Heritage Oil starts exploring for oil in Uganda, this is the first time oil exploration activities have taken place in Uganda in over 60 years.
* 2004 Tullow acquires energy Africa shares for $500 million and enters the Ugandan Market.
l2006 Hardman Resources announces the first successful commercial discovery of Oil in Uganda and commences to generate a series of positive and encouraging media reports about every find they make.
* 2007 Heritage Oil announces King fisher find, a maximum flow rate of 13,893 bopd is estimated making this the biggest find in Uganda at the time
* 2007 Tullow acquires Hardman Resources gaining 100 per cent interest and operatorship of Block, which is 50 per cent at 1.1 billion, the deal is inflated given that the two Heritage blocks go for 1,450 billion much later in 2010.
* 2008 Tullow fails to achieve early production promise, blames it on world prices.
Tullow announces Ngasa find, this cost $100 million for a single well which is the most expensive ever drilled in Uganda yet very little oil is actually found, mainly gas.
* 2009 Tullow announces it wants to sell a portion of their assets in order to develop the oil fields in Uganda including construction of a refinery.
* November 2009 Tullow announces a sale of some of their assets will take place in Jan 2010.
December Government blesses Eni - Heritage deal and announces that Tullow will not be allowed to stand in the way of the deal. Mid December Tullow vows to stop the Eni-Heritage deal.
Government backtracks, issues statement through the State minister Lokeris. Line minister Onek is silent and refuses to comment.
* January 2010 the Italian Foreign Minister visits Uganda and promises his government’s support for the oil sector including construction of a refinery.
* January 2010 Tullow drops plans to sell its assets in Uganda - announcement made by the Aiden Heavey. Eni CEO Scaroni announces they have a 14 billion dollar development plan with financing ready for Uganda.
* January 2010 Tullow preempts the ENI Heritage deal on the January 17 basically they are forced to do so. They stand to lose on the 1.1 billion investment made by buying Hardman which appears to be a less attractive than previously thought.
* February Tullow announces shares will be floated on the Ugandan stock exchange by April.
* February Heritage and Tullow announce sale of Heritage to Tullow will take place in the first quarter of the year
* April – June Taxation becomes a big issue Government insists Heritage should pay capital gains on the transaction. Negotiations take place
The case drags on for 6 months
* July 2010 6; A month preemption deadline about to expire.
July Heritage threatens to withdraw from the SPA and sends a letter to that effect to Ugandan government. Government asks for and is granted a one week extension
HO officials return for talks, Government insists tax must be paid and declines Heritage offer of a 30 per cent deposit and arbitration in the UK as per the PSA.
Heritage officials fly out of the country
* July 2010 Heritage and Tullow meet in London Heritage threatens to withdraw from the whole deal if Tullow do not pay Heritage. Fearing a breakdown of the whole deal, Tullow decides to pay Heritage. This is a huge commercial risk taken without the consent of the Government and Tullow shareholders. Tullow pays this money in the belief that Government will be put under pressure to give unconditional approval for the takeover of the Oil assets.
Tullow announces the takeover of Heritage Uganda.
The Minister signs a conditional consent for the takeover, in London Tullow claim they have received unconditional consent.
Tullow shares rise sharply on the LSE. The President announces the deal is void till the tax is paid and he takes over all negotiations related to the oil industry in Uganda.
* August 2010 Tullow officials including Aiden Heavey fly into Uganda for talks to resolve the issues.
President insists the taxes must be paid otherwise the deal is off. A letter is sent by government to Tullow indicating the appraisal licence for block 3A will not be renewed or extended and the Government plans to take back ownership of this block. Tullow share price on the LSE loses 1 Billion pounds in four days
Government tells Tullow to stop drilling activities in Block One after completion of the next appraisal well till transactional and tax issues are resolved.
* September 4 2010 Tullow officials fly into Entebbe for emergency talks with the Government as the September 7 deadline for Block 3A approaches.