13 January 2013

Uganda: Oil, Energy on National Agenda

Kampala — As the country geared at marking 50 years of independence last year, the energy sector was on top agenda as several power blackouts set in with numerous discussions around electricity supply and the developments of the oil sector also at centre stage.

From the discovery of more oil reserves, commissioning of the Bujagali Hydro power project, passing of the controversial oil bill that pitted the legislature against the executive to arguments as to whether to construct a refinery or not, the sector was awash with activity for much of the year.

The commissioning of Bujagali in October 2012 has greatly improved on power supply with President Museveni, announcing that Uganda will not experience load-shedding for at least 24 months.

He added that it would lower the cost of electricity since the expensive thermal generators were no longer needed. Uganda for many year before the switching on of Bujagali was depending on electricity generated from diesel generators.

However, the Ministry of Energy and Mineral Development towards the close of the year had announced that load shedding was bound to return because the growth in demand for electricity was not being matched by supply.

As a result, Uganda Electricity Transmission Company Limited (UETCL) announced late last year that it was planning to buy more thermal power to meet the increasing demand.

With government announcing the withdrawal of subsidies to the sector, it means that power users will have to dig deep into their pockets to pay bills as they await the introduction of cheaper hydro power into the grid.

However even then, the actualization of the Karuma Hydro Power project which would meet the demand for electricity has been delayed as a result of procurement flaws. Until then, the power users will have to contend with higher power bills and irregular power supply.

The pegging of power tariffs to the dollar rate, inflation and fuel prices by the Electricity Regulatory Authority (ERA) has also raised eyebrows as power users query the rationale behind the move.

According to Mr. Julius Wandera, the Communications Officer at ERA, UETCL which is the sole buyer of electricity pays the power generators (Eskom, Bujagali Energy Ltd, Uganda Electricity Generation Company Ltd) in dollars but sells to distributors (Umeme, Uganda Electricity Distribution Company Ltd, Ferdisult) in shillings.

Its why, the automatic tariff adjustment was instituted to cater for the exchange rate gaps.

"The genesis of the automatic tariff adjustment, pegging it to the dollar rate, fuel prices and inflation was the removal of government subsidies," Wandera told a stakeholders' workshop last year.

Dr. Benon Mutambi, the Chief Executive Officer ERA also told stakeholders that the debt that was contracted by the licensees was not in shillings and that that is why the foreign exchange aspect cannot be overlooked.

"Government used to meet these gaps (foreign exchange gaps) with the subsidies but when the subsidies were withdrawn, the consumers will meet that gap.

He added, "If the Uganda shilling was to appreciate against the dollar in a particular month, the tariffs will automatically be adjusted downwards. We strongly believe it's the best way forward. It is already being done in Kenya and it eliminates the quarterly adjustments which would cause shocks."

Until just recently, average load-shedding in Uganda was 12 hours per day and this undermined the competitiveness of Uganda's economy by stifling industrial growth leading to riots by businessmen in parts of the country.

Construction of the $900m Bujagali power dam commenced in 2007 and had the first unit online in February 2012. Currently, the installed capacity the five units is 250MW. This is a milestone for Uganda because the dam has enabled the country to have enough electricity for only the second time in recent years.

The plant which currently meets nearly 50% of the country's energy needs was funded by the Aga Khan Fund for Economic Development, Sithe Global and the government of Uganda after previous attempts had failed to produce tangible results.

According to the concession agreement, Bujagali Energy Limited (BEL) will manage the project for 30 years and will handover to government at the cost of $1.

While much of the hydroelectric potential of the country is largely untapped, the government's decision to expedite creation of domestic petroleum capacity coupled with the discovery of large petroleum reserves holds the promise of a significant change in Uganda's status as an energy-importing country.

Similarly, the passing of the controversial Petroleum Exploration bill was one of the activities that highlighted the sector's influence in the future this East African nation.

At one point, the debate in parliament over the bill turned chaotic and the Speaker, Hon. Rebecca Kadaga was forced to adjourn the stormy session.

Despite the back and forth movement between parliament and the executive over clause nine of the bill which gives powers to the Minister to revoke and give licences, the bill was finally passed.The argument thus shifted to the process of constructing a refinery and when commercial production of the oil would commence.At the beginning of 2012, Mr. Robert Kasande, the Assistant Commissioner for Geology in the Ministry of Energy and Mineral Development disclosed that commercial oil production in Uganda would commence in 2015, right about the same time the refinery would be completed.

"Commercial production of the oil will start when the construction of the refinery is complete in about three years' time, so in 2015/16 production will have started," he said then during the Uganda Revenue Authority (URA) Open Minds Forum,

He said that they would begin with a small refinery that will produce about 20,000 barrels a day then move onto a bigger one with the capacity to process 60,000 barrels a day.

Responding to a question as to whether Uganda will export oil, Kasande said that it would depend on many factors.

"We discovered commercial deposits of about 2.5 billion barrels and we can only drill about 40% (1billion barrels) and this can only cover the domestic demand. However, if we discovered new oil deposits then there will definitely be a need for a pipeline to transport the excess oil", he said.

As the year progressed, the sector received good news that the country had discovered another 1billion barrel of oil from at least three new wells.

This, according to Mr. Ernest Rubondo, the commissioner Petroleum Exploration and Production, Ministry of Energy and Mineral Development increased Uganda's oil capacity to 3.5 billion barrels of oil as of September 2012.

The discovery of more oil deposits is a clear indication that the country can go ahead with the planned construction of an oil refinery in Hoima, Western Uganda.

Uganda finally settled for the construction of an oil refinery rather than a pipeline, after it was found less cost effective with a number of advantages over the setting up of a 1950km pipeline to Dar es Salaam (southern route) or a 1325km pipeline to Mombasa (northern route) from the oil wells.

According to experts, the country will be able to reap $3.2b in profits within a period of 2.7 years after the construction of a refinery.

"We have already identified the land to construct it. Compensations are ongoing," said Mr. Kabagambe Kalisa the Permanent Secretary in Uganda's Energy Ministry when contacted earlier in the year.

"The market exists in South Sudan, east DR Congo, Rwanda, Burundi and we can decide to go into direct competition with the Kenya Petroleum Refineries Limited for the western Kenya and Tanzania market," said Mr. Gerald Banaga the head of the Midstream Petroleum Unit at the Energy Ministry commenting about the viability of the refinery project.

He stressed the total operating costs for the refinery will be around $132 million, other than the $500 million for the pipelines and $110 million for land acquisition where the pipes would pass.

Rubondo disclosed that out of the 77 wells drilled that had been drilled, 70 had been proven to contain oil and gas. The oil fields, he added, were showing a comparatively higher level of productivity when measured against the experience in other countries where the chances of oil discovery in an equal number of wells usually lingers at only 10 per cent.

"And therefore, $1.5 billion is the amount that has been spent in all the activities leading to the 3.5 billion barrels discovery," noted Rubondo.

Rubondo stressed exploration is still ongoing and more discoveries are expected along the way.

Tullow oil in the year sold its 67% stake to the China National Oil offshore Corporation and Total.

President Yoweri Museveni is keen to ensure that Uganda establishes an oil refinery so as not to miss out on the over 80 by-products from oil refinery and wants other African countries to emulate Uganda.

The president pronounced himself vividly that the oil money would not be used on luxuries such as improvement of salaries but development of core amenities such as infrastructure.The prospects of oil exploration have already attracted a number of international oilfield companies such as Schlumberger, Halliburton to set up shop in Uganda.

The oil industry has also influenced the growth of the aviation sector in the country as seen by the number of airlines that have started plying the Entebbe route. The carriers are making a killing transporting oil experts from around the world into Uganda.

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