The recent signing of new oil agreements between Uganda and Tullow has paved the way for the farm-down to partners Total and Chinese company CNOOC, but unresolved issues of infrastructure, oil laws, environment and delays in approval of work permits for the oil firms’ expatriates are fuelling uncertainty, and could potentially drive investors away from Uganda.

In the event that Kenya or Tanzania made significant oil discoveries in the short term, the two countries would be more attractive, considering that they are on the sea and have ports.

“A threat is developing that a significant oil find in either Tanzania or Kenya could result in loss of interest in Uganda. Tanzania and Kenya are currently witnessing a surge in exploration activity. The absence of a definitive infrastructural plan for processing or exporting Ugandan oil exacerbates the threat,” reads a confidential documents from the industry, which The EastAfrican has obtained.

It states that, due to this threat and the 18-month haggling between Uganda and Tullow over clauses in the new agreements that were signed just over two weeks ago, production timelines are going to be pushed back, with the first significant oil flows expected around 2017, and not the “unrealistic” dates of 2013 and 2015 that were earlier envisaged.

On February 3, the parties signed two production-sharing agreements for Exploration Area 1 and Kanywataba Area, as well as a production licence for Kingfisher Production Area.

Apparently, there are also approval delays on environmental impact assessments, permits and budgets, resulting in long standby times for rigs that have been hired from contractors, and this implies costs running into millions of dollars.

“When we don’t get approvals in time, this impacts on our timelines,” a source said, adding that Tullow’s estimates so far are $7 million in costs for hiring rigs.

Hence, Kingfisher, which is ready for production, cannot go onstream because of lack of necessary infrastructure, legislation to guide the midstream and downstream operations and transparency issues.

According to the 2008 National Oil and Gas Policy, the government had planned to start production at 4,000 barrels of oil per day under an early production scheme to produce kerosene and diesel for direct sale on the local market and heavy fuel for electricity generation, but that proposal was scrapped in 2009 after donors objected to putting infrastructure in a protected area.

In fact, industry sources reveal that the early production scheme amounts have been scaled back from 4,000, to a largely symbolic 2,000 barrels per day in the first year of production — 2017 — should that happen at all.

In the intervening period, a modular capacity refinery of 20,000 bpd will have to be built, a process that takes a minimum of three years. Tullow’s plan is to have a refinery that can be expanded to peak at 120,000 bpd, which would require a further three years, a job that requires up to $10 billion. 

Long-term project

“There is expectation that production will start soon. No. This is a very long-term project we need to build the infrastructure. Uganda’s oil project is a very big logistics project. We are still thinking of how to move machines through two countries, two rift valleys,” says Tullow’s commercial advisor, Adrian Bukenya.

Landlocked Uganda has no easy access to the sea; the product will have to be transported to the nearest seaports of either Mombasa in Kenya or Tanga in Tanzania, a process that will require building pipelines and providing heating systems to maintain the oil flow as Uganda’s crude is waxy in nature.

This too, requires huge investment and President Yoweri Museveni has said Uganda will only build pipelines after more oil discoveries are made — and “if the economics is right.”

So, between now and then, can Uganda’s oil become unattractive to the investors?

So far, there are 80 other companies lining up for the licences, including two majors in the industry, Shell and ExxonMobil.

But parliament in October 2011 put a freeze on the sector, demanding that no new deals be signed between the government and the oil companies, over lack of transparency and allegations of bribery.

In December, companies that are contracted to offer support services to the exploration firms in the Albertine Graben petitioned the Energy Ministry, citing loss of business due to a slowdown in oil activities.

“It is important to note that some neighbouring countries are actively involved in petroleum exploration and should major discoveries be found there in the intervening period, a wholesale relocation by these companies may result,” reads the petition.

Uganda discovered 2.5 billion barrels of oil in 2006 but only 1 billion barrels is recoverable. This, however, represents only 40 per cent of all exploration areas, and the remaining could potentially yield more.

This has energised Kenya, Tanzania and Ethiopia to intensify their own search for oil and gas due to their having a geophysical structure similar to Uganda’s Albertine Rift, although South Sudan’s Mesozoic systems have substantial oil and gas reserves.

“Since the country has more unexplored areas with potential for petroleum discovery, it may be difficult in future to attract serious international oil companies to apply for licences,” the contractors’ petition warns.

Three Bills to regulate the sector have just been tabled before parliament but oil firms remain guarded over how these laws will turn out, arguing that initially in 2010, Uganda favoured short-licence durations of seven years — against the industry average of 15 — which do not allow for efficient execution of the contracts.

In effect, the government has not moved fast enough in enacting laws and creating institutions to regulate the sector, beyond the 2008 oil and gas policy.  The industry’s concern is that laws and such institutions are “critical indicators towards operation.”

Reuben Kashambuzi, the Uganda government’s chief technical advisor on oil and gas, has said that as the country looks at another five years before oil begins to flow, in addition to losing investors and downstream jobs and services around the sector, there is also the bigger risk of losing the regional market, in case of discoveries in Kenya and Tanzania. 

Reported by Halima Abdallah and Julius Barigaba