The next 40 years: Oil set to shape economy

Oil money is like cocaine, British journalist/author Nicholas Shaxton opined in his 2007 book, Poisoned wells: The dirty politics of African oil.

If you are healthy when you first take it, you might survive, Mr Shaxton wrote, “but if you are not [healthy], then chances are you will become totally addicted.”

Cocaine, although proscribed in majority countries, is a multi-billion dollar business whose market similarly presents a clear threat at global level, according to the UN’s Office on Drugs and Crime.

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The essence of Mr Shaxton’s argument is that for countries with troubled politics of clientele patronage systems, including systemic cronyism, democratic deficit, and maladministration, among others, anything that can go wrong will go wrong when petro-dollars start flowing.

The list of countries in the resource-rich global south (Africa and South America) that have met such fate—the resource curse— is long. Next door Democratic Republic of the Congo (DRC), Nigeria, Angola, Equatorial Guinea, and South Sudan are notable examples.

Only a handful of governments, including Botswana (diamond mining) and Ghana (after its Jubilee field discovery in 2007) have repelled the resource curse.

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Sixty years after attaining Independence, Uganda is yet to see a peaceful change of government. The last 36 years under President Museveni’s National Resistance Army/Movement have been relatively peaceful, with periodic elections marred by controversy and violence, while he constantly flip-flops on the question of political transition.

When the President was about to clock 75 years old, his ruling NRM party engineered a contentious scheme to remove the age-limit, the last stopgap measure against a possible life presidency. While the progressive 1995 Constitution offers[ed] clarity of the transition question, with the omnipresence of the military, the country is cruising to the edge.

The resource curse is a complex, structural phenomenon, caused by poor management or investment of proceeds from mining or oil and gas projects by governments of resource-rich countries. 

The former Angola strongman Eduardo Dos Santos’s family was noted to finger state coffers with oil revenues at leisure. Equatorial Guinea with its massive earnings from oil, according to the International Monitory Fund (IMF), has one of the highest levels of per capita income in all sub-Saharan Africa, while the First Family members live large, including partying in Western capitals.

Notwithstanding the combustible discussion of phasing out fossil fuels ice on the polar regions—including oil and coal blamed for fuelling greenhouse emissions and the ensuing climate cataclysm manifesting through rising water levels, erratic forest fires, erratic weather and fast melting—crude oil remains a force to reckon with for the next 20 years.

This realisation has come to pass in the aftermath of Russia’s invasion of Ukraine eight months ago. Global petroleum supply chains were interrupted enormously, triggering inflation all over the world as a result.

Oil: Uganda’s moon landing

This, as Uganda’s oil project in February reached the key milestone—when the joint venture partners, Total Energies EP, CNOOC, Uganda National Oil Company (UNOC), and Tanzania Development Corporation, announced Final Investment Decision (FID) for the Tilenga and Kingfisher upstream oil projects and the East African Crude Oil Pipeline (EACOP).

The Tilenga project in Nwoya and Buliisa districts operated by French Total Energies EP is expected to produce 190,000 barrels of oil per day during peak production, while the Kingfisher project operated by China’s Cnooc will pump 40,000 barrels of oil per day. The EACOP running 1,445km from the pump station in Hoima to Tanzania’s Indian Ocean Tanga port, is the medium that will transport Uganda’s crude oil, en route to the international market.

FID unlocked investments of $15b (Shs57 trillion) over the next five years in development and construction of the required infrastructure to start commercial oil production at the earliest, late 2025. The date could slightly shift to early 2026, before or after the general election scheduled that year, hence guaranteeing that oil production will be a tool for electioneering.

The investment of $15b is four-fold of the cumulative investments in the oil sector stood between 2006 to end of 2021, of $3.8b (Shs14 trillion), making the oil project the most capital intensive venture in post-independence Uganda.

It is also expected, according to projections that the development phase— awarding of multi-billion tenders and construction activities—will significantly anchor the country’s next phase of economic growth, including to growing GDP to about $40.1b (Shs139 trillion) by end of the next FY2022/2023.

Already, according to the sector regulator, Petroleum Authority of Uganda (PAU), over 170 contracts valued at more than $6.5b (Shs24 trillion) have been awarded, of which contracts worth $1.7b (Shs6.5 trillion) have been awarded to Ugandan companies, directly at Tier 1 ($933m)—or Shs3.5 trillion— and through subcontracting commitments at Tier 2 ($745m)—or Shs2.8trillion.

The trickledown effect is employment, both direct and indirect jobs. As at the end of June, according to PAU, at least 5,624 people were directly employed by the sector out of whom, 95 percent are Ugandans. The numbers are expected to increase significantly as more contracts continue to be awarded.

“The multiplier effect of indirect and induced employment is estimated at between five and seven times, hence the expected increase in the impact of the sector on employment,” says Mr Ernest Rubondo, the PAU executive director.

He adds: “It is exciting to note the progress made by the oil and gas sector in the country, during this period, and the positive impact this is beginning to have on the country’s economy and the livelihoods of its people.  This impact is expected to become even more evident when the country starts commercial production in 2025. The key drivers of progress for the oil and gas sector, and for the country in general over the last 60 years include good leadership and well-defined policy direction, and peace and security, which has enabled implementation of projects and activities across the country.”

Refinery calculus

In 2010, the government hired Foster-Wheeler, a British engineering firm, to study the viability and feasibility of the refinery. The Foster-Wheeler report posited that the refinery is an economically viable investment with a Net Present Value of $3.2b at a 10 percent discount rate and an Internal Rate of Return of 33 percent, despite opposition by oil companies and analysts.

President Museveni has since stood his ground, arguing that there is a ready market in Uganda, and a captive market in Rwanda, east Congo and other neighbouring countries—making Uganda’s refinery viable.

While the refinery’s economics remains not-so convincing, the government in 2017 tapped the Albertine Graben Refinery Consortium (AGRC) to design, finance, construct and maintain the project estimated to cost $3b (Shs11 trillion) in Hoima. Its construction dates have been shifting, to now early 2024.

An additional $40b is expected to flow into the economy over the 25 years of operation and maintenance of the oil fields and related infrastructure. In effect, oil is the vehicle to reaching the long-awaited middle income economy class, which officials claimed in late June the country had attained, only to make a U-turn at the behest of the World Bank.

Murky politics

But first things first, for the oil industry to flourish during the remaining window to switch to clean energy options to save the planet, Uganda will have to get its politics right, particularly the transition question. On the surface of the semblance of stability, the country is sitting on deep political fault lines.

At his inauguration more than three decades ago, President Museveni said “Africa’s problem is leaders who overstay in power.” He shifted goalposts in 2012 during an interview on NTV’s political talk show, On the Spot, saying the problem is of leaders who “overstay without being elected.”

The Justice and Constitutional Affairs minister, Mr Nobert Mao, last week told a gathering of the Youth Day celebrations in Mitooma District that the earliest the transition can take place is 2031.

“It is not about where you are coming from; it is about where you’re going,” Mr Mao proclaimed. Uganda’s history of violence is succinctly captured in the preamble of the 1995 Constitution, whose framers sought not to repeat mistakes of the past that keep recurring.

Like the 24 years (1962-1986) before he came to power, researchers Godber Tumushabe and Job Kiijja underlined in a 2021 paper titled Uganda’s political transition scenarios to 2026 and beyond: The crested crane, the storm in the teacup or the warrior mad king?, President Museveni’s 36-year reign has been defined by the fact that since Independence in 1962, Uganda has never had a peaceful transition of power from one president to another or from one ruling political party to another.

According to the paper, there is compelling evidence to suggest that there are at least three alternative political transition scenarios for Uganda: First is the “crested crane scenario”, which envisages a Uganda that emerges from the current whirlwinds into a fully fledged democratic and peaceful country, where there is shared prosperity, second is “the storm in the tea cup scenario” where the trajectory of political, social and economic situation remains largely unchanged with those at the extreme end of the spectrum seeing doom and gloom and a future that is highly unpredictable, and third is the “warrior mad king scenario” whose timeline spills beyond 2026; it is the least desirable, but perhaps the most likely scenario, given Uganda’s political journey since the post-election violence of 2006.

“The ‘warrior mad king” scenario is premised on the apparent evidence that: i) Mr Museveni’s mental programming is to be the president of Uganda for life and he will be on the ballot as long as there are elections; ii) he does not see anybody capable of leading Uganda other than himself. Right or wrong, he sees himself on a selfless mission of transforming Uganda and believes that no other Ugandan can manage; iii) he alone should determine who may succeed him whenever his tenure terminates whether by not offering himself to contest in future elections, by losing an election or even by the unavoidable course of nature,” the paper reads in part.

While on the [re] election campaign trail, President Museveni told a January 9, 2016 press conference in Ntungamo District that he cannot leave power when all that he planted is starting to bear “fruits.” A few months earlier, he had said he cannot hand over power to wolves [Opposition], “people without vision” and further accused the Opposition of being after “my oil”—the current stock tank of oil reserves, currently estimated at 6.5 billion barrels.

To his credit, President Museveni has maintained a hard-liner stance against the leechy oil companies, not giving in to pressures and their demands, and maintained that the oil can remain in the ground until the enabling environment for Uganda to reap enormously has been put in place.

On the backdrop of internal dynamics, Uganda will during the next course of journey have to navigate the dicey clean energy transition question during which the government will have to recalibrate its focus from the old fashioned industrial revolution to the green revolution.

The next 20/40-year journey

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 Shs11.4 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 seven to 10 percent forecast, up from the current stagnation of four percent exacerbated by the recent Covid-19 back to back lockdowns and the Russo-Ukraine conflict.

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.

UNOC, the statutory body mandated to manage Uganda’s commercial interests in the oil sector, put revenue estimates for the next 25 years at around $47b, excluding the revenues from the indirect and induced opportunities.

“There will be an improvement in the Balance of Payments through import substitution. There will be substation national capital formation from all the integrated projects,” says Proscovia Nabbanja, the UNOC chief executive officer.

The next 40 years, she adds, will see the oil sector “contribute substantially to the country’s GDP and transform Uganda’s economy with oil and gas resources, significantly contributing to the country’s industrialisation plan. Ms Nabbanja believes such will be the size of value addition that it will integrate “the industry with other sectors of the economy through initiatives such as the production of petrochemicals, fertilisers, agro-based industries and more.”

Through UNOC, the government holds a 15 percent stake in the nine production licences over 14 oil fields across the Tilenga and Kingfisher projects. The company also carries Uganda’s 15 percent equity stake in the EACOP, and the 40 percent stake in the Greenfield 60,000 barrels per day oil refinery.

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