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Uganda launches long-awaited bid round

Uganda is finally launching its bid round, ending an eight-year freeze on the licensing of new acreage in its energy sector

Uganda is finally launching its bid round, ending an eight-year freeze on the licensing of new acreage in its energy sector. 

Ahead of that, it reached an agreement with the UK producer Tullow, which said on 22 June that it had agreed to pay $250m to settle its capital gains tax liability related to the sale of a share of its of local assets in 2012. Tullow had specific exemption from such taxes on sales in block 2, where the transaction was, whereas in the adjacent blocks 1, 3, the PSAs removed that protection.

The sum comprises $142m that Tullow paid in 2012 and $108m to be paid in three equal instalments of $36m between 2016 and 2017. “The settlement of this long-running dispute is good news for Tullow and Uganda,” Tullow’s chief executive Aidan Heavey said. The Uganda Revenue Authority’s initial assessment of capital gains tax payable following the farm-downs to France’s Total and China’s CNOOC was $473m, which Tullow disputed.

The round has been a long time coming and there are still important commercial issues to be resolved between the government and the exploration companies. These include the timing of the construction of the refinery; its financing; the route of the export pipeline and how much to charge new entrants for shipping their crude.

Uganda is offering six blocks, which cover about 3,000 km² in the Albertine Graben area, in and around Lake Albert where oil has already been found. The six blocks are: Ngassa in the Hoima District (and mainly in the lake) where oil and gas shows were encountered during drilling in 2007 and 2009; Taitai and Karuka in the Buliisa District, close to the Kaiso-Tonyo oil field; Ngaji in the Kanungu and Rukungiri District which failed to encounter any hydrocarbons during drilling in 2009; the Mvule block in the Moyo and Yumbe Districts together with the Turaco and Kanywantaba blocks in the Ntoroko Districts. 

In 2004, the Turaco-3 well found heavily-contaminated CO2 well owing to volcanic activity in the area. This was a big let-down for Heritage Oil & Gas and Energy Africa and the government. Turaco was the first target to be drilled in the whole of the Albertine Graben area since 1938.

The government’s energy and minerals department aims to evaluate successful applicants in July and award icenses in December 2015, according to the energy ministry’s head of the petroleum, exploration and production department, Ernest Rubondo. 

The Albertine Graben has long been thought to have the best oil potential in the country but the Graben itself, an area of about 500km long and up to 400 km wide, has not yet been fully explored. This, and the existence of other, even less explored basins, has seen Uganda’s estimates of petroleum resources rise from 3.5bn barrels of oil in place in 2012 to 6.5bn barrels in 2014. Of these, 1.5bn barrels are so far estimated to be recoverable, Rubondo told delegates at the launch of the round in London in May.

According to Rubondo, the country has had an unprecedented drilling success rate with more than 88% of the drilled wells finding oil and gas – one of the highest in the world.

The round is expected to be competitive despite current low oil prices although its timing could be questioned. There are still so many unanswered questions relating to infrastructure development and the fact that the development plans for existing fields are still not finalized apart from $2bn Kingfisher oil field, for which the production licence was awarded to CNOOC in 2012. 

Tullow and Total are still waiting for the approval for production licenses of a least nine oil fields in blocks 1 and 2. But first production from the 635m barrel Kingfisher field is expected to begin in late 2018, a year later than expected, owing mostly to delays to related infrastructure. Crude from the field will be transported along a 50-km planned pipeline to a 30,000 b/d proposed refinery. 

The three companies expect to invest over $14bn over the next five years with the bulk of the expenditure in field and infrastructure development.

The government and the companies, Tullow, Total and CNOOC, who each hold one third shares in the existing licenses, in February 2014 signed a memorandum of understanding establishing a framework for oil production, including providing fuel for electricity generation, supplying crude to a planned refinery and exporting crude by pipeline. 

Japan’s Toyota Tsusho is expected to complete a feasibility study in early July to determine the best option for transporting the oil to the coast by pipeline and the most cost-effective route. This, in theory, could see Kenya and Uganda finally making a decision on the route then.

Two options have been proposed: one running from Lake Albert’s oilfields to northern Kenya around the Lokichar Basin and extending to Kenya’s Lamu port; and a second following an existing products pipeline route from Eldoret in Kenysa further south to Mombasa. 

In February, Russia’s RT Global Resources, a subsidiary of defence and technology company Rostec, won a tender to build the oil refinery, a project worth $3.3bn, according to the Uganda energy ministry.

The government’s plan for a 120,000 b/d refinery has been a running sore for the operators as it has delayed first oil from the oilfields in Lake Albert. Tullow, Total and CNOOC spent years arguing in favour of an export pipeline and in February 2014 both sides eventually compromised on a smaller project in an agreement that also addressed the question of crude oil exports. 

The refinery is expected to start production at 30,000 b/d in 2018, 12 years after oil was first discovered in the east African nation. It is expected to reach a capacity of 60,000 b/d by 2020 at the earliest. The government will find 40% of its cost and 60% will come from an investor who is yet to be selected. The plant will be in the west of the country, not far from Lake Albert and produce gasoline, kerosene, diesel, aviation fuel, LPG and heavy oil products.

The Ugandan government believes the project will cause a major upheaval in regional petroleum supply logistics. But the current low oil prices have led many to question whether Uganda’s costly refinery will be commercially viable and whether a price of around $50/b would even support costs of production. 

Uganda’s oil has also high wax content, making it costly to process and transport. While the cost of finding oil and gas in Uganda is among the lowest in the world, at less than $1/b compared with a range elsewhere between $5 and 25/b, the cost of building the infrastructure and the distances from the discoveries to the ocean wipes out some of that advantage. The export pipeline alone is estimated to cost $4.5bn.

For the three oil companies, the key point of contention is how to prioritize commercialization of already confirmed discoveries. 

“If the companies cannot agree with the government on production, they cannot guarantee crude to the refinery,” according to Angelo Izama, an oil analyst with Kampala-based think-thank Fanaka Kwawote.

Izama says that Rostec has virtually suspended negotiations until the source of crude is clear; decisions about the pipeline have yet to be made. He said the delay is creating the kind of stalemate that will have serious implications for the near future and for companies who are planning to join in  Uganda’s new bid round. 

Uganda imposed a moratorium on new oil licensing in 2007 – shortly before companies confirmed commercial oil reserves – to allow the country to devise a framework that would ensure that developing new reserves benefited the country. After some delay, law makers have passed two key oil bills, and are now completing the last bill to regulate the sector. 

A sovereign wealth fund to manage potential oil revenues will be set up as Uganda hopes to follow the path of ‘Norway not Nigeria.’ The government is keen to avoid the so-called resource curse that has plagued other African countries like Nigeria where much of the benefits of oil and gas revenues have been squandered in large-scale corruption. But whether the Norwegian model is an appropriate is at best a moot point. That aims among other things to manage production for the very long term so that the payback period stretches decades into the future; and also to tax it highly. This approach deters investors – not short of alternative regions in which to risk their money – on two major counts.

President Yoweri Museveni’s very tight grip on the oil sector is unparalleled in east Africa. He personally negotiated changes to the initial production-sharing agreements and he is reported locally to have been ignoring lawmakers’ calls for greater scrutiny of contracts. 

Calls for greater transparency and social protection measures have fallen on deaf ears. Museveni, now 70, has been in power for three decades and shows no signs of easing his autocratic grip on the sector. He appears likely to run for another term in 2016. 

His determination to “add value locally” – he uses the analogy of exporting coffee beans -- has set the country’s petroleum sector back years, costing the country valuable oil revenues. Uganda’s 40m people earn an average $510, according to the World Bank. 

Although there is still a lot of work to be done, a competitive, open and transparent bid round can nevertheless galvanise interest in the Ugandan oil sector, bolster chronic-low investor confidence and add a positive chapter to those that have preceded it in the country’s quest to join the league of African oil producers.

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