The Resource Is Too Little And Costly! Expert Warns Ugandans On Oil & Gas Over Excitement

The Resource Is Too Little And Costly! Expert Warns Ugandans On Oil & Gas Over Excitement
Denis Tukahikaho

Summary:

  • The journey of Uganda’s oil and gas sector from exploration to production, including challenges and future prospects, is outlined alongside insights into the economic implications and potential risks.

Although indications of the availability of oil and gas in Uganda can be traced to the 1920s, exploration for the resource was not taken very seriously until the early 1980s. The colonial government did not believe that oil was available in sufficient quantities to justify its exploitation. Post-colonial governments took a similar view until a survey ‘indicated a possibility of the existence of hydrocarbons in the Albertine area in the north-western part of the country. From the 1990s onwards, more serious efforts were devoted to exploration in the area and however, no petroleum exploration or production.

The daydream for Uganda, one of the poorest countries on the planet with $1,163 GDP per capita (World Bank report 2024), landlocked in the chaotic African Great Lakes region which is a rural country with an extremely young population (75% under 30), suffers from an appalling lack of access to high quality education, lack of quality health care and even electricity, particularly in the countryside (less than 36%) and the tax burden which stands at 40% the fourth among highest in Africa. Albertine region has approximately 6.5 billion barrels of oil reserves, with at least 1.4 billion estimated to be economically recoverable at a peak production rate of about 230,000 barrels per day and it is estimated that the current discovered resources can last 20-30 years. It should also be noted that 88% of the wells were successfully drilled during exploration and found oil, the dry wells stood at 12%. This is one of the highest global success rates, given that on average, only 25% of wells the world over yield oil at the exploration phase. The gas reserves are estimated at 672 billion cubic feet of gas, with 499 billion barrels of non-associated gas and 173 of associated gas.

The discovery of oil and gas deposits in 2006 raised high hopes for Ugandans after several delays, the country is now aiming to commercialize oil and gas by 2025 and around 1.4 billion barrels from two oil fields: Tilenga, the larger one, operated by France’s Total Energies, and Kingfisher, entrusted to China’s Cnooc. This discovery marked a significant milestone for the country, as it presented an opportunity to tap into substantial hydrocarbon resources, it should be noted Uganda discovered commercial oil reserves nearly 20 years ago but production has been delayed by a lack of infrastructure. The East African Crude Pipeline (EACOP) project which is the world’s longest heated crude oil pipeline globally 1,443 km (296 km in Uganda and 1147km in Tanzania) with an insulated and buried 24” inch electrically heated pipeline and is projected to cost US$5 billion of which $2 billion is to be raised by the owners of the pipeline as equity investment and the remaining $3 billion to be borrowed from external sources. The planned Mpigi terminal is expected to have a holding capacity of 320 million litres of fuel and it is said to carry a $30 million price. In May 2023, Sumitomo Mitsui Financial Group said it was not financing the pipeline, as Standard Chartered joined 24 banks that had distanced themselves from the project. As of June 2023, only two banks namely the South African Standard Bank, through its subsidiary Stanbic Uganda, the Industrial and Commercial Bank of China, were financial advisors to the project. In August 2023, it was reported that US$3 billion in loans was expected from Export-Import Bank of China, Islamic Development Bank and while the pipeline shareholders would provide about US$2 billion. According to a report by the Climate Accountability Institute, the East African Crude Pipeline (EACOP) is expected to emit 379 million tonnes of CO2 during 25 years. However, the construction and operation of the pipeline only account for 1.8% of the estimate and with 87.22% of estimated emissions coming from eventual product use of the oil and not from the pipeline itself. The estimated total emission over the 25 years exceeds France’s national emissions in 2020 at 277 million tonnes and is slightly less than Australia’s at 392 million tonnes. It carries a significant global impact by contributing to global warming. Uganda will be the highest global warming suspect.

The Uganda’s Refinery Project includes the development of a 60,000 barrels of oil per day (bopd) refinery located in Kabaale -Hoima District, a 211-kilometer multi-products pipeline from Kabaale to a distribution hub in Namwambula -Mpigi District, a refined product storage terminal in Namwabula – Mpigi, and a raw water pipeline from the Lake Albert to the refinery in Kabaale. The Refinery project will be a private sector-led project, with Government’s shareholding by the Uganda National Oil Company, through its subsidiary Uganda Refinery Holding Company. The East African Community partner states (Kenya and Rwanda) and Total Energies Exploration and Production Uganda TEPU also expressed interest in holding shares. The project is funded through a debt-to-equity ratio of about 70:30. The Lead Investor is responsible for raising the debt for the project. The Uganda Refinery project is estimated to cost around US$ 4 billion but even if the government borrows to cover its upfront contribution to costs, it will need to divert around $330 million in present value terms from the national budget for loan repayments in the 2030s. Additionally, the huge costs involved in oil and gas exploration, production, infrastructure development, development of the oil refinery, the international airport, the East African oil and gas pipeline are long-term in nature and the payback period may go beyond the expected 20-25 years of oil and gas production. The East African Crude Pipeline (EACOP), project is to cost $ 5.0Bn, Uganda will pay a transit fee of $12.5 per barrel to Tanzania, the cost of Exploration is on global average of USD 5 per barrel and Investment into infrastructure development i.e. International Airport, Roads, Hotels is in the range of USD 7.5-10Bn billion, high cost of Land acquisition and compensation was due to corruption by government officials.

As already indicated, Oil companies submit project development plans with the budget before the commencement of work and while this seems all right, it presents significant risks to the government because the approved budget in the development plan is considered a recoverable cost. By the end of 2018, the Petroleum Authority of Uganda (PAU) had approved up to $483 million, equivalent to UGX1.7 trillion as recoverable costs by the five oil companies operating in Uganda. The companies were Tullow, Total, China National Offshore Oil Company (CNOOC), Armor Energy and Oranto. The oil recoverable costs /expenses increased to $483 million in 2018 from $283 million in 2017. This cost is certainly much more since there are pending cost audit reports that were questioned by Office of the Auditor General. The fact that the Petroleum Authority of Uganda (PAU) approves oil companies’ development plans without any form of oversight by parliament and a thorough audit of the planned recoverable expenses is a recipe for loss of revenue to Uganda. Unless oil development plans have in-built flexibility regarding the detection of fraud at any stage of implementation, the companies have been arm-twisting the government and limit its ability to fight inflation of expenses, which might erode expected revenues. For example, the Office of the Auditor General rejected up to UGX290 billion ($82,294,117) in cost claims in 2018 as ineligible expenses and this would easily cost the government lots of money in court awards if the oil companies chose to challenge the rejection in the courts. Also, lack of parliament’s oversight on recoverable costs compounds the risk and the Office of the Auditor General audits on the recoverable costs and submission of its report to parliament after development plans have been approved and costs have been incurred by oil companies is rather than post-mortem.

In conclusion, the oil and gas sector remains less profitable to Uganda’s economy and the Ugandan people. Ugandans can rest assured that current estimates on Government revenue from the Upstream alone remain somehow favorable but they should not get overexcited. It is important to note that the basis for investment was the need for the International Oil Companies (IOCs) to secure a 15-20 % return at an international oil price of US$ 50 per barrel. The conclusion of key oil agreements, the companies’ investment, so far, and commitment towards further investment, are a testament to a risk Uganda’s oil and gas sector. Therefore, Ugandans must be prepared for the oil and gas curse, also known as the paradox of plenty or the poverty paradox as evidenced by political and economic dysfunction known as the “oil curse” which is a complex, structural phenomenon, caused largely by poor management or investment of oil revenues by the governments of oil-producing countries. Because this syndrome is taking an increasing toll on oil operations in Uganda, experts urge that the capital cost of oil and gas projects in Uganda has increased to 300 percent. These higher costs are, in the end, largely passed on to the host country governments and citizens.

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