21 November 2012

East African Oil - Hard Going

  As the oil bill gets closer to being passed into law, Civil society organizations have joined members of parliament who are against the ... ( Resource: Civil Society to Demonstrate Over Oil Bill in Uganda )

Regulatory uncertainty around the buying, selling and development of oil assets is impacting independent and small scale oil companies in East Africa.

Independent and small scale oil companies like to be quick on their feet. But in some of Africa's new terrain, regulatory uncertainty around the buying, selling and development of assets is holding them up.

London-based Heritage Oil are in arbitration in a UK court over capital gains tax disputes related to its sale of Ugandan assets to Tullow Oil, for which the latter paid $1.45 billion. The Ugandan Revenue Authority says income tax is due on the capital gain arising from the disposal. Heritage disagrees.

In a similar fashion, the Kenyan government is reportedly blocking the transfer of oil exploration license stakes which come as part of the August acquisition of Cove Energy by the Thai national petroleum company PTTEP, one of Asia's smaller outfits. Kenya's energy minister has reportedly said: "This company has done absolutely nothing. So, we cannot sit back as a government and allow somebody to trade a piece of paper for 3 billion shillings. We want a share of that money to be able to transfer to a third party"

Even companies moving away from the conventional minnow model - of finding oil, selling discovered reserves and moving on - are running up against hurdles. Tullow Oil has moved into the production space over the last few years, hoping its development assets can fund further exploration, thus avoiding the need to raise fresh equity.

So far, the strategy is working out. The company has around $3.5bn worth of reserves-based lending facilities in place, meaning it can spend around $1bn a year on exploration. But in Uganda, life as a producer is proving a slog. Specifically, Tullow disagrees with the government over its desire for a 120,000 bpd refining facility. Since oil companies need an export market for their products - which is where their banking finance comes from - a large in-country refinery is not too appealing. For now, there is an impasse. Until it is resolved, production cannot proceed.

Ugandans might look enviously at Ghana, which found oil at around the same time, but is already pumping while their East African peers seem to be stuck. In part, the geography is different. Uganda's oil is over a thousand miles from the nearest port, whereas in Ghana "you just bring it to the surface, put it in a tanker, and off it goes," says Thalia Griffiths, editor at African Energy. But Ghana's experience in the extractive sector also means some embedded knowledge which might help speed things along. East Africa, meanwhile, is turning out to be "a learning curve for everyone involved," Griffiths says.

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