Uganda’s ascendancy to the petrol dollar club of nations has hit a few rough patches in 2019 dragging down economic growth. The list of problems is long. First was the premature exhaustion of the Petroleum Fund in Bank of Uganda without approval of Parliament and for a purpose which it wasn’t set up. Government transferred monies to the general fund rather than oil infrastructure.
Second, there are still failed efforts to end the Tullow Oil farmdown tax dispute over an assessment for capital gains tax in connection with a proposed sale of interests to CNOOC and Total. This dispute so far has attracted attention from Total and Heritage PLC, who are litigating over the prior sale where Tullow withheld tax liability and remitted to URA in order to get approval.
Third, the prospective prices of crude oil have created short-term uncertainty over the amount of new crude coming to market, a growing market for electric or convertible engines that use both renewable and fossil fuels. The world’s largest producer, Saudi Arabia, has floated a 2 per cent stake in Aramco yielding a slightly less than expected $1.7 trillion valuation of the company.
Market analysts project that two decades after the major economies go electric for all new vehicles produced; the only profitable producers will be offshore producers which don’t have to absorb significant transportation costs. To compete with electricity, only Saudi Arabia and a few others capable of producing $20 bbl., will be in the game. This eliminates high cost producers.
For small and niche producers like Uganda, the party will be on for such a decade if they can get the oil out of the ground. Uganda has taken a few bold steps. It has staked out to process oil inside Uganda to spur certain industrial activities that will remain in demand even after the pumps go dry.
The National Oil Company, whose board got a fresh term, is soliciting for an engineering production contract, may be better served on focusing on delivering a refinery and tamping down on the pipeline. Our giant neighbour DRC is still light years from accessing its own rich resources.
Global oil has burnt a few players. For years, the big players manage their balance sheets by regularly retiring less profitable fields to lower cost producers and paying for significant finds. This is the case in North America, Russia and the Middle East. Small players like Tullow grew out of ties to the Chatham House class, who have arrogated themselves a primary role in allocation of natural resources globally. However, their success registered in scanning promising finds has hit a dead end.
They are lightly capitalised. Tullow is rapidly burning cash without resolving substantially the various tax disputes it has in several countries. African countries, which have been banking on oil money, have spent their first revenues in anticipation of a windfall, which so far hasn’t and will not materialise. Oil decision 2021/2022 is already starting to look ridiculous.
Oil is no longer “a hot-cake” as it was. An auction of new exploration blocks advertised by Uganda widely in the international press recently yielded zero takers. Ironically, the second major driver of demand for oil in the unregulated crude oil market dominated by State/warlords, is drying out as global conflicts are on the wane rather than on the rise. Warlords are becoming something of the past and military coalitions continue to push them further away from production lines. Even shocking events like the bombing of Aramco refineries in Saudi Arabia did little to dampen production.
Returning to Tullow, government should quickly request for a premature termination of their licenses, which will lose any value that would otherwise be clawed back into the existing production. After bleeding so much capitalisation, its stock has fallen by 60 per cent in a short period, and high debt levels relative to size, especially on notes approaching maturity, their capacity to manage even a stake as small as 10 per cent in the oil fields is limited.
Mr Ssemogerere is an Attorney-at-Lawand an Advocate. email@example.com