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Uganda's oil dreams move closer to realisation

Production, pipeline and refinery projects are moving forward

The long quest to commercialise Uganda's sizable oil reserves seems to be coming to a head. Following a series of agreements, progress is finally gathering pace to unlock production, provide a prestige oil refinery and ensure a pipeline needed to get oil to international markets gets built.

In late April, Uganda and Tanzania said they would sign an intergovernmental accord by the end of June to speed up construction of the $3.5bn crude oil export pipeline from landlocked Uganda to Tanzania's Indian Ocean port of Tanga. A final investment decision (FID) for the 1,445m-long pipeline is now expected by the end of 2018, some six months earlier than originally envisaged, according to Irene Muloni, Uganda's energy minister.

That announcement came just days after Uganda signed a $3.5bn deal with a consortium of companies led by GE to build and operate a 60,000 barrels-a-day refinery at Hoima, close to Lake Albert, the epicentre of the country's burgeoning oil industry.

With the refinery and pipeline projects making progress, the next phase in Uganda's oil sector development will be for the East African nation to join the league of oil producers—a prospect made more attractive by the recent recovery in oil prices. According to government data, the country has around 6.5bn barrels of oil resources in total, of which around 1.7bn are likely to be recoverable.

France's Total and China's Cnooc, together with the UK's Tullow Oil, are advancing production projects and hope to start pumping as much as 200,000 b/d out of Uganda by 2020, with plateau oil production of up to 230,000 b/d of crude delivered to the Hoima refining and processing hub by 2023.

This and a host of planned infrastructure developments could lift Uganda into the league of middle income nations within the next decade, if things go to plan—but either way, the country urgently needs oil export revenues.

"We expect the oil sector to provide substantial support to long-term fiscal dynamics. Revenues from exports will allow the government to meet its debt obligations while reducing its reliance on borrowing over a multi-year time horizon, consultancy BMI Research said in a recent note on the country.

Uganda's economy needs to grow by at least 7% a year, compared to 4.5% over the last five years, if the country is to be able to service its fast-expanding public debt, a central bank official told Reuters in April. Uganda's debt has nearly trebled in the last three years and stands at more than 60% of the country's gross domestic product.

Partner tensions

The government is optimistic that last minute obstacles to production plans will be overcome. Last year, Tullow announced a $900m sale and purchase agreement, transferring 21.57% of its 33.33% stake in the Buliisa oilfields to Total. But, Cnooc exercised its pre-emption rights to acquire half of the stake Tullow was selling to Total, holding up progress. Disputes over taxes and a coordinated approach to oil developments are also believed to have slowed progress.

However, the Ugandan energy ministry said recently that the companies had reached a compromise, with Total and Cnooc agreeing to maintain an equal shareholding of 37.5% in oil fields in which Tullow was reducing its interests. Having made the first major discoveries in Uganda more than a decade ago, Tullow has been refocusing its resources on other regions of Africa.

"We are on a forward move. The companies have agreed to work together and as a government, we are happy with the cooperation" Muloni told Petroleum Economist on the side lines of an oil and gas conference in Kampala in April.

The new deal, which is subject to government approval, was still being finalised in early May, according to government officials. Total and Cnooc were not available for comment.

Despite the dispute, engineering feasibility studies for the production projects have been continuing and the government still hopes for FID before the end of the year, aligned with the pipeline project. That would pave the way for the development phase, which is expected to cost some $8bn, according to Ahlem Friga Noy, Total's spokeswoman in Uganda.

Pipeline progress

The Uganda-Tanzania crude export pipeline project, championed by Total, is also moving forward. Engineering design studies are complete, and the two countries hope to award a construction contract for the project before the end of the year.

In August 2017, Ugandan president Yoweri Museveni and his Tanzanian counterpart John Magufuli laid the foundation stone for the construction of the East African Crude Oil Pipeline. It will be the world's longest electrically heated crude pipeline and will be able to transport 216,000 b/d.

The chosen route, with tariffs capped at $12.2/b, was deemed the cheapest way to get oil from Hoima to Tanga for shipment to international markets, according to the project's feasibility studies. The Tanga route, which is across largely flat terrain, presented the fewest environmental challenges, as well as the shortest available route to the coast. A rival pipeline route to the Kenyan coast at Lamu, originally backed by Tullow was rejected, ostensibly on cost grounds.

A refinery deal, at last

The refinery framework deal, which entails the development, design, financing and operation of the plant, looks set to bring an end to years of controversy over its merits and failed negotiations. Previous talks over the refinery's construction with Russia's RT Global Resources and South Korea's SK Engineering and Construction collapsed in 2016.

The Albertine Graben Refinery Consortium (AGRC) comprises the engineering giants: GE-owned Baker Hughes (BHGE) and Italy's Saipem, together with two infrastructure financing and development vehicles—Washington DC-based Yaatra Ventures and Nairobi-based LionWorks. The refinery is expected to be financed under a Public-Private Partnership arrangement, with AGRC taking a 60% stake and the government 40%.

Total and Cnooc, together with the UK's Tullow Oil, hope to start pumping as much as 200,000b/d out of Uganda by 2020

"We look forward to the execution phase and delivering a world-class facility that represents a unique opportunity for investors. The project will deliver a broad, significant economic development impact for Uganda and the East Africa region," Rajakumari Jandhyala, president of Yaatra Ventures, said on announcing the agreement.

Building the refinery has been central to government ambitions to elevate Uganda's position on the regional economic map. The idea is for the refinery's products—including kerosene, petrol, diesel and heavy fuel oils—to be distributed across East African markets, as well as in Kenya. But some doubt whether it will prove to be a viable proposition in the long run, given its position away from the coast.

Dickens Kamugisha the executive director of Africa Institute for Energy Governance, a Kampala-based non-governmental organisation, believes plans to expand rival refining capacity at the more accessible Kenyan port of Mombasa could undermine demand at Hoima.

"As a country, I don't think we will benefit much from such a project," he said. "It will end up being so expensive and force the country to revert to exports."

But the developers insist that the facility's location close to Uganda's oil resources will make it profitable, while analysts say it may benefit from the future expansion of Kenyan and Tanzanian oil and gas developments, in that the entire region is going to be regarded as less risky for investors putting money into industrial developments in the years to come.

Uganda's pipeline project inches forward Source: Petroleum Economist
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