Uganda’s long walk to oil production continues and in 2016, the country made a step closer to joining a league of oil producing countries. The year had started off with damaging news, especially for suppliers in the oil and gas sector.
Many more companies in the logistics and camp management had been forced to lay-off workers as oil activity continued to slow down. The lower oil price environment also presented a reality check to the Ugandan government over its dreams to start oil production. This reality check meant that expectations on possible returns had to be managed.
In 2016, the most anticipated news for the oil and gas sector came from the final issuance of production licences to Total E&P and Tullow. On August 30, the Uganda government granted production licences for Exploration Area 1 (EA1) at the northern end of Lake Albert (in the Murchison Falls National Park) operated by Total, and Exploration Area 2 (EA2) to the east of Lake Albert in the Butiaba region operated by Tullow in South Western Uganda, better known as the Albertine Graben.
The awarding of the licences came after long and protracted negotiations that can be traced as far back as 2012 when Tullow sold 66.66 per cent of its shareholding in the Uganda licensed area to Total and CNOOC. The government awarded three licences; Ngiri, Jobi-Riii, and Gunya to Total E&P. On the other hand, Tullow secured five fields namely Kasamene-Wahrindi, Kigogole-Ngara, Nsoga, Ngege and Mputa-Nzizi-Waranga.
“The licences have been issued for a period of 25 years and can be renewed for an additional 15 years as provided for in the Production Sharing Agreements. The companies are expected to reach FID 18 months after issuance of the production licence and work to first oil by 2020,” Ms Irene Muloni, the Energy minister said at the issuance of licences.
Projections indicate that investment in the sector will approximately be ($8b) Shs27 trillion to undertake the above, drilling of about 500 wells and construction of associated infrastructure before the country can see first commercial production by 2020. Oil company shareholders and investors are yet to approve the investment plan for oil production in Uganda.
A production licence is a final phase of the oil production cycle - exploration, appraisal, development and production - eventually leading to commercial oil production. This, now, brings the total number of production licences so far awarded to nine, including one for the Kingfisher field which was granted to CNOOC in September 2013.
At the current oil prices, the returns for Uganda are estimated at $1.5b annually. The licence issuance is expected to revive the sector in terms of jobs and supplies.
It is yet another year and there is still no lead investor for the Uganda oil refinery. All seemed to be going to plan and an announcement was imminent by July 2016.
However, on June 30, the deadline for concluding negotiations was reached but a consortium led by RT-Global Resources later pulled out, sighting problems around the stabilisation clause for the oil refinery, among other factors.
Rostec said it “decided not to extend the bid security for refinery construction, which expired on 30 June”.
“Thus came the end of the warranty period for the fulfillment of obligations on the conclusion of major agreements between the consortium and the government of Uganda.”
Once the Russians had pulled out, the Uganda government started negotiations with the alternate preferred bidder, SK Energy from South Korea. But then SK would later also insist it can only negotiate with the government. The initial plan was for the lead investor to hold a 60 per cent stake and the government would have 40 per cent. SK had objected to that in the earlier bidding process. It preferred the government taking a majority stake. Now the government is back to the drawing board for the refinery.
“We are also restructuring that project because we had 40-60 and that did not yield the desired results. One of the reasons was that government should take a higher percentage in the refinery, not 40 per cent. So we are looking to restructure this to see how the project will go ahead. The project shall be restructured accordingly depending on what is seen from expressions of interest,” Mr Dozith Abeinomugisha, the commissioner for refining at the Petroleum Directorate, told journalists at a recent media dialogue.
A process that appears to make much faster progress is the crude export pipeline. The direction seemed to be heading to a route through Kenya to the Port of Lamu.
However, in April 2016, that had all changed. The Uganda government instead opted to go with the route through Tanzania to the Tanga port.
The option through Tanga was considered the “least-cost option.” The Port of Lamu lost out on all grounds of comparisons, which left it at a loss of the lucrative pipeline deal. The route to the Lamu port was also considered to have unique challenges like the fact that the port was not yet completed. More hiccups came with land reclamation at the port likely to cost between Shs2.6b and Shs3.2b.
The concern, insiders noted, is that all these costs could have an effect on the resultant tariff that Uganda will have to pay to use the export pipeline. All this is because the port remains underdeveloped.
“On the other hand, the Tanga port is fully functional,” a report dated April 11 reads in part. This means the port did not require additional infrastructure to cater for the pipeline.
First competitive bidding
In March 2016, the Uganda government received the first bids for the first competitive round in the oil sector. The first competitive round bidding was meant to allow companies to bid competitively for the exploration rights in the Albertine. The companies currently awaiting award of contracts are four.
The four firms include Australia’s Armour Energy Limited, WalterSmithPetroman Oil Limited, Oranto Petroleum International Ltd and Niger Delta Petroleum Resources Ltd from Nigeria.
The firms, the Petroleum Directorate indicate, Armour Energy had bidded for the Kanywantaba (344 Km2) block in Ntoroko District; WalterSmithPetroman for the shallow and deep plays in the Turaco (425 Km2) in Ntoroko District, while Oranto Petroleum International Ltd and Niger Delta Petroleum Resources made a bid for the Ngassa (410 Km2) in Hoima District.
There are, however, other two exploration areas of Taitai & Karuka (565 Km2) in Buliisa District, and Mvule (344 Km2) in Moyo/Yumbe districts, whose status remains unknown.
UNOC, PAU appointments
In 2016, the government finally made appointments at the top two institutions that will be involved in the commercial and regulation of the oil and gas sector - the Uganda National Oil Company (UNOC) and Petroleum Authority Uganda (PAU).
On June 1, Ms Josephine Kasalamwa Wapakhabulo was appointed the first ever chief executive officer of UNOC.
UNOC will be responsible for the commercial interests of the Uganda Government in terms of selling Uganda’s government oil share, the oil refinery government stake and participating interest in the various licensed areas.
On August 18, Mr Ernest Rubondo was appointed the executive director of PAU. The PAU is expected to monitor and regulate exploration, development, and production of the petroleum in Uganda.
In June 2016, during the Budget speech for 2016/17, President Museveni set a target for oil production in Uganda to be the year 2020. It has also been a constant phrase from Ms Irene Muloni, the Energy minister who, on several occasions, has said the oil production target is 2020.
However, oil companies have remained non-committal on the year oil will start to flow. But what is clear is that the level of infrastructure in the country doesn’t match the needs for the oil sector. For instance there is need for roads, an export pipeline, refined products pipeline and an oil refinery. The timeline for project completion being between three and five years, Uganda still has a long way to complete projects meant to deliver oil by 2020.
2020: Although some industry players think 2020 is a very unrealistic year for Uganda to start producing oil as projected by government, president museveni maintains that uganda will surely be producing oil by 2020
The period in years production licences have been issued for but can be renewed for an additional 15 years.