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Uganda wanes off foreign pressures as oil production nears

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Posted  Thursday, April 18  2013 at  11:40
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For the last seven years, Uganda has been engaged in intensive behind-the-door negotiations with multinational companies exploring for oil in the western part of the East African country.

Uganda's insistence on towing its line against a push from multinational oil companies and their home countries have over the years resulted into court battles and threats to the oil companies to wind up their business. "We have wasted too much time. We are now with the issue of oil for seven years. We need to make our final decisions," Ugandan President Yoweri Museveni on April 11 told a meeting of government officials and a delegation from multinational oil companies. Museveni's frustrations arise from the back and forth negotiations and the reluctance by the oil companies to tow the government line.

News of oil discovery in the western part of Uganda back in 2006 excited many Ugandans who saw the country becoming prosperous in a few years to come. At several public gatherings, Museveni told his audience that unlike other oil producing African countries, Uganda was going to use the oil revenues to fast track the country's transport and energy infrastructure development, a key factor to unlocking the country's economic potential.

Uganda discovered commercially viable oil deposits in the Albertine Graben in 2006 after years of survey by Ugandan geologists. Since then oil exploration has been ongoing leading to the drilling of 89 wells, out of which 77 had oil deposits. So far the total reserves that have been discovered are 3.5 billion barrels of oil, out of which 1.2 billion barrels or 1.7 billion barrels can be recovered depending on what technology or methods of extraction are used.Statistics from the ministry of energy and mineral development indicated that the revenue that can be reaped from the recoverable oil amounts to 150 billion U.S. dollars.

Currently extended oil well testing is taking place to determine how the oil will be drilled out. Some oil amounting to 36,000 barrels of crude oil has so far been got out of 16 wells during the testing."We do further drilling in order to understand the exact volume of oil that is contained in that field and how you will recover that oil. A number of fields are undergoing appraisal," said Kabagambe Kaliisa, permanent secretary of Uganda's ministry of energy and mineral development, on Tuesday when giving an update on the latest development in the country's oil sector.

There are three multinational oil companies operating in western Uganda and these include British oil company Tullow, France's Total and China's CNOOC.Previously Tullow, Heritage Oil, Dominion and Neptune were operating in the country after Hardman, an Australian oil company, sold out its stakes.Dominion and Neptune did not find oil and therefore their licenses were returned to government leaving Heritage and Tullow oil in play. After a long battle with the government and Tullow on who it should sell its assets to, Heritage eventually sold to Tullow as per the Production Sharing Agreements. Heritage had preferred to sell its stakes to Eni, an Italian oil company.

The sale of Heritage's stakes resulted into capital gains tax amounting to 404 million dollars. Heritage refused to pay the tax to Uganda opting for arbitration in a London court. Tullow paid off Heritage while the latter refused to pay the tax, a factor which angered the Ugandan government which saw Tullow as letting Heritage off the hook. The government then resolved that Tullow must pay the tax since it was seen as letting Heritage off the hook. Early this month, Uganda won the arbitration case in London.After Tullow bought the Heritage stakes in the oil blocks, the Ugandan government insisted that it did not want a monopoly in the exploration process.This compelled Tullow to bring on board Total and CNOOC, each of which acquired a third of Tullow's stakes at a total cost of 2. 9 billion dollars. Tullow like Heritage contested the capital gains tax resulting from the sale.

Besides the tax issues, the other contention between the Ugandan government and the oil companies is the construction of the oil refinery.The Ugandan government insists that an oil refinery has to be built in the country following an East African Community (EAC) study which recommended that another refinery is needed in the region and most preferably needs to be built in Uganda. EAC, an economic block which brings together Kenya, Tanzania, Uganda, Rwanda and Burundi, has one refinery located at the Kenyan seaport of Mombassa. This refinery, according to Uganda's ministry of energy and mineral development, operates at 35,000 barrels of oil per day (bopd) instead of the installed capacity of 70,000 bopd.This is in relation to the high consumption rate of petroleum products by the East African region.According to statistics from the ministry of energy, the region will by 2030 consume 370,000 bopd. Most of the oil is imported from outside the region.

The oil companies in Uganda were insisting that an oil pipeline be constructed from western Uganda to Mombasa, noting that it is the most viable way. However a feasibility study done by Uganda showed that it would be more profitable to build a refinery of an installed capacity of 60,000 bopd instead of an oil pipeline with the same capacity. The argument was that since Uganda's oil is waxy, the pipeline would need to be heated which would push up the transportation costs.The oil companies have now succumbed to government pressures that a 2-billion-dollar-refinery with an installed capacity of 60, 000 bopd would be constructed. In case of further oil discoveries, the extra oil would be transported in through a pipeline.

The refinery would be constructed on a public private partnership arrangement where government would own 50 percent of the refinery and the other half would belong to the private sector. According to Irene Barebe, a petroleum officer at the ministry of energy, the Ugandan government has invited the East African countries to buy interests in the 50 percent public stake. At a meeting on April 11, Museveni urged the oil companies and ministry of energy officials to finalize and agree on the development of the oil refinery and pipeline concurrently and sign a Memorandum of Understanding (MOU) to the start of oil production.

The two negotiating parties disagreed on some of the clauses in the MOU of the development of the refinery and pipe line. The oil companies pressed on for the construction of a refinery size of 30,000 bopd while the ministry of energy officials pressed for unconditional expansion of the refinery size of 30,000 to 60, 000 bopd when the demand increases in future. The two parties however agreed to start with the refinery size of 30,000 bopd. Museveni said Uganda needs the oil money to develop infrastructure and provide cheaper energy for the people to use for economic development. He said Uganda was targeting a refinery size of 60,000 bopd because of the increasing demand in the market which is likely to over grow the present consumption rate of 30,000 bopd.According to Kaliisa, the government has been able to wane off pressures from foreign companies and non government organizations with foreign interests.He said credible oil companies from Japan, South Korea, India and China have expressed interest in constructing the refinery.Production is expected to start in 2016 with an initial output of 30,000 bopd and later 60,000 bopd in 2018 when construction is complete.