The Uganda government and prospecting firm Tullow begin key talks this week aimed at resolving a number of sticking points that have held up the transition of the country’s oil programme to commercial production.

According to information from well-placed sources within Tullow’s Ugandan operation, the meeting, scheduled for this Tuesday, July 3, will try to harmonise positions between the government and Tullow over the configuration and scheduling of the commercial oil production.
Commercial production was supposed to have commenced as early as 2009 but this has slipped towards 2017, the result of a dispute over capital gains tax that held up Tullow’s farm-down of its interests to partners Total and CNOOC for more than a year.

The deadlock was finally broken when new production sharing arrangements were agreed last February, partially unlocking a key obstacle even as Uganda and the oil companies remained poles apart over construction of an oil pipeline.

“We shall be seeking to discuss the production of oil from Uganda, assessing what we have discovered from the entire basin and how commercial production of all this can be undertaken in one big push as opposed to doing it piecemeal in a staggered fashion as had earlier been anticipated,” the sources added.

That appears to be a reference to President Yoweri Museveni’s desire for the immediate development of an oil refinery targeting the domestic and regional market for refined oil products, while an export pipeline would only come into play after more reserves are discovered and an economic case for the pipeline is established.

Museveni’s position is informed by studies done by consulting firm Forster Wheeler that gave the refinery a “net present value” (NPV) of $3.2 billion and an “internal rate of return” (IRR) of 33 per cent.

In contrast, the same studies assigned an NPV of 0 per cent and an IRR of 10 per cent to the pipeline.

But armed with new figures that put confirmed reserves at 1.1 billion barrels and estimates of another 1.5 billion in undiscovered resources, Tullow and its partners will be gunning for approval of a full field development plan that will have both a pipeline and a refinery running concurrently.

According to oil industry standards, recoverable reserves worth 250 million barrels are considered the minimum requirement for construction of a pipeline, a benchmark Ugandan has already exceeded.

Tullow insiders believe that for potential investors to feel that the Ugandan programme is sufficiently “de-risked,” the government would have to give assurances on a range of issues from mundane matters of compensation and stakeholder engagement to location of key infrastructure and scale of production.

“A lot of these questions have not been fully discussed and they form part of basic information that that will be required when we seek public financing,” said a Tullow source, who alluded to perceived risk about the proposed location of the refinery in light of the current unrest in the Democratic Republic of Congo as well as the reported presence of anti-Ugandan rebels in that country.

Significantly, this week’s meeting, which follows closed talks between President Museveni and Tullow founder and chief executive Aidan Heavey on June 8, will also involve a broader range of stakeholders including the Ministry of Finance.

New perception

The ministry’s participation is being seen as important as it suggests that key decision-making about Uganda’s oil programme is moving from the geologists who discovered the resource, to the number crunchers who will play a critical role when the petrodollars begin to flow.

Tullow, which feels that competition for capital is intensifying as East Africa becomes the new oil and gas frontier, thinks the involvement of Treasury officials will help the government look at the issues holding up the programme from a new perspective, including differences over whether to export crude or not.

“There is very little money to play around with and a more compelling case needs to be built to attract investors to back Uganda’s bid for commercial oil production. We hope there will be a proper understanding of the changed environment and what we need to do as partners to get the programme going as early as possible,” added the source.

It is estimated that bringing Uganda’s oilfields to full production will require investments in the region of $10 billion.

Tullow Oil announced the discovery of oil reserves in northwestern Kenya in March while about the same time, offshore prospectors in Mozambique found massive reserves of natural gas.

Although officials at the Ministry of Energy said they would not be in position to comment about these developments before we went to press, it is understood that Tullow will also be seeking clarity over its participation in the new licensing round for new basins as well as further exploration of the blocks it already holds.

“The June 8 meeting between Mr Heavey and President Museveni sought to establish a common understanding of the key issues and challenges as we transition to the next phase of development of the Uganda programme,” said a Tullow manager.

For both parties, the talks come at a propitious time. Uganda, facing waning donor support for the national budget and economic uncertainties occasioned by the persisting euro zone crisis, needs the inward flows that will be triggered by the ramp up to commercial oil production.

On the other hand, with more than $4 billion locked up in Uganda, Tullow needs to put the crude on the market at the earliest opportunity to begin recouping its investment.

Hints that Uganda oil production timeline had slipped beyond the revised estimates of 2012 came mid-April when Loic Laurandel, Total E&P’s general manager in Uganda, told a parliamentary ad hoc committee on oil that Uganda would have to wait for a minimum of four and a half years. “The first oil from these blocks is expected in 2017,” he said.