MPs block plan to use Shs116.7 billion Petroleum Fund money for oil roads

Friday December 23 2016
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The oil drilling machine at Kasamene 2 drilling ground in Hoima District. File photo

PARLIAMENT- Parliament has turned down the government’s request to withdraw Shs116.6 billion from the Petroleum Fund to finance the construction of roads in the oil belt.

 Parliament said the government had not followed the necessary laws to move the money.

 “The matter is prematurely before this House,” the Speaker of Parliament, Rebecca Kadaga, said on Wednesday.

 “So please go back and file the necessary papers namely the Appropriation Bill on this issue before we can proceed.”

 Moments earlier, Finance Minister, Matia Kasaija, had, during plenary in Kampala, moved a motion requesting that Parliament allows government to withdraw the money.

 “To ensure the first oil comes out in 2020, we have found it necessary that we touch on the Petroleum Fund…to commence on the roads that are going to the oil wells,” Mr Kasaija told the House during plenary Wednesday.

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 “These roads must be in place by 2019. With the rest [of the money needed] we shall borrow and we have had to suppress certain expenses from the budget and we believe with that package we should be able to get the oil out of the ground by the target date.”

 The government also wanted Parliament to approve a supplementary budget of an equivalent amount to the Uganda National Roads Authority.

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Shs27 trillion needed to see first oil

Wednesday August 31 2016


KAMPALA

The Uganda government yesterday granted eight production licences to UK-listed Tullow Oil [Uganda] and France’s Total E&P (Uganda) B.V, bringing the long wait and hushed grumbling from industry players to an end. The development is expected to pave way for the country to join the league of oil producers.

The licences cover, 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.

Total was granted licences for three fields namely: Ngiri, Jobi-Riii and Gunya; while Tullow went home with licences for five fields including Kasamene-Wahrindi, Kigogole-Ngara, Nsoga, Ngege and Mputa-Nzizi-Waranga.

A production licence is the final phase in 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.

The Kingfisher licence had been initially, conditionally, awarded to Tullow in February 2012 but after which the UK explorer sold (farmed down) 66.66 per cent of its stake to both Cnooc and Total. After the farm down under a joint venture partnership arrangement in the same month, the oil companies tapped Cnooc to take over Kingfisher.

At a news conference yesterday in Kampala, the outgoing director of Petroleum in the ministry of Energy, Ernest Rubondo, who was at the heart of protracted negotiations for the licences with the oil companies, revealed the first application for a production licence was submitted in December 2010 and the last was submitted early this month.

Applications for licences are supposed to be accompanied by an approved Field Development Plan (FDP) and Petroleum Reservoir (PR) reports, which respectively detail the status, operations and viability of the oil fields. The licence is awarded when an oil firm demonstrates to the government that it understands the oil field it is to operate in, as contained in both the FDP and PR reports.

“We had to respond to each and every aspect in the submissions to ensure they are all to our satisfaction before making the licences ready,” Mr Rubundo explained. Evaluation of the application, FDP and PR reports, for two fields Jobi East and Mpyo field, which were submitted late, is ongoing.

After getting the licences, Tullow, Cnooc and Total, which operate as a joint venture partnership (moving at the same time) will now get down to the core work of conducting various Environmental Impact Assessments, closing the Final Investment Decision (FID) and later, pre-Front End Engineering and Design (FEED) studies and eventually undertake the FEED.

The FEED, among others, looks at the required infrastructure at an oil well, layout of well pads, and analysis on central processing facilities, which facilitate pumping of oil.

According to projections, Ms Irene Muloni, the Energy minister, said the oil companies will approximately invest ($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.

“The licences have been issued for a period of 25 years and can be renewed for an additional period of 15 years as provided for in the Production Sharing Agreements,” Ms Muloni remarked. “The companies are expected to reach FID 18 months after issuance of the production licence and work to first oil by 2020.”

Also present at the public awarding of the licences were the chief executive officer of the National Oil Company (NOC), Dr Josephine Wapakabulo, deputy Solicitor General Christopher Gashirabake, technocrats from the Petroleum Directorate and board members of the NOC and Petroleum Authority, respectively and officials from the ministries of Justice and Energy.

The Production Sharing Agreements (PSAs) signed with oil companies provide for government’s participation through a carried interest of up to 15 per cent in each of the licences. The NOC, which according to section 42 of the Petroleum (Exploration, Development and Production) Act 2013, is charged with handling of the country’s commercial interests in the petroleum sector, will now take over this responsibility.

The licence ceremony started with the signing of two addendums to the earlier PSAs between the government and the oil companies; one containing the production and management the gas reserves, which was not captured in the earlier, according to the Permanent Secretary in the ministry, Kabagambe Kaliisa.

In an ideal reservoir there are two types of gas resources; associated (located within the oil fields) and and non-associated gas (sometimes referred to as free gas). However, most of Uganda’s discoveries is associated gas, estimated around 192 million standard cubic feet - located in fields such as Mputa, Waraga, Kingfisher and Nzizi.

However, other wells including Kasamene, Kigogole, Nsoga, Wairhindi, Ngara, Lyec, Mpyo, Gunya, Ngiri, Jobi-Rii and Jobi-East have also been found to have some embedments of natural gas. Government’s earlier plan was to generate electricity, about 50MW from the gas.

The second addendum to the PSA, was for the unitisation of the Ngege field which cuts through the exploration areas manned by the three and will be developed jointly.
Cautious excitement as 2020 first oil may falter due to infrastructure gaps

During the issuance of licences, Energy minister Irene Muloni, made reference to Uganda getting first oil in 2020 at least three times. The 2020 target is veiled in government’s ambitious imagination of the country reaching middle income status, largely made possible by oil production.

To achieve the target, Uganda would have to move at a much faster rate than it is in terms of turning around the infrastructure. The average estimate for infrastructure projects to be completed in Uganda is about five to six years, inclusive of the procurement process.

The oil companies were hesitant to commit to the 2020 target but their bosses present, Tullow’s Jimmy Mugerwa, Total’s Adewale Fayemi, and Cnooc’s Xiao Zongwei, categorically used the phrase “to ensure we get to first oil as soon as possible.”

“This is a complex project in a very environmentally sensitive area, there are a lot of expectations from the Ugandans. It is an onshore project. It has a world class resource – 1.7 billion barrels of recoverable oil. It is 1500kms from the sea and it is a new industry for the country,” Mr Mugerwa noted.

The government, even amidst the lack of infrastructure to support the movement and refining of crude oil, insists that the 2020 target is attainable.

Missing refinery

Interestingly, before first oil arrives, there has to be an oil refinery to convert the crude oil into petrol, diesel and other petrochemicals. The oil refinery is the first call for any oil that will be produced from the fields Total, CNOOC and Tullow operate. However, to-date, the government negotiations for an oil refinery appear to have hit a dead end after a Russian led consortium, RT GIobal Resources, pulled out at the last minute last month.

“We were very keen to put ink to paper like we have done for the production licences. Unfortunately, the consortium that we had been negotiating with over a period of time at the last minute brought on board new conditions to reopen the negotiations and we felt that was not advantageous for the country,” Ms Muloni says.

The government is now negotiating with SK Energy from South Korea, which was the alternative preferred bidder. The government is also negotiating with other previously interested private investors in the oil refinery. For there to be oil by 2020 and it eventually benefit the domestic market by reducing the import bill, the oil refinery construction should be starting now. However, government is still negotiating.

Pipelines needed

The oil companies had been previously opposed to the need for an oil refinery as it doesn’t generate returns as fast as possible. In February 2014, government and the oil companies agreed to develop both the pipeline and a refinery.

The crude oil pipeline route was decided in April 2016 and it will be financed with funding from oil companies. The route picked is from Hoima to Tanga in Tanzania. The construction of the crude oil pipeline is also yet to start since the land acquisition and impact on the social and environmental structures are yet to be completed.

The projection when picking the Tanzania route indicates that expected completion of the pipeline route will be around 2019/2020, which is within the first oil government target.

In a joint statement, the three oil companies, Total, Tullow and CNOOC reveal that issuing of the production licences paves way for the commitment of long term capital for oil developments in the country.

“This approval marks a major milestone towards the production of Uganda’s oil resources. It complements the production licence issued to CNOOC Uganda Ltd as the operator of Exploration Area 3 (Kingfisher) and the important decision made to export crude oil to the international market through a 24 inch, 1443km pipeline from Kabaale (in Uganda) to Tanga port (in Tanzania),” a joint statement from the companies reads.

The government also needs to complete the construction of a refined products pipeline from Kabaale, where the refinery will be to the Central Storage Facility in Buloba, Wakiso District. Currently, the Resettlement Action Plan study for this pipeline is ongoing.

Shs5 trillion revenue estimated annually

From the issuance of the oil production licences, the government expects that for the period of 25 years, the country will be earning an estimated at $1.5b (Shs5 trillion) annually. The figure, according to Ms Muloni, is derived from the projected oil to be extracted from the nine production licences that have been issued so far.

“Uganda will receive royalties, annual fees, the state’s share of profit oil and corporate income tax. Revenues from these licences are estimated to average about $1.5 per year for the duration of production of these fields,” Ms Muloni said during the awarding of licences.

This revenue will not entirely be spent to cover for any budget deficit left by the Uganda Revenue Authority. According to the Public Finance Management Act 2015, the oil revenue will be placed in Petroleum Reserve and money can only be appropriated from it through approval of Parliament.

A percentage of that revenue is expected to be invested for the future generation through the Petroleum Investment Reserve. Ms Muloni revealed the oil revenues will go a long way in ensuring that investment is made in agriculture, electricity, water and road sectors of the economy.

The concern for Uganda is that it has been borrowing money for several infrastructure projects that has raised the debt to Gross Domestic Product ratio. Uganda’s debt levels have led several economists to think that the borrowings mean Uganda has mortgaged its oil.

The estimates of revenue have, however, declined from the initial projection of $2b (Shs7 trillion) because of the fall in global oil prices since 2014. As the global oil prices fell, the prospects for Uganda to extract oil and make high returns fell.

For the licences issued, the Uganda government is estimating production to peak at 230,000 barrels per day. If global oil prices were to decline, even revenues accrued to government would decline.

Additionally, if global oil prices rise, then returns for the government would also rise. Ms Muloni, however, revealed that the current low oil global oil price environment would reduce the costs of production.

“The issuance of the licences during a period of low oil prices, oil companies should benefit from low cost of services and materials that is a result of the low oil prices,” she added.

 Mr Kasaija added that the government thought it is not necessary to refer the matter to the House Budget Committee.

 Referring to the Public Finance Management Act and the Appropriation Act, Mr Abdu Katuntu said the finance minister should address himself to seek  Parliament’s permission to withdraw the money from the Petroleum Fund.

 “It will not be a casual motion you bring and we [Parliament] allows you. The Attorney General should address you on the provisions of the law,” Mr Katuntu said.

 

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