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Uganda: now it gets difficult

World-class oil reserves have been established in Uganda's Lake Albert area. The problem now is exploiting them, Martin Quinlan writes

LANDLOCKED country deep in the interior of Africa, with some security concerns, would not be an explorer's first choice of location for a large new oil province. UK-Canadian company Heritage Oil and the UK-Irish firm Tullow Oil took big risks when they launched their drilling campaigns along Uganda's Lake Albert coast – and now they face the problems of success.

These are likely to include bringing in an assertive, capital-rich partner – Chinese state-owned companies are tipped – to build a 1,200 km pipeline across Uganda and Kenya to the Indian Ocean coast, at a cost estimated at up to $2bn. As well as financial and schedule risks, there are political risks: although Uganda has been relatively stable and democratic in recent years, relations with its neighbour on the other side of the lake, Democratic Republic of Congo (DRC), are not good and there is rebel activity in the area. As other African states have discovered, sudden oil wealth can stir-up old grievances.

Corporate restructurings could also result. Some analysts have suggested that Heritage will sell most or all of its interests in the country, to use the cash elsewhere – particularly in its licences in Iraq's northern Kurdistan region, where results could be achieved more quickly. In June, Heritage agreed to acquire Turkey's Genel Enerji (PE 7/09 p26), which holds assets in Kurdistan, to create a much larger company. Heritage has itself been the subject of bid speculation, with Chinese companies said to be interested.

Tullow has also been tipped as a take-over target, having been expanding fast over the past few years. However, chief executive Aidan Heavey, who set up the company in 1985, said in June that the firm is not for sale and could continue growing at the same pace. Tullow had indicated earlier that it would sell part of its interests in the Ugandan fields to help fund their development, but Heavey now says he has no plans to, beyond handing the pipeline partner an upstream interest.

Pipeline plan

When the companies started their search in Uganda, there were ideas for using road and rail transport for the relatively small finds considered likely. That plan changed with last year's string of discoveries. In June, Tullow said discovered resources in the basin stood at over 0.6bn barrels, with a potential of "significantly beyond 1bn barrels".

Reserves of this magnitude could be expected to support production of over 100,000 barrels a day (b/d), so an export pipeline will be needed. The government, however, appears to have other ideas: earlier this year the energy minister said he wanted a refinery constructed so that all crude would be processed in the country and refined products exported regionally. Uganda's refined products supplies, brought in through Kenya by pipeline and then road, can be unreliable and costly; as well as resolving the supply problem, construction of a refinery and becoming a regional exporter of refined products would raise the country's profile in eastern Africa.

The companies are arguing behind-the-scenes that construction of a large refinery would be impractical and uneconomic, while keeping their options open in public. However, supplying refined products locally was always part of the exploitation plan. Tullow has said it will construct a 4,000 b/d topping unit (a simple refinery) at Hoima, the nearest substantial town to the oilfields. Transport and heating fuels will be supplied locally and heavy fuel oil will be used to generate electricity in a 57 megawatt power station, to be built nearby.

Development plans are still being worked out, but one option being considered is an early production facility supplying the topping unit, with output being raised to about 20,000 b/d in three-to-five years. Capacity of the topping unit will be increased and some crude will be exported by road and rail. Subsequently, the pipeline will be constructed and production will rise to 100,000-150,000 b/d.

Tullow says an integrated team is in place to define the development plan for the whole basin and it expects to opt for a phased development. An early production facility for one or more fields will yield reservoir data and will provide crude for the local market, with output being stepped up "to provide more significant production volumes for the local and regional fuel oil and oil products market". The firm says it will present its plans to the government before the end of the year. According to Heritage, a phased development yielding first oil in 2011 with transport by rail is a possibility.

Meanwhile, there is a plan to utilise the existing refined products pipeline in Kenya to export Uganda's oil. State-owned Kenya Pipeline (KPC) operates a multi-products pipeline extending 775 km from Mombasa to Nairobi and on to Eldoret, in the western part of the country. Extending the pipeline about 320 km further west to Kampala, Uganda, has been under discussion since the mid-1990s and in 2006, Libya's Tamoil won a bid-round to be the two governments' partner for the project. Interests in the Eldoret-Kampala section are to be Tamoil, 51.0%, KPC, 24.5%, and the Ugandan state, 24.5%.

But the extension remains a plan – although, following the discovery of oil, Tamoil has developed the project and envisages a further extension to the Lake Albert area. The firm says the pipeline has been designed so that it can flow in either direction. But capacity of the existing pipeline is limited – the Mombasa-Nairobi section is 14 inches in diameter, with a refined products capacity of 66,000 b/d, but the section onward to Eldoret reduces to 6 inches, with a capacity of 24,000 b/d.


About 25 exploration and follow-up wells, including sidetracks, have been drilled in the Lake Albert area, but none in the lake so far. Drilling is fast and – once the rig has been brought in – relatively low-cost because the targets are mostly shallow, in some areas only 400 metres sub-surface. Oil has been found in three adjoining blocks – Block 1, where Heritage is operator for a 50:50 partnership with Tullow; Block 2, held 100% by Tullow; and Block 3A, held by the Heritage-Tullow partnership.

Block 1 holds what is thought to be the largest discovery in the basin so far. Heritage's Buffalo-Giraffe field, found by the Buffalo well of December 2008 and the Giraffe well in January – which pressure and seismic data showed to be structurally connected – covers 48 square km and holds an oil column of about 140 metres. Heritage's initial estimate for recoverable reserves is 350m barrels and the firm says the field might be connected to the still-undrilled Buffalo East prospect, in which case the combined structure will cover 90 square km.

In Block 2, Tullow has made a string of discoveries with only one disappointment. The original discovery in the Lake Albert area, Mputa, has been appraised with a multi-well programme and had been planned for development with an early production facility, although this might now go elsewhere. Other significant finds include Kigogole, where three wells have flowed oil, Nsoga, Kasamene and Nzizi. The second well into the potentially large Ngassa field gave oil shows last month and is due to reach target depth in August.

Block 3A holds the Kingfisher field, where Heritage has drilled three wells and several sidetracks and has established a large structure with excellent flowing properties – one well tested 14,364 b/d. Kingfisher reserves are estimated at about 200m barrels.

The search is due to move offshore next year. Heritage and Tullow have carried out joint studies into the equipment needed to drill in the lake and were due to finish a front-end engineering and design study by mid-year. Heritage says seismic surveys over the offshore part of Block 3A have shown a number of prospects, of which the large Crane and Pelican structures are expected to be at the top of the list for drilling.

Also seeing exploration is Block 5, a large area north of Block 1, which had been completely unexplored. The UK's Tower Resources holds the block and is to be joined by Australia's Global Petroleum as 50:50 partner through a farm-in agreement under which Global will pay for two wells. However, the first, Iti-1, came in as a disappointment in June, with no producible reservoir sands found.

Meanwhile, it seems that some progress is being made with the dispute that has prevented a start to exploration in DRC's part of the Lake Albert basin. In 2006, rights to Blocks I and II, covering DRC's entire part of the lake and its onshore area, were awarded to Tullow with 48.5%, Heritage with 39.5% and state-owned Cohydro with 12.0%. However, the government said the oil minister did not have the authority to award the licences and they still have not been confirmed with a presidential decree.

Tullow has mounted a vigorous defence of its licences and says it is ready to take legal action in DRC or internationally to secure them. Earlier this year, a new oil minister said the licences would be reinstated to Tullow; but one licence had been re-awarded by the earlier minister to a group including a South African firm called Divine Inspiration, which also claims that the award followed proper process.

The indications are that Tullow and Heritage will have their rights confirmed, although they might have to accept additional partners. But until a presidential decree is issued to conclude the dispute, the licences' five-year exploration term, with a work-programme covering seismic surveys and wells, will not start. Consequently, the maturing of prospects in DRC's part of the basin will be lagging several years behind Uganda's part, delaying the drawing-up of the companies' preferred whole-basin development scheme.

Also still to be settled is the demarcation of the lake between the two countries. A joint study is under way, but in June, Uganda was complaining about DRC's construction of a new border-post in a disputed area. Both countries maintain a strong military presence around the lake.

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