New dawn as govt, oil firms seal deal to kick off production

President Yoweri Kaguta Museveni gestures during a meeting with Tanzanian President Samia Hassan that preceded the signing of the the East African Crude Oil Pipeline (EACOP) Tripartite Project Agreement at State House Entebbe on April 11, 2021. PHOTO/PPU

What you need to know:

  • Today’s signing of three agreements by the presidents of Uganda and Tanzania, and the head of oil giant Total, has renewed hope that commercial oil production could finally kick off in four years’ time. 

The government and international oil firms—French Total E&P, and China’s Cnooc have today signed off four key agreements for commercialisation of the proposed East African Crude Oil Pipeline (EACOP), bringing to end years of protracted negotiations and setting on course Uganda’s oil project for the next phases of development and production by earliest 2025.

The high-level signing ceremony at State House, Entebbe, is expected to be attended by the newly-installed Tanzanian President Samia Suluhu Hassan, and the French oil giant, Total SA’s chief executive, Patrick Pouyanne. 

Total SA is the parent company of Total E&P licensed to operate in Uganda, alongside Cnooc. The two ventured into Uganda after each acquiring 66.66 per cent stake from Anglo-Irish Tullow Oil PLC, which recently sold off its entire stake, and is currently processing winding up its operations.

The officials, speaking on condition of anonymity due to sensitivity of the matter, described today’s signing as a momentous occasion—the long-awaited moment—which is expected to mark the launch of the Ugandan oil project to get the black gold out of the ground, 14 years since the country announced discovery of commercial oil reserves in mid-western Uganda.

The agreements signd today includes two separate Host Government Agreement (HGA) between Total E&P, and the governments of Uganda and Tanzania. Energy minister Goretti Kitutu will signed on behalf of Uganda as is her Tanzanian counterpart, and Total E&P vice president for Africa on the other hand.

The HGA, which was first initialed at a signing ceremony in September last year, details vertical issues on the EACOP such as governmental   obligations, investor   duties, environmental   and   other   relevant   standards, liability, and project closure. 

Other agreements are the Shareholders Agreement (SHA) between the four shareholders in the EACOP holding company. This will be signed by the Uganda National Oil Company (Unoc) chief executive, Ms Proscovia Nabbanja, the Tanzania Petroleum Development Corporation (TPDC) boss, and the Total E&P vice president for Africa, and the Cnooc president.

UNOC is the statutory body mandated to manage the country’s commercial interests in the oil sector, including marketing the country’s share of petroleum, and developing in-depth expertise in the sector. It manages Uganda’s 15 per cent equity stake in the EACOP.

French Total E&P owns majority 72 per cent shareholding in the EACOP, followed by Unoc with 15 per cent, Cnooc with eight per cent, and TPDC with five per cent. However, officials described Tanzania’s shareholding through its national oil company, TPDC, as tentative.

Uganda’s 15 per cent stake is in sync with the 15 per cent stake in the production licenses for each of the oil fields operated by Total E&P and Cnooc. 

Also, to be signed is the Tariff and Transportation Agreement (TTA) between the pipeline company and the shippers of Uganda’s crude oil through the pipeline. The total vice president will sign on behalf of the pipeline company, Ms Kitutu on behalf of Unoc, Cnooc and Total E&P.

The signing of the agreements today was initially scheduled for last month, March 22, but was deferred to allow mourning of fallen Tanzanian president John Pombe Magufuli.

The long walk to today’s event has been punctuated with hurdles, including disappointments, protracted negotiations with the oil companies, and a plunge in prices for the international Brent crude oil. 

Uganda's president Yoweri Kaguta Tibuhaburwa Museveni and deceased Tanzanian president John Pombe Magufuli interact in Tanzania on September 13, 2020 during the signing of the key agreement on oil pipeline. PHOTO/FILE/PPU 

These delays over the years spawned cynicism and conspiracies of the oil being non-existent in the ground or being secretly shipped out through tankers guarded by the army, while Members of Parliament on the Committee on the National Economy—which scrutinises loan requests by the executive—late last month wondered why government continued to borrow extensively for oil related infrastructure yet nothing ever comes out.

A study last December by the London based Climate Policy Initiative (CPI) detailed that Uganda’s oil project had equally dropped in value by 70 per cent from $61b (Shs223 trillion) to $18b (Shs66 trillion) since 2015 when oil prices plunged from $100 per barrel to under $50 today.

The drop in value, according to commodity financial models run by CPI, is as a result of changes in the global oil market, including slump in prices of Brent Crude Oil—the international benchmark—and commitments by oil multinationals to the 2015 Paris Climate Change Agreement, a landmark deal signed by countries to intensify investments needed for a sustainable low carbon future.

In a world where the signatory countries, including Uganda and oil supermajors like Total E&P fully commit to the Paris Agreement, CPI detailed in the report indicated that Uganda’s oil project could at best be worth $8b (Shs29trillion).

Ugandan technocrats merely ignored the CPI findings  while the government, and President Museveni who has previously inaccurately claimed his government discovered the oil, have defended that the delays are good for the country.

The start of commercial oil production, according to the World Bank, offers Uganda long-term prospects to diversify the economy and catapult it to upper middle income status by 2040. 

With commercial oil production at peak in the 2030s, the Bank estimates show that Uganda could earn up to $3b (approximately Shs7 trillion) in revenues from exports of up to 60,000 barrels of oil per day. These revenues have the potential to propel the economy between 7-10 per cent forecast, up from the current stagnation of  four  per cent.
However, like countless other actors have chorused, the World Bank says this is only possible if revenues don’t just end up in the country’s leaders personal bank accounts but are channeled to development of human capital—education, institution building, good governance and transparency, properly managed through an efficient and transparent strategy, and if an effective sharing formula is ensured for revenues to trickle down to local government entities.

After today’s signing, officials expect Total E&P and Cnooc to announce Final Investment Decision (FID)—the availability of at least $10b (Shs36 trillion) for the development phase, followed by awarding of the Engineering, Procurement, and Construction (EPC) contracts.

Of the $10b, about $6.7b (about Shs24 trillion is for developing Total E&P’s Tilenga oil project, which included oil fields in Buliisa and Nwoya districts, and Cnooc’s Kingfisher project in Hoima and Kikuube districts, and $3.8b (Shs13.8 trillion) is the capex for the EACOP.

The awarding of EPC contracts, many of which have been evaluated over the last months, is expected to commence in the the next weeks and pave way for the development/construction phase.

The construction phase, whenever it kicks off, is expected to run for at least three years paving way for commercial oil production by the earliest, 2025. Officials, however, intimated they expected construction to start tentatively by July.

The EACOP, which runs for 1,443km from Hoima district to Chongoleani terminal in Tanga at the Indian Ocean in Tanzania,  will be developed in 60:40 per cent debt to equity arrangement. 

Eighty [80] per cent of the pipeline, 1,147km, will be on the Tanzanian side, and it is estimated that 80 per cent of the project capital expenditure will be spent in Tanzania. The Ugandan section of the pipeline is about 296km through 10 districts and 25 sub-counties, and 172 villages.  

Another high-level [press] ceremony, attended by executives of the oil companies—Total E&P, Cnooc, government technocrats and others, is scheduled for Tuesday to announce more details to the country. 

Key timelines 

February 2012
Anglo-Irish Tullow oil PLC signs farm down (sales stake) to China’s Cnooc and French Total E&P. 

The Ugandan government signs a Memorandum of Understanding with Tullow Oil, Total E&P, and Cnooc, detailing a roadmap for commercialisation of Uganda’s oil including developing an oil pipeline, refinery and gas to power plant.

August 2015
Uganda and Kenya agree on the northern route as the least cost for the proposed oil export pipeline.

April 2016
Total E&P and Uganda agree to the southern route through Tanzania as the “least cost” route for the proposed oil pipeline.

August 2016
The government issues production licenses for both EA1 and EA2, paving way for the technical Front Engineering Design on the oil fields.

January 2017
Tullow announces selling 21.57 percent of its interests in each of the three exploration areas to Total E&P for $900m (approx. Shs3.2trillion) behind Cnooc’s back

May 2017
President Museveni and the late Tanzanian President John Magufuli sign the Heads of State Agreement concretising the two countries to the pipeline project.

The Intergovernmental Agreement was signed on May 26 that binds the two governments on the project signed between Energy minister Irene Muloni and Tanzania’s Minister for Constitutional and Legal Affairs, Prof John Palamagamba Kabudi. 

This is followed by commencement of negotiations of the Host Government Agreement, which dragged on until last year.

August 2017
President Museveni and late President Magufuli lay foundation stone for the pipeline at Chongoleani marine terminal, Tanga port at the Indian Ocean.

November 2017
President Museveni and late President Magufuli lay a second foundation stone in Rakai. A third stone was laid in Hoima by President Museveni and Tanzanian officials, a function Magufuli did not attend.

This, as Total E&P commences pre-construction studies including geophysical and geo-technical and Front-End Engineering Designs throughout 2018.

January 2019
The French oil major Total’s chief executive and chairman, Patrick Pouyanné, jetted into the country for talks the Host Government Agreement, Tullow’s sales deal, and other lingering issues in the way of negotiations.

August 2019
Tullow Oil’s attempts to farm down 21.57 per cent of its interest in each of the three exploration areas—1, 2, and 3— in Buliisa, Nwoya, Kikuube and Hoima districts, to French Total E&P and Cnooc, collapsed on August 29  following disagreements over Capital Gains Tax and payment of Income Tax.

April 2020
Total SA announces acquisition of Tullow oil’s remaining stake in Uganda for $575m (Shs2.1 trillion), with $500m paid once the deal has been approved by authorities, and $75m paid whenever Final Investment Decision (FID) is reached.

May 2020
The China National Offshore Oil Company (Cnooc) Uganda Ltd decides against—exercising its pre-emptive rights to—acquiring part of the 33.33 per cent Anglo-Irish Tullow Oil stake floated to French oil giant Total E&P last month.

This offers clarity on the shareholding structure in the upstream and hence the pipeline, clearing way for conclusion on HGA.

September 2020
The Ugandan government and Total E&P initial the Host Government Agreement at a signing ceremony at State House, Entebbe, also attended by Total global chief executive Patrick Pouyanne.

A week later, President Museveni flies to Tanzania where the declaration of the principals of the agreement is signed with the Tanzanian government.

Speaking at the 6th oil and gas convention later that month, both President Museveni and Total executives commit to reaching Final Investment Decision by end of the year.

October 2020
Total E&P officials on Oct 25, initialed the Host Government Agreement for the proposed East African Crude Oil Pipeline [EACOP] with the Tanzanian government.

This paves way for commencement of negotiations of the Shareholders Agreement that details the sharing holding structure, and the Transportation and Tariff Agreement of taking oil to the international market.

December 2020 study
A study last December by the London- based Climate Policy Initiative (CPI) detailed that Uganda’s oil project had equally dropped in value by 70 per cent from $61b (Shs223 trillion) to $18b (Shs66 trillion) since 2015 when oil prices plunged from $100 per barrel to under $50 today.

March 2021 
The signing ceremony of the Host Government Agreement, the Shareholders Agreement, Transportation and Tariff Agreements is scheduled for March 22 but is deferred to April 11 following the death of Tanzanian President Magufuli the week before.