Uganda wins concessions from oil companies

Saturday February 11 2012

Uganda has moved from prospecting for oil to expecting drilling any time now. Picture: File

Prospects for bringing Uganda’s oil to the surface within the revised timeframe of 2015/17 have become brighter with the February 3 signing of new Production Sharing Agreements between the government and Irish oil explorer Tullow Oil.

However, the cost of the programme is now the subject of new variables, since under the revised agreements, the proposed export pipeline has been hived off in favour of an in-country refinery.

These developments, which by extension also unlocked Tullow’s $2.9 billion farm-down to partners Total and the China National Oil Offshore Oil Company CNOOC, pave the way for ramp up to oil production that will be preceded by design and implementation of a full field development programme that earlier estimates had suggested would cost in the region of $8-10 billion.

Giving a cautionary timeline of 2015/16 for the first significant oil flows, Tullow Uganda corporate affairs manager Jimmy Kiberu revealed that according to the agreements with government, the company was first expected to submit a field development programme for the Kingfisher field with 12 months. However, the revised cost of the programme would not be known until the full field development plans are complete.

“It is too soon to give figures because the field development plans are not complete. But logically, the first priority now is to develop budgets and complete environmental impact assessments before drilling can start,” Mr Kiberu told The EastAfrican.

Mr Kiberu could also not put a number on how many jobs would be created, although he said it was safe to assume they would be in the thousands as Ugandans became involved across the entire value chain of the new industry.


Coming after more than 18 months of haggling between President Yoweri Museveni and the oil companies, the announcement of the breakthrough in the oil sector lifted the spirits of a country that has been drained by double-digit inflation, high interest rates, severe power shortages and a local currency that has only recently gained traction against the greenback.

“In terms of changing the structure of the economy, that is unlikely to happen until after the oil has started flowing; but in the short term, one can expect economic growth to benefit from the investment flows associated with the development of infrastructure that will support oil production,” commented Jared Osoro, a senior research economist with the East African Development Bank in Kampala.

In the course of an address to parliament last Friday, President Museveni gave glimpses into the protracted nature of the negotiations that had transpired between government representatives and the oil companies. With a candidness that reflected the confidence he had in the renegotiated deals, Museveni also departed from his earlier assertions that details of the Production Sharing Agreements were privileged information, casually throwing numbers on the table.

During the cost recovery phase of production, for instance, oil companies will take 74 per cent of the production while Uganda’s take will rise to 58 per cent after the cost recovery phase. That translates into 152,326 barrels of oil per day at the proposed daily peak production threshold of 200,000 barrels.


At all times, however, Uganda will tax the income on the share of the oil companies by 30 per cent; and take a royalty ranging between 5 per cent and 12.5 per cent of production. Furthermore, the country will benefit from any windfall gains the companies make through a 15 per cent equity stake that it will own through its National Oil Company.

On the oversight side, Uganda will have to agree to proposed exploration budgets by the oil companies before programme execution. The companies will be allowed to recover verified costs capped at a ceiling of 60 per cent of gross production. On renewal of an exploration licence, the prospectors will be obliged to return ownership of part of the licence area to the state.

The other significant concession Uganda wrung from the oil companies was an agreement to develop an oil refinery targeting the domestic and regional market for refined oil products. An export pipeline will now only be considered after more reserves are discovered and an economic case for the pipeline is established.

Museveni revealed that studies by Forster Wheeler, which the government retained to give an independent assessment of options for Uganda’s oil programme, had given a refinery a Net Present Value of $3.2 billion and an Internal Rate of Return of 33 per cent.
In contrast, the same studies assigned an NPV of 0 per cent and IRR of 10 per cent to the pipeline.

Sixty-four wells have been sunk in Uganda, with 56 of them yielding oil. Only 40 per cent of the potential exploration area has been covered, leaving the open the possibility that Uganda’s reserves, now estimated at 2.5 billion barrels, could more than double.

With the wheels in motion once again, Uganda can expect stiff competition during the new licensing round when six new blocks are put on the market after the new oil laws are passed by parliament.

More significant for Uganda, however, is the fact that President Museveni’s brinkmanship, which saw activity in the sector frozen for close to a year, has allowed the country to claw back some concessions in a renegotiated Stabilisation Clause even as the drawn out process brought activity to a near halt and raised Uganda’s country risk.

On the other hand, faced with mounting civil strife and an economy facing both internal and external threats such as the impact of the Eurozone crisis on export earnings, President Museveni needed new income streams and opening up the oil sector offered the easiest route. The government was on the brink after burning a hole in its pocket when it raided foreign reserves to buy fighter jets at $740 million last year, in anticipation that oil money would replenish the reserves.

“There was so much at stake for everybody, so there was an accommodation that led towards a middle of the road solution that satisfies the needs of Uganda and provides enough financial comfort for the companies to make investments,” Tullow Oil’s Mr Kiberu told The EastAfrican.

A prolonged stalemate also risked making Uganda a blacklisted destination in the petroleum industry, which would have made it difficult to attract reputable firms into the nascent oil industry.

What was not clear from the announcements, however, was the status of ongoing litigation in which Tullow is challenging Uganda’s claims to a 30 per cent tax (equivalent to $472 million) on the proceeds from the $2.9 billion sale of its assets to Total and CNOOC.

Reported by Esther Nakkazi and Julius Barigaba