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Financing questions lie ahead after MoU

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Mr Mugerwa (L), flanked by the Uganda Media Centre boss

Mr Mugerwa (L), flanked by the Uganda Media Centre boss, Mr Ofwono Opondo, address journalists after signing the MoU with the government of Uganda in Kampala last week. PHOTO BY STEPHEN WANDERA. 

By  FREDERIC MUSISI

Posted  Tuesday, February 11  2014 at  02:00

In Summary

The concerns Although the government and venture partner oil companies signed an MoU, there is concern that it will be difficult to raise money to finance the various projects that are needed to kick-start oil production by 2018.

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Kampala- Since 2006 when commercially viable hydrocarbon deposits were announced, Uganda has been slowly preparing to join the club of oil economies.

Eight years later, a Memorandum of Understanding [MoU] between the government and Joint Venture partners, including UK’s Tullow Oil, France’s Total E&P and China’s North Offshore Corp (CNOOC) has been inked.

Before then, venture partners, though tongue-tied, had been concerned over the pace of government’s conduct of business, with the civil society urging the government to borrow a leaf from the Ghana experience, which took the country four years to start commercial production of oil.

The MoU, signed mid last week by the Energy minister Irene Muloni and executives from the oil companies, details a commercial route-to-market structure for the country’s oil resources.

Industry analysts say the three partners are in line with the terms of the Production Sharing Agreement (PSAs) and are in the process of conceptualising engineering values and investment modules for both upstream [development of oil fields] and midstream projects [pipeline, refinery, power plant among others].

The mismatch
However, there seems to be a mismatch in relation to the overall investment needed to implement the MoU, according to details obtained from oil companies and the government.

Whereas government says it would need between $12b (Shs29 trillion) and $22b (Shs54 trillion), subject to inflation, oil firms say preliminary studies put the figure at $15b (Shs37 trillion), including the development and preparation of fields.

The latest commercialisation plan is based on the current recoverable reserves estimated at 1.7 billion barrels from the 3.5 billion barrels discovered to-date.
Whatever the final cost, the projects that will eat into the investment include a Greenfield oil refinery, a crude export pipeline from Hoima to Lamu in Kenya and a crude feed for electricity generation.

Some of the projects, like the refinery, are largely a government undertaking and oil companies remain jittery about such investments.

However, Ms Muloni says the MoU will propel and support such projects but she does not go into details on how this will be done.

The current foreign direct investments in Uganda’s nascent oil sector stand at $2.5 billion (about Shs6.17 trillion [from exploration and appraisals] yet the MoU raises eyebrows of a seemingly bigger burden of raising Shs37 trillion to finance the projects.

Mr Loic Laurandel, the Total general manager, last week raised concerns over the mode of financing the above listed projects within three years, when oil production is expected to start.

His concerns have so far not yielded direct response from the other two partners or even government, which industry players say might push the production date further.
It is expected that by 2018, Uganda would have started commercial production of oil.

What next?
The MoU, which was held back by protracted haggling on the arbitration clause, had been anticipated to be the long awaited instrument to start production but as things look, there is still a long way to go.

Mr Ahlem Friga-Noy, the Total corporate affairs manager, said in an email exchange last week that with the signing now complete, “a detailed implementation plan will have to be defined in order to jointly agree with government on the main steps and actions required to achieve first oil – as early as possible.”
The company maintains that it does not see itself start production before 2018.

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