The Uganda government is at loggerheads with oil explorers once again, this time over proposed extraction rates that run counter to the commercial interests of oil companies. 

The government sees a longer production run concentrated in smaller production areas as desirable, since this would ensure the country continues to be an oil producer beyond the current estimate of 25 years.

But oil companies want a peak extraction rate of 200,000 barrels per day to guarantee a quick return on their investment. 

The Uganda government’s intentions, which form part of a new licensing policy, are likely to re-ignite debate on the most economically viable option for oil production in the country. Opinion is currently swinging between exporting crude and developing a processing capacity focused on the regional market.

Uganda discovered commercial hydrocarbon deposits in the Albertine rift basin along the border with the Democratic Republic of Congo in 2006, which the government estimates at two billion barrels, but says there could be more.

Tullow Oil, which has so far invested $800m and is set to embark on Extended Well Testing next month, is looking at producing 20-80,000 barrels per day (bpd) by 2012. It hopes to raise this to 200, 000 bpd by 2015, says Tullow Uganda corporate affairs manager, Jimmy Kiberu.  

Net importer in 30 years

At this rate, estimated reserves so far could support production for 20-30 years, after which Uganda will revert to a net oil importer unless new reserves are discovered.  

The other imperative for a lower production rate is to regulate the amount of money oil production will inject into the economy, which would, in tandem, avoid the Dutch disease and white elephant projects.

In its strategy, the government wants production to initially be at 20,000 to 60,000 bpd, before peaking at 120,000 bpd by 2015, says assistant commissioner incharge of geology at the Petroleum Exploration and Production Department (PEPD), Robert Kasande.  

“If you have a billion barrels of proven reserves and you are producing 100,000 barrels per day, you will produce oil for donkey years,” adds chief technical advisor, oil and gas industry, Reuben Kashambuzi.

At that rate, the country hopes to export the refined products to only the East African region market, which stands at 60,000 barrels per day, and is growing at 5 per cent annually, according to a study on oil consumption in the region by The East African Community (EAC). Uganda consumes 11,000 barrels per day.  

The fear is that with no infrastructure and sufficient expertise in Uganda, so much oil produced in a short period of time may choke the economy, while the reverse would allow it to adjust itself slowly to absorb the large revenues that come with oil production.

At a reserved price of $100 per barrel, when production peaks, over $2 billion will be earned from the oil per day. Estimates of the cost of bringing Uganda’s oil to the market have varied from as low as $2 billion for a programme focused on the domestic market to as high as 48-10 billion for a basin-wide development programme. 

However, consensus is yet to be reached over whether to build a pipeline to export crude, although the oil companies say they will build both a refinery and an export pipeline.

Under its proposed longer production profile the government proposes that a $2 billion refinery should be built near the oil fields, at a distance that will probably not require heating the oil before it gets there. The government does not support the pipeline option. 

Kashambuzi says the pipeline will deprive Ugandans of value addition, besides the costs and security issues involved. 

“There is a problem of keeping the pipeline full, the millions worth of crude sitting there. Who owns that? The other day, the railway line was uprooted in Kenya; who will ensure the pipeline’s security?” asked Mr Kashambuzi. 

“The refinery is only for domestic need and regional demand. We are not opposed to it,” says Mr Kiberu.  

According to Mr Kasande, the government, either way (low or high production), would have to borrow money to put up the infrastructure. Only then can oil production start.  

Uganda’s decision is based on a cost analysis study that established that laying a 1,325km pipeline to transport the crude would be more costly, at $2 billion, compared with $1.6 billion for building a phased 120,000 barrels per day refinery.  

The Foster Wheeler study also shows that a mini refinery with a capacity of 15,000 barrels per day, which is Uganda’s daily consumption rate, would cost $ 1 billion.

But transporting the crude oil, according to the report, using the northern route to Mombasa through Lake Albert would cost $1.7 billion, while the southern route to Tanzania would cost $2.3 billion. 

The multiplicity of 15 oilfields spread over 160km, as well as a home and regional refinery, present an opportunity to develop the transport sector, both in Uganda and regionally. 

“It is like feeding a starved person. You do not start with a sumptuous meal. They are given small doses until their bodies adjust, otherwise the person may die,” said Mr Kashambuzi.

According to research by Tullow Oil, there are 1 billion barrels proven reserves so far in the Albert basin, with a potential of a further 1.5 billion barrels.

For prolongation of these reserves, the government has imposed a moratorium on licensing oil companies indefinitely until the already discovered areas are exhaustively explored.  

“For areas which have reverted to the government, we shall go in there and demarcate smaller blocks. Kaiso-Tonya was just about 200 sq km with three fields. It showed us that you do not have to have a large block to have a field,” said Mr Kashambuzi.  

State participation

Oil producing countries like Norway, the world’s seventh largest producer, do not have large fields. For instance, their exploration areas can be as small as 300sq kms and the production areas as small as 20sq kms. 

Uganda has opted for state participation in the oil industry. One of the requirements to this is that it monitors the oil fields at all times. 

At the time, they anticipated that the oil sector would grow slowly. But when it struck oil, many activities sprung up and now happen concurrently. For instance, seismic surveys in many exploration areas, drilling and road construction are happening at the same time. 

Typically, exploration areas have also doubled since 2001, from five to 10 in 2009. But the monitors trained at the Petroleum Exploration Production Department (PEPD) in Entebbe cannot cope with this hyper activity yet still keep watch everywhere, as required. 

So the government has decided to keep the fields fewer by halting licensing of new oil firms to get revenues early, but also to easily monitor compliance. 

“There are not many areas in which any wrongdoing will escape scrutiny, as would be the case if the monitors were stretched over larger areas of operation,” said Mr Kashambuzi. 

The Albertine Graben is also home to the most diverse and sensitive biodiversity in the world. So adherence to high environmental standards is a must.