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Uganda battles to revive oil project

The energy ministry’s aim to achieve FID in early 2020 looks ambitious

The Ugandan government claims to have found a solution to the impasse blocking development of its huge oil production and pipeline export project. However, there is little sign of an early resolution with companies over the dispute, ostensibly over a tax issue but also the development’s wider commercial framework. 

Efforts by partners Total, Cnooc and Tullow Oil to develop an estimated 1.7bn bl of recoverable resources in the Albertine Graben around Lake Albert in western Uganda have suffered a series of setbacks since Tullow made the first commercial oil discoveries in 2006. 

Most recently—despite months of wrangling with the Ugandan authorities over the treatment of tax—Tullow was unable to execute its planned farm-down of part of its one-third stake to its partners, a prerequisite for the company to reach final investment decision (FID). 

In August, Tullow abandoned talks when an agreement could not be reached before the expiry of its sales and purchase agreements. It still aims to reduce its stake to around 10pc, preferably by selling to Total and/or Cnooc, which are already operators of separate parts of the project. 

“While Tullow’s capital gains tax position had been agreed, as announced in the group’s 2018 full year results, the Ugandan Revenue Authority and the joint venture partners could not agree on the transfer of capital allowances related to the consideration to be paid by Total and Cnooc as buyers,” Tullow set out  in a 13 November trading statement. 

Elusive FID

The failure to resolve the tax dispute effectively brought progress towards FID on the 230,000 bl/d development to a halt. The Total-led section of the project, involving the construction of the $3.5bn East Africa Crude Oil Pipeline (EACOP) taking oil 1,445km from landlocked Uganda to the Tanzanian coast at Tanga, was also quickly suspended. 

Nonetheless, Uganda’s energy minister Irene Muloni sounded upbeat during the Africa Oil Week conference in Cape Town in early November, insisting that a solution had been offered that could lead to FID in the first quarter of 2020 and the first exports by 2023. However, neither Muloni nor the companies have commented specifically about the nature of the proposal. 

Total’s chief finance officer Jean-Pierre Sbraire said in a results presentation in late October that the company remained “fully committed” to the development, but added that it was “a bit too early to assess when FID could be taken”. 

“Despite FID repeatedly being pushed back the government has stepped up borrowing, pre-empting a petroleum windfall that remains years away” Branson, Verisk Maplecroft

Tullow has been similarly cautious. “The joint venture partners remain supportive of the development and conversations with the government of Uganda are ongoing. Tullow remains committed to reducing its equity stake in the project ahead of FID and, when appropriate, will initiate a new sales process to achieve this,” the UK-based firm outlined in the November statement. 

Whether a revised tax arrangement can be reached as part of a new farm-down pact remains uncertain. “Despite FID repeatedly being pushed back the government has stepped up borrowing, pre-empting a petroleum windfall that remains years away. This has only increased pressure on the Uganda Revenue Authority to secure a capital gains tax windfall from Tullow’s farm-down,” says Nick Branson, an Africa analyst at risk advisory firm Verisk Maplecroft.

Wider concerns

A solution will need to involve more than a tax agreement. Bubbling underneath the central negotiations are a series of concerns among the partners—over the wider commercial agreements and fiscal framework underpinning the project—that remain to be resolved. 

Branson says hard bargaining by Ugandan president Yoweri Museveni throughout talks with the venture partner has caused repeated delays to FID—notably an attempt to attach a $3bn, 60,000 b/d oil refinery project to the oilfield development. “Even if a resolution can be found to the tax dispute, IOCs should be prepared for the possibility of Museveni moving the goalposts again ahead of the 2021 elections, much as he did over demands for a local refinery,” he says.

The partners would incur extra costs if some of the oil planned for the pipeline was diverted to the refinery and so have reportedly asked for the refinery project to be delayed. The government is still pushing ahead with planning for a refinery in Hoima district, though the construction schedule is not clear. 

Other outstanding obstacles are the firming-up of host government agreements and shareholder agreements relating to the pipeline, as well as issues surrounding compensation to landowners along the pipeline route. 

1.7bn bl Recoverable resources in the Albertine Graben

Tanzania’s President John Magufuli is similarly regarded as a tough negotiator and faces a presidential election even sooner than his Ugandan counterpart—in late 2020—so there is a political as well as economic incentives to keep the project alive. However, there is little chance of either country being able to raise the billions of dollars needed to build the pipeline without Total’s financial clout.        

With so much still to be done, an early FID seems unlikely. While all parties stand to gain, it may be the Ugandan government that feels greater pressure to reach a deal quickly. The longer the standoff continues, the greater chance of companies cutting their losses and focusing on more straightforward projects elsewhere. Uganda’s reserves could yet end up as undeveloped, stranded assets. 

Exploration push

Given the problems faced in getting the current Ugandan development over the line, this may not seem like the most propitious time to be touting further exploration acreage in the country, but the energy ministry has been doing just that. Muloni was attempting to persuade companies at the Cape Town conference to invest in five exploration blocks in the Albertine Graben, unveiled earlier this year. She hopes awards will be made by end-2020, but it looks like a tough sell. 

“In the absence of progress on developing reserves discovered back in 2006, and the accompanying evacuation pipeline, IOCs will show little appetite for exploration licences in the Albert-Edward Rift basin,” Branson says.

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