Aren’t we already incurring losses in oil sector?

Tuesday May 19 2020

 

By Hussein Lumumba Amin

About two years ago, I calculated that for Uganda to make any profit from its oil reserves, oil prices would have to be at a minimum $60 (about Shs230,000) per barrel. The government says the break-even point is actually $50 (Shs190,000) per barrel but they are not calculating the increasing number of high peripheral costs that have been tabled as requirements for the oil and gas industry.

Last year, government fronted a proposal for over $20b (Shs75b) to develop the sector. This is the equivalent of all the profits the country would make from its entire oil reserves if prices were at $50. This means we have already depleted the oil sector profits even before starting production and building pipeline and refinery.

Regardless of the difference between my calculations and that of the government, given today’s oil prices, the pandemic has exposed the fact that everyone has not only tremendously miscalculated their forecasts, all local and international market projections are deserving of the deepest corners of the dust bin.

We have clearly made a huge blunder by pinning national planning and economic development hopes on oil. Let it be remembered that the high production costs for Ugandan oil are the reason the Amin government abstained from exploiting it’s oil reserves back in the 1970s. The price then was only $12 per barrel.

No matter how excited we get about oil, and how meticulous we are in engineering positive projection numbers, Uganda’s oil is simply not profitable.

For the record, Saudi Arabia makes a profit even when oil prices are at only $10 (Shs64,000).

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The OPEC oil today is at $17 (Shs26,000) per barrel, meaning that they have a $7 (Shs26,000) profit margin already.

Meanwhile, Uganda’s oil is the same good quality as WTI crude (oil from Texas, USA) which is selling at $32 (Shs120,000) today. Ours is among the best quality in the world mainly because it is purer (easier to refine).

However, if Uganda sold its oil today, we would be making a loss of between $15 and $45 on every single barrel sold. Obviously in such a market, business sense dictates that we cut our losses, shut down such a capital depleting venture, and end our headaches, pressure, and endless anxiety.

Our main problem is that we simply do not have the quantities of oil that would reduce our production costs and thereby give us more freedom to comfortably float over any market volatilities like the gulf countries have been doing for decades.

The only option going forward is to either join the US and others like Europe (Northern sea producers) in some sort of new oil production country’s consortium, or join OPEC.

It is already obvious to anyone with pragmatic macro-economic foresight that at the most, our oil reserves are more likely to be a blessing only to the upstream production companies and related partners, while ending up as a costly white elephant to the country.

It is gloomy that government has taken loans largely reliant on future oil sales as both security and repayment funds, yet the market has over the past few years been found to be increasingly unsound as a guarantee for loans.

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