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].
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.
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.
The implementation of the MoU has to go through other steps like harmonisation of the fiscal regime for the oil industry and appliance of International Finance Corporation standards on environment, social and biodiversity aspects, which all may not be possible in two or three years to the emphasised “2017” date.
Similarly, Uganda stands exposed to more sizable financial risks if the extended lead-time [period between exploration and production] keeps expanding with costs accrued by oil companies [recoverable costs] against the expense of government’s share of proceeds.
Oil companies currently bear the entire share costs [of exploration, development and production], and have become wearily but with future prospects of recouping more on investment.
According to Mr Jimmy Mugerwa, the Tullow Uganda general manager, the company is right now concluding necessary Field Development Plan and Production License approvals in consultation with the government.
Cutting oil imports
When achieved Uganda’s first crude oil is expected to be refined into products for regional markets, thus cutting on fuel imports estimated at 15 per cent per annum.
The imports cost Uganda up-to $400 million per year in revenue.
A landscape of 29 square kilometers in Kabaale Parish in Hoima District has already been secured to accommodate the mega infrastructure, also expected to accommodate an aerodrome, staff quarters, chemical treating plants, and other amenities like hospitals.
However, with government expecting to export to neighbouring countries, a section of the population is concerned whether the production pace will be able to match other countries demands or even withstand global market dynamics.
With optimism of global oil prices steadily moving upwards - currently a barrel at $100, the government has fended off such concerns arguing there is enough market in the region.
THE CHINA FACTOR
It should be noted that the project might not be short of finances, as said by Mr Zongwei Xiao, the CNOOC Uganda president.
During a media briefing last week, Mr Xiao cheekily said his company had the muscle (resources) to kick start and finance all its projects up-to 100 per cent. This could be an option at hand but the Ugandan government would be required to pay back in the long run.
The company was the first to be awarded a production licence for the $2 billion Kingfisher oil field estimated to hold up to 685 million barrels of oil. CNOOC is yet to start the pre-production processes, notably Front End Engineering Design (FEED) and making investment decisions which might take between two and four years to complete.
The FEED which will be conducted in two phases, according to the government, allows for a 2017 first oil production, which covers cost estimates [production], layout of well pads, production and water injection, development of drilling mechanisms and establishment of a central processing plant with up to 20,000 barrels-per-day.
Tit bits on Uganda’s oil production process
Awaiting production licences: As Tullow and Total wait to receive production licences, plans to construct a midsize $3 billion refinery of 60,000 barrels per-day are ongoing in Hoima and the process to procure a lead investor is in advanced stages but should be up and complete by at least “2017.”
Refinery land secured: A landscape of 29 square kilometers in Kabaale Parish in Hoima District has already been secured to accommodate the mega infrastructure, also expected to accommodate an aerodrome, staff quarters, chemical treating plants, and other amenities like hospitals.
Phased refinery: The refinery will be developed in two phases, starting with 30,000 barrels per day “to allow oil production” but another subsequent phase will be added by 2020.
What production delays mean: The shift in production dates is likely to expose Uganda to sizable financial risks if the lead-time [period between exploration and production] keeps expanding. Costs accrued by oil companies [recoverable costs] will keep expanding even when there is no production.