Oil: When are the seeds of a curse sown?

Sunday February 6 2011

 PROGRESSING: Oil exploration in the Albertine is expected to provide employment opportunities to many Ugandans.

PROGRESSING: Oil exploration in the Albertine is expected to provide employment opportunities to many Ugandans. FILE PHOTO 

For close to five years now, Uganda’s oil industry has attracted heated debate, especially on the lack of transparency in the industry. In a two-part commentary, Isaac Imaka analyses Uganda’s young oil industry by tracing the discovery of the mineral, the major developments in the industry; its impact on the social, economic and political life of the country, and the lessons from different African oil-producing countries.

In the 1920s, Mr E.J Wayland, then a government geologist, made the first significant oil discovery in the Lake Albert region; a few years after setting up the first geological survey in East Africa. The oil issue would later be shelved for 64 years until 1984 when the first unit for the exploration of oil – under Mr Fred Kabagambe-Kaliisa, now the permanent secretary ministry of Energy and mineral development - and it’s this unit that worked on the first oil law and the agreement of cooperation with Congo to prevent any conflicts in case oil drilling was to start.

In 1985, Uganda had followed the path taken by many African oil producing countries of giving bids to big international oil companies – Shell, Exxon and Total - but this was blocked by President Museveni who - after less than two months in power - at a February 3, 1986 meeting, said the oil unit lacked capacity to trade in oil with the international oil companies.

The red flag helped the unit to formulate an oil exploration policy, gather information about the country’s oil, and also form the Petroleum Exploration and Production Department [PPD] in 1991 which entered into agreement with Petrofina, a Belgium-based company, to explore the entire Albertine Graben.

Eye-opener
The company later pulled out due to political constraints between Belgium and Congo but it had opened the route for other companies.
In 2003, Heritage Oil and Gas Company came in and drilled the first deep well [2km under].

From the time of discovery, public attention to oil was mild, only limited to the echelons of political power until early 2000 when President Museveni and NRM cadres started citing discovery as the end to the country’s miseries and its reliance on donor funds. But does exploration mean a done deal for Uganda’s economic status?

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Countries like Equatorial Guinea have 10 times more oil than Uganda but they are not doing well because they lack the structure and mechanisms to manage the oil. Uganda’s oil debate has been shrouded in suspicion for what many say is lack of transparency and a regulatory framework. Two important Bills; the National Oil and Gas policy and the Revenue Management and the Resource Management are now before parliament. The laws might help bring transparency and swift management of the oil.

The continued secrecy and unwillingness by the government to publicise the Public Sharing Agreements even to MPs could imply that either Ugandans are being ripped off, that there is high level corruption or that the government is simply dragging its feet on such an important matter.
Norway, the world’s role model in oil management and one of the world’s largest oil exporters, has been able to turn oil from a curse to a blessing because of the amount of information it makes public about the strategy and investments.

Managers of the oil fund meet regularly with parliament and journalists to report performance and risk exposures. This level of transparency has made the investors and Norwegians to view the fund as a professional outfit motivated by the bottom line rather than politics and poses no threat of increased volatility and has caused tremendous development.

The Ugandan government needs a balanced mechanism of de-linking politics from mining capita and also, of linking mining capital with politics; something that calls for strong fiscal discipline and transparency. This requires the formation of strong and independent financial institutions, an independent revenue body, a corrupt free public sector, a national oil company formed by a statutory framework, an independent oil regulatory body, an independent oil ministry with an independent revenue fund which will keep oil money within.

Mr Kabagambe, a geologist with 35 years of experience in mineral exploration who has been at the heart of Uganda’s oil for over 20 years, is optimistic that Ugandans will not be ripped off by foreign companies because they [energy ministry] “are not spectators but are part of the industry.”

But Mr Dickens Kamugisha, the chief executive officer of African Institute for Energy Governance, insists that if oil is for Ugandans then they have “a right to know whatever is going on.” Although there is a provision for local content in the oil industry, Ugandan firms are yet to fully appreciate what role they can play. The lack of knowledge and capital is a major hindrance.

Manpower development
“This is not a peasantry economy where you have every Ugandan participating in growing beans and cotton,” Mr Kabagambe says. There is need to therefore develop local corporate capacity that will enable local firms take up the challenge. Uganda’s oil potential now stands at two billion barrels from just 45 per cent of the potential area. If Cabinet adopts the feasibility report by the ministry of Energy, which recommends the construction of a $2 billion worth oil refinery plant, Uganda will be producing 60,000 to 120,000 barrels per day.

A local oil refinery will help set what Dr Fredrick Kisekka Ntale, a research fellow at the Makerere University Institute of Social Research, calls “a precedent against the oil curse.” And Uganda would have put itself in another framework of emerging oil producers. A home refinery, will lead to development of oil supported infrastructure, industries and enterprises leading to the growth of a local economy and entrepreneurs.

However, the appropriation of oil rent, money from oil, whether from home grown industries or from direct sale of crude or processed oil politically affects the country especially when the political echelon resort to authoritarian rule, and/or clientilism-(buying off opponents). Or, turn the country into a welfare state, making life easy for people so that citizens think they are in a comfort zone-‘eating the fruits of oil’– and so, not question the state about oil proceeds.

Dr Kisekka argues that such a situation and the intention to enclave the oil producing areas as a no-go-point should not be an option for the government once oil money starts coming because they cause tension, suspicion and mistrust. If Uganda is to produce 120,000 barrels per day, and going by the current price per barrel (159 litters) of $90, (around Shs200,000) Uganda could get an annual $3b (over Shs6.8 trillion).

But will this money from the sale of the refined oil trickle down to the common man? Mr Kabagambe says, “yes”. “If you build better roads, better social services, and enough electricity and provide jobs then you will be giving value to the people and the economic empowerment will be achieved.”

But as the payments per barrel eventually start to trickle in, Ugandans will want to see a change in the standard of living. Most commentators believe the benefits from an oil flow would be effectively felt if the revenue is allowed to trickle to the last citizen of this country.

Fusion of sectors
This will be important as it creates a ripple effect in form of a stimulus which helps other sectors to fuse into the oil sector and help develop the economy without blocking free speech. Mr Pascal Odoch, a rural development specialist with 15 years of experience working with government and non-government organisations in drafting strategies for rural transformation, sees oil as a light at the end of a tunnel for the Ugandan poor and expects that it will help the country beat the premier Millennium Development Goal of reducing the poverty level to a single digit - if the proceeds are used for infrastructural development.

Oil would replace agriculture as the backbone of the economy, however, it would be suicidal to completely ignore investment in agriculture because of the gains from oil. As a 2007 UNDP country report – Rethinking Agriculture – points out; with oil money, there should be strengthening of the agricultural sector from peasantry and hand hoe farming to commercialised and modern agriculture.

Mr Odoch says if peasants want to join the oil sector, they should, instead of out rightly abandoning the hoe, lease out their land to commercialised farmers. “People should understand they cannot do everything at the same time,” he says. “You cannot get much from using rudimental tools in agriculture, people should go and offer causal labour and let value added farming take its course.” Uganda is lucky that there are many countries in Africa and the world to learn from on how to manage oil.

In the next and last part, the writer will look at how some African countries have managed their oil and the politics therein.

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