How will Uganda finance its oil projects

Securing financing for oil projects might prove to be relatively hard because a number of financiers have been cutting back on funding fossil energy production due to climate concerns. Photo | File 

What you need to know:

  • This shift is already causing some discomforts to countries with greenfield oil and gas projects because global financing institutions are cutting back on funding oil projects. 

The extraction of oil has come at a tough time. The world is making a radical shift from fossil fuel as an energy resource to climate-smart energy.  

This shift is already causing some discomforts to countries with greenfield oil and gas projects because global financing institutions are cutting back on funding oil projects. 

On Wednesday, Standard Group, one of Africa’s biggest funders of oil projects, said it will reduce financing oil projects by 5 percent by 2030.

Standard Group, which has affiliates across Africa, including Stanbic Bank in Uganda, also said it will stop providing financial products and services for extraction, exploration and production of tight oil and pipelines. 

It also intends to stop financing new oil-fired power plant construction or expansion, except where plants provide support services as part of an integrated renewable energy power plant.  

The reductions will also extend to power sector clients generating energy from oil with funding cut from 0.05 percent of total group loan advances in 2021 to 0.03 percent in 2026 and to zero by 2030.

Sim Tshabala, the Standard Bank chief executive office, said in a statement: “In certain tightly defined circumstances,” the Group will remain open to supporting ‘brown’ energy and mining projects in Africa.

It is not clear if this decision will affect Uganda’s oil projects in a substantial way.

However, Stanbic Bank officials in Kampala, who asked to remain anonymous, did not indicate their position, telling Daily Monitor that: “We have been active participants in oil and gas financing.” 

Stanbic is currently undertaking support in business training for small and medium enterprises across 10 districts along the East African Crude Oil Pipeline.

Standard Chartered Bank’s official position on oil financing shows the bank will no longer finance new projects in exploration and production in the Arctic and Amazon Basin regions.

The bank’s statement, however, is silent on oil financing in Africa.

Uganda’s biggest lender, the World Bank, resolved in 2017 “it would no longer finance upstream oil and gas operations starting 2019 over climatic concerns.”  

However, the bank said: “The financing could only be made in exceptional circumstances, with consideration given to financing upstream gas in the poorest countries where there is a clear benefit in terms of energy access.” It’s not clear if Uganda will benefit from this window. 

A similar pronouncement has already been made by the African Development Bank, and 11 other financial and investment institutions across the globe. 

While the $10b FID was announced last month, financing is yet to be secured for the development of East African Crude Oil Pipeline, whose estimated cost has jumped from $3.5b to $5b due to an increase in costs as a result of production and transport Covid-19 disruptions.  

An estimated additional $4b is needed for the refinery and refined products pipeline. 

For this reason, upstream partners including; UNOC, Total and CNOOC, in the Lake Albert project and the pipeline have turned to financing institutions.

The upstream partners are Total Energies, which holds (56.67 percent), CNOOC (28.33 percent) and UNOC (15 percent).

Products from oil fields will be transported to through a port in Tanga, Tanzania via a cross-border pipeline, whose shareholders are Total Energies (62 percent), UNOC (15 percent), TPDC (15 percent) and CNOOC (8 percent).    

Government will have to secure resources for the 15 percent stake in the pipeline as well as the planned 40 percent equity stake it holds in the oil refinery. 

Total Energies, which holds the biggest stake, has not made mention of how it intends to raise money.   

UNOC has not yet made a definitive answer on how they intend to raise finances.

Other institutions such as the International Finance Corporation, are hesitant to invest in the project due to risks associated with energy transition and environmental and social concerns.    

However, Ernest Rubondo, the Petroleum Authority of Uganda chief executive officer, believes, the shift to climate-friendly financing may, for now, not affect financing of oil projects because oil and gas is still expected to be very valuable for at least the next 40 or so years.

He reasons that the prevailing high demand for oil and gas is evidence enough to indicate globe preferences.

In addition, there are some oil and gas products, which, as he says, cannot easily be replaced by renewable energy such as tyres, seats, polyester for clothing and bitumen for road construction, among others. 

“On a technical side, Uganda’s oil and gas sector is being taken forward in a manner that reduces the negative impact on the environment,” Rubondo says.