Waiting for a sip on the ‘h-oily’ grail: The state of Uganda’s oil sector and the 2017 question

KAMPALA- Public debate on the oil and gas sector was sparked by the October 2011 controversial Parliament debate that resolved that transparency and accountability must be the cornerstone of the oil sector.

Since then, Parliament has passed two laws for the sector and the last one on public finance management is in the works.

The inquiry into bribery allegations made in Parliament against top government officials is yet to be concluded but reliable sources say the report is done with the investigating committee which has neither acquitted the accused ministers nor exonerated them.

“How could we implicate them or acquit them yet our efforts to visit the countries (UAE and Malaysia) where the crime was allegedly done were frustrated?” one of the top technical brains on the committee said.

The report is most likely to suffer a still birth because it has been overtaken by events: Tullow has since farmed down to Total E&P and Cnooc and so far one production licence has been awarded.

The creation of a National Oil Company (Noc) is in final stages and licensing in the upper Graben was halted until the company is formed– it will be the one farming down to any interest companies.

It appears, as one Petroleum Exploration and Production Department official said, pushing for the report will be dragging the sector several steps back from progress so far made.

Evaluation
But where does this progress stand? According to a 2013 KPMG report, Oil and Gas in Africa: Africa’s reserves, potentials and prospects, the discovery of enormous oil reserves in Uganda in 2006 and subsequent discoveries- so far standing at 3.5 billion barrels- have sparked hopes among investors and large oil companies that the country could become a lucrative new player on the global oil stage.

It is now believed that Uganda could be sitting on one of the biggest onshore oil reserves in Sub-Sahara Africa. If events go according to plan, the report notes, Uganda could transform itself into a mid-size oil producer in coming years, with the reality being that it could be one of the top-50 oil producers in the world.

When the government awarded Cnooc a production licence in September, the question among journalists who attended the press conference was why not Tullow, a company that has been here longest and actually brought Cnooc and Total on board.

The official line is that it does not matter who gets the licence first since the three partners have an equal share in all the fields.

But a top executive of one of the partners said, during a meet up in his office, that it would have been a wrong idea for the government to entrust its first production with a company whose main expertise is in exploration. 

“Tullow is a small company and it has no experience in producing oil in an environment like Uganda and it knows,” he said. “There is no way any serious government would give it a production licence to gamble.”

The chief executive’s comments point to a serious issue in the sector– the lack of trust in Tullow’s production competence by the government and the ‘deliberate’ delay in approving their field development plans. 

Tullow submitted its first Field Development Plan (FDP) for the Nzizi Well last year, shortly after CNOOC’ Kingfisher submission, but are yet to receive a production licence.

An FDP is a detailed plan of how an oil company plans to produce the oil and in which capacities.

While addressing Parliament in December 2012, President Museveni expressed anger at an oil company which had submitted what he called “unrealistic and insincere” recoverable oil estimates in its field development plan.

He told the House that the company’s plan was rejected and asked to submit acceptable figures.

Although the President did not name the company, two officials from PEPD intimated that the said company was Tullow.

According to Mr David Onyango, Tullow’s spokesperson, the company has received “useful” comments from PEPD in respect of the FDPs to which they are preparing a response.

“We hope we will be granted a production licence in 2014,” he said.
Presently, Tullow has four FDPs under review by PEPD, with possibilities of submitting one more in 2014.

Total’ general manager Loic Laurandel says his company will submit its first FDP for Exploration Area 1 in the Nwoya belt on December 12 and then a plethora of submissions will follow next year.

Total’ general manager Loic Laurandel says his company will submit its first FDP for Exploration Area 1 in the Nwoya belt on December 12 and then a plethora of submissions will follow next year. 

The company, he says, is not in a “rush to produce and it is on course in terms on time”.

Skeptics say the government is holding back the appending of a Memorandum of Understanding (MoU) with the Tullow and its partners, to fully operationalise oil production.

The MOU defines a framework for production and commercialisation of the 3.5 billion barrels of oil resources.

Earlier this year, international media reports quoted Tullow’s chief executive, Aidan Heavey as saying the MoU with the Ugandan government was closer like never before and within the year, something which has come to pass.

However, Mr Onyango said: “Talks between Tullow and partners CNOOC and Total, with the government on the MoU are still ongoing, but will be signed anytime from now.”

On their part, Mr Laurandel, noted that yet the MoU aligns key principles on the commercialisation of oil, infrastructure like a refinery, a pipeline and roads, are all still on paper, “which calls for no rush.”

“We are majorly in the appraisal process of our area of operation, so we cannot rush for the MoU, but negotiations are ongoing.”

Why the delays?
Mr Izama, however, intimated that, “government is purposely delaying the MoU because of Tullow.”

He, further, revealed that, if Tullow’ FDPs are approved, it will imply that their oil fields are viable, and therefore can be sold off, “may be to one of its partners”. “Tullow has intentions of exiting but government is still uncertain of a period thereafter,” he said, “Therefore it’s in government’ interest if this MoU is delayed as we approach the said oil production date.”

The government has been criticised over delayed production of oil and giving different first oil years, with many critics pointing at Ghana as a perfect example of a success story in early oil production. 

Ghana produced its oil within three and a half years following its initial discovery at the jubilee field.

But according to PEPD, countries have rushed into production without clear understanding of their reservoirs which has caused inefficient production and ultimately increased the costs.

“Fast tracking production may lead to sacrificing a profitable future while settling for a “less profitable” but immediate cash inflow,” PEDP notes. 
However, as KPMG notes in its report, the delay in Uganda’s oil production can be excused because unlike in West Africa, everything about oil in East Africa is new.

The lack of infrastructure also plays a part in Uganda’s delay.

Mr Tim O’Hanlon, Tullow’s vice president for Africa, told Reuters that “[n]o matter where you are in the world, where there’s no infrastructure and no history of the oil business, it will take at least half a dozen years to go from exploration phase to development concepts”.

Experts in the sector say that with a production licence in hand, it will take Cnooc four years to develop the Kingfisher field-which contains an estimated 635 million oil barrels- to ready it for the first oil.

But Mr Laurandel says Kingfisher is the only hope to have oil out by 2017, adding that it is only possible provided there are no hiccups and delays from the government side.

With the production licence in hand, the second step for Cnooc is to carry out a detailed assessment and preparation of the field which conduct will also include and engineering, procurement and construction process and a Front End Engineering Design (FEED).

The processes, among other things, includes the assessment of technical requirements, layout of well pads, production and water injection, central processing facilities, storage and transport facilities’ analyses.

In a smooth uninterrupted environment, the two processes take about four years, hence the possibility of production by 2017.

But the government has to fulfill its part of the bargain especially on infrastructure. “You cannot produce the oil if the infrastructure is poor,” Mr Loic says. 

The government’s main interest is to refine the oil from Kingfisher. PEPD is currently receiving Statements of Qualifications (SOQs) from the appropriately qualified investors.

More than 850,000 tonnes of material is needed to erect the two infrastructures, which government ambitiously states must be up by 2017 –the oil production commencement date.

Mr Izama says there is no need for rush. “Besides a refinery being so expensive, the course of its development is leaving behind eventful stains that will be something to reckon in the near future,” he says.

He argues that going by the country’ experience on such big projects, among others like Bujagali and Karuma dam, a refinery will similarly require time to sort out issues like corruption and the red tape.

The report notes that for all of Africa’s oil resources, refining capacity on the continent remains limited and as a result, countries like Angola and Nigeria export crude oil, only to import refined oil again later at an additional cost.

Challenges
According to the KPMG report, problems in the refining industry on the continent include corruption, poor maintenance, theft, and other operational problems. 

In some countries, conflicts have at times also interrupted the flow of crude into the refineries and forced them to shut down.

“Subsidies have also contributed to low capacity utilisation at refineries. In Nigeria... current subsidy schemes lead producers to sell crude overseas rather than to local refineries and therefore add to increasing volumes of refined product imports, which present an enormous cost to the economy,” the report reads in part.

However, engineers in Cnooc say everything is possible and they will do everything to deliver oil to the government refinery in time.

As Uganda teams up with its regional neighbours to hatch a best possible plan for the oil sector, especially as far as the oil pipeline is concerned speed and urgency is needed if the first oil is to be got by 2017. And yes, it is possible.

Timeline of oil discovery in Uganda

The search and eventual “discovery” of oil did not start with the NRM government. As early as the 1910’s, the colonial government had started digging up the Albertine Graben and documenting the behaviour of the rocks.

As Mr Angelo Izama, a journalist and gas researcher, who is writing a book on Uganda’s oil exploration experience, notes, this year marks 100 years of oil exploration in Uganda.

His research landed him on documents showing that the first application for oil exploration concession was filed in November 1913 by a Mr W. Brittlenank for 898 Sq. mile acreage. The application was accepted and it expired in 1922. 
Why was there a lull, then, that the oil issue was only reignited in the formative years of the NRM regime?

The reasons are many, and this newspaper will be running a longer piece about the history of oil exploration in Uganda.

But international political events of the time such as the Second World War and the discovery of huge deposits in West Africa, particularly in Nigeria forced the colonial government to shelve the Uganda project.

Fast forward to the return of peace in 1986 and President Museveni closes the doors on Shell BP executives who had come asking for concessions.
He instead chose to send a team of young Ugandans on an oil and gas study blitz. 

The outcome was the confirmation of the commercial viability of oil in 2006. 
Since then, a lot has happened in the sector and 2017 has been mentioned as a possible ‘first oil year’.

                      A version of this story appeared in the Daily Monitor of November 5 2013.