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Discoveries raise upside for Uganda's oil

Two discoveries made in June seem set to give Uganda’s oil reserves another lift, while Tullow, Total and CNOOC hammer out their Lake Albert development plans

IN TERMS of drilling success rates, Uganda’s Lake Albert oil province is one of the most impressive worldwide. Of the 41 exploration and appraisal wells drilled so far in the northern sector of the basin, only one found no hydrocarbons at all. A conservatively estimated 1 billion barrels of reserves has already been established, but many expect this figure to be doubled, or even tripled, over the coming few years. Production of well over 200,000 barrels a day (b/d) is expected.

As if to emphasise the potential, the first two wells drilled by Tullow Oil since it resumed exploration in April – work had stopped during a tax dispute – have made substantial discoveries. The two wells in Block 1, surrounding the northern tip of Lake Albert, have both proved new reservoirs adjacent to large fields for which development plans are already in preparation.

The find made with the Jobi East-1 well appears pearticularly promising. The well was drilled 4.4 km east of the discovery well for the large Jobi-Rii field – originally known as Buffalo-Giraffe and found at the turn of 2008-09. Jobi East-1, drilled to a total depth of just 563 metres, hit a net 15 metres of oil zones and 5 metres of gas zones, in high-quality reservoirs.

Tullow said the well will be tested later. The firm’s immediate priority is to drill up to four appraisal wells into the Jobi East structure over the second half of this year, to assess the extent of “this important new oil accumulation”.

Mpyo-3, drilled 1.6 km southeast of the Mpyo-1 discovery well, found 21 metres of oil sands at a depth of only 340 metres, with the well drilled-out to 513 metres. Logging showed highly viscous crude, similar to that of the discovery well. The well was suspended for future testing.

Operatorships awaited

Tullow, now with five rigs in Uganda, has set out on an extensive programme of exploration and appraisal drilling, seismic acquisition and well testing, which will run through the second half of the year and is aimed at quantifying the area’s potential to allow a basin-wide development plan to be drawn up. The company is acting as interim operator for Blocks 1, 2 and 3A until September, when the authorities will name an operator for each block.

Block 1, where the main production facility is likely to be sited, is the top prize – but Tullow, which has been exploring the basin since 2004 and has accounted for most of the discoveries, might not win it. Total, which is in the course of buying a 33.3% share in each of the three licences for $1.467 billion, says it expects to be operator of Block 1, while China’s state-owned CNOOC, buying three 33.3% shares for the same sum, indicated it will be offered the operatorship of Block 3A. If so, Tullow will be left with the operatorship of Block 2, together with its remaining 33.3% shares in the three licences.

How the separate operatorship arrangement will work for a basin-wide development remains to be seen. Also still unclear is the destination for the crude. The Ugandan government, mindful of the unreliability and high cost of the landlocked country’s fuel supplies, wants a refinery built near the oilfields, while the companies have been arguing behind-the-scenes for a pipeline to allow crude to be exported from the Kenyan coast, probably from a terminal at Mombasa.

The ability to sell crude on the world market firms up the project in the eyes of potential financers because it captures a hard-currency revenue stream. A refinery investment, with refined products supplied within Uganda and exported to neighbouring countries, involves many more uncertainties.

But the government seems determined to have a refinery. In his state-of-the-nation address in June, President Yoweri Museveni said the facility would be built through a public-private partnership and would be fast-tracked for start-up in three years. Recent anti-government protests, prompted by high fuel and food prices, doubtless weighed on his decision – although Ugandans have also been warned not to expect a bonanza of cheap energy. Reuben Kashambuzi, a senior official at the energy ministry, says home-refined oil products will only be less costly to the extent that transport costs have been removed.

Foster Wheeler, which carried out a feasibility study for the refinery last year, identified a market for 60,000 b/d of refined products in Uganda and its southern neighbours Rwanda and Burundi, and the eastern part of Democratic Republic of Congo (DRC). Including the western part of Kenya and northern Tanzania would raise the prospective market to 120,000 b/d. With market growth, the government envisages expanding the refinery in stages to 150,000 b/d or even 200,000 b/d. The location will be Kabale, near Hoima – close to the oilfields.

Because Uganda’s crudes are acidic, the refinery will be a costly facility – and costs will be raised further by the need to transport almost everything required over often-poor roads from Mombasa, more than 1,300 km away. Officials have given a cost estimate of $2 billion, although new refineries elsewhere in Africa – such as Angola’s planned facility at Lobito, also designed for acidic crudes – are projected to cost at least three times as much. A crude export pipeline is also estimated to cost $2 billion, with construction and operating costs raised because heating facilities will be needed to keep the waxy crude flowing.

Products pipelines

Pipelines to distribute the refined products from Hoima are already being planned. There will be a 230 km link to the capital, Kampala, as a priority. Meanwhile, the East African Community – grouping Kenya, Uganda, Tanzania, Rwanda and Burundi – said in May that it will commission a study into a pipeline running from Kampala to Kigali, Rwanda, and on to Bujumbura, Burundi.

Also on the wish-list is the long-envisaged extension of Kenya’s state-owned products pipeline from Mombasa to Eldoret, in western Kenya, taking it on to Kampala. The 320 km extension would allow products from the Mombasa refinery – owned 50:50 by India’s Essar and the Kenyan state – to flow into the line to Rwanda and Burundi, while products could also be imported through Mombasa to create supply competition for the landlocked market. If advantageous, the flow could be reversed to allow products from the Hoima refinery to reach the coast at Mombasa.

Tullow says its target for achieving “significant” oil production from the area is 2015. However, low-level output will start in the second half of this year, as a result of extended production-tests on several wells. The crude will be sold to local industrial users.

The first larger flow is likely to come from the Kasamene field in Block 2, where four wells have been drilled. A development plan, due to be submitted to the authorities this summer, envisages an early production facility with a capacity of 10,000 b/d – although, with an oil column of 100 metres and a large aerial extent, the field will eventually flow much more than this. Development plans for the Mputa and Waraga fields in Block 2 – the country’s first two discoveries – have already been submitted.

Also with the authorities is a development plan for the Nzizi field in Block 2 – due to be the country’s first gasfield. Nzizi’s gas will be delivered to an electricity plant to be built near Lake Albert. Start-up is targeted for next year, although details of the plan have not yet been settled.

Electricity shortages, along with the high cost of imported fuels, have been identified as serious impediments to Uganda’s economic-development prospects. According to the government’s oil and gas policy document, drawn up in 2008 in anticipation of oil production, the country is 93% dependent on biomass for its overall energy supply, with imported oil products covering 6% and hydro-electricity covering 1%. Oil products account for 15% of the country’s total import bill.

Extending the search

Exploration has yet to extend far offshore into Lake Albert, where the structures appear to be large. Tullow has drilled two prospects with wells deviated out from shore locations, making substantial discoveries with both. The Kingfisher field in Block 3A has been proved with three wells, all finding between 37-40 metres of oil zones, and holds reserves estimated at 200 million barrels.

About 40 km northeast of Kingfisher, in Block 2, there is the Ngassa field, which has seen two wells. Tullow says the Ngassa structure could extend to an area of 150 square km and has “the potential to be the largest oilfield in the basin”.

An engineering study into the facilities needed to extend the search deeper offshore has been carried out and is being considered by the three operators. One finding is that a more powerful drilling rig will be needed than for the land wells. Reservoir depths are much greater offshore – 2,000 metres at Kingfisher – than onshore, where most targets are shallow, in some areas only 400 metres below the surface.

North of Block 1 is Block 5, where the UK’s Tower Resources is operator. The company drilled two unsuccessful wells, Iti-1 and Avivi-1, in 2009 and 2010, but remains optimistic for the large, and largely unexplored, area. Another 2-D seismic survey is due to be shot this summer and a location will be selected for the third commitment well. Tower is looking for a new farm-in partner after Australia’s Global Petroleum, which helped to finance the first two wells, said it did not want to contribute further.

Meanwhile, the prospects for including any discoveries made in the DRC’s part of the basin in the development plan for Uganda’s fields – the two countries’ border runs through Lake Albert – have now evaporated. Tullow, which in 2006 had been awarded the operatorship of Blocks I and II, covering the DRC’s sector of the lake, has given up its fight to retain the areas.

The government had revoked the licences and re-awarded them to two unknown companies registered in the British Virgin Islands. Legal action followed, but Tullow says, in view of the difficulty of enforcing any award against the government in the event of success, it has ended its claim and withdrawn from the country.

Another problem is that the border-line through the lake is contested and both countries maintain a strong military presence in the area, so the lake’s central sector seems unlikely to see any exploration for the foreseeable future.

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