18 February 2013

Uganda Oil - Region Has Lessons to Learn

Dar es Salaam — Last week, as political leaders and experts gathered in Arusha to confer on the future of the extractive industry in the region; the writing was on the wall regarding the salient issues and potential pitfalls.

Environmentalists fervently argued for sustainable development, the politicians a bright future through people-centred resource allocation while the dominant corporates already have their eyes set on lucrative business prospects.

Even when all players claimed to speak on behalf of the common person, no villager was invited to the podium to discuss their realistic aspirations during the 6th East African Petroleum Conference and Exhibition.

This dichotomy is reminiscent of the unending fable on whether natural resource endowment is a 'curse or blessing' to countries, especially in Africa.

Bad examples abound on the continent: Nigerian motorists are challenged to afford fuel the country produces in plenty; in Libya, former President Muammar Ghaddafi used oil proceeds to entrench himself in power for 42 years while unchecked corruption suffocates growth in other mineral-rich nations.

Uganda presently boasts of confirmed deposits of 3.5 billion barrels of oil to-date since the initial find in January 2006.

Tullow Oil PLC, China Offshore Oil National Company (CNOOC) and Total SA of France are three companies presently involved in oil & gas exploration in the Albertine Graben region.

Each of the companies holds an equal one-third stake in the oil fields in blocks EA-1, 2 and 3A in mid-western Uganda. In 2010/2011, Tullow temporarily held 100% interest in the oil wells, having bought out London and Toronto-listed Heritage Company's 50% stake at $1.45 billion.

Tax disputes/bribe allegations

Whereas the sale of Heritage's assets excited the participation of new players, the process was later to be sullied by allegations that three senior Cabinet ministers received bribes from foreign oil firms aiming to dig into the Uganda market.

Parliament discussed the accusations during an emergency sitting in October 2011, and resolved implicated ministers step aside and imposed a freeze on transactions in the oil sector until all enabling sector laws were enacted as provided for in Uganda's February 2008 National Oil & Gas Policy.

Heritage disputed the levy and declined to pay. Because the UK firm bought Heritage, the standoff over tax threatened its business interest in Uganda.

Officials say Tullow on behalf of Heritage then paid part of the tax, and deposited the arrears on an escrow account with a bank in London, pending the outcome of on-going arbitration proceedings Tullow initiated in London against Heritage Oil & Gas Company and the Government of Uganda.

So what should Kenya and Tanzania, learn from Uganda?

Industry experts say transparency about contracts with oil firms, availability of and public access to information and adequate laws are crucial in affirming citizens' confidence and safeguarding the environment beyond the period when the finite resource would be exhausted.

Production date

State Energy Minister Simon D'Ujanga says they expect oil production to begin in the next two years.

"2015 is our realistic target for production," Mr D'Ujanga said, adding, the country will be selling oil by 2017 whatever the case.

The production deadline has already been pushed multiple times since 2009. Uganda government urged Tullow to 'farm-down' to CNOOC and Total to break its brief monopoly after Heritage.

Officials said they hoped entry of new players would aid mustering of more resources as well as deployment of appropriate technology and expertise to fast-track oil and gas production.

Tullow Uganda general manager, Jimmy Mugerwa, says they are aiming for first oil production approximately three years after the partners have made a final investment decision.

Refinery a must

Existing disagreements make a sell-out more probable. The oil firms contend that building a refinery to process the country's waxy oil would not be profitable, and is likely to make related products and by-products more expensive and uncompetitive regionally.

Uganda government commissioned UK's Foster Wheeler to examine the viability of an inland refinery, and concluded such a plant would help create local jobs, earn extra foreign exchange for the country by placing it in pole position to export high-value processed fuel and by-products.

President Yoweri Museveni has strongly argued that exporting crude would amount to "donating" the country's resources and jobs to outsiders, and he will "never allow that to happen".

It is unclear if Foster Wheeler had appraised different alternatives in handling the oil or only conducted a study tailored to justify refinery construction.

Dickens Kamugisha, Chief Executive Officer of Africa Institute for Energy Governance (AFIEGO), a local think tank on extractives, says whereas it is desirable for an oil-endowed country to build refineries, the decision to invest in the plants should be based on long-term commercial and environmental gains and ramifications.

"Otherwise, we might sink a lot of money to build a refinery which will become a 'white elephant' project," he noted.

The government aims to construct a refinery with a capacity to process up to 100, 000 barrels of oil per day, according to a re-designed blue-print prepared by the Ministry of Energy and Mineral Development.

It will be modular; daily processing is projected to begin at 20, 000 barrels per day and rise incrementally until full capacity operation.

"That one (refinery) is not for debate; it's not negotiable," junior Energy Minister D'Ujanga said, "But we are leaving open the option of exporting part of oil in crude form."

Secrecy & dry wells

Official secrecy on deals remains the biggest hazard to Uganda's fledgling oil sector, AFIEGO"s Kamugisha said.

"Citizens are empowered to demand accountability if they have access to information; if there is effective public participation and access to justice," he argued.

The country has confirmed oil deposits of 3.5 billion barrels, although multiple December 2012 drillings at Riwu-1, RAA-1 and Til-1 areas did not encounter commercial hydrocarbons.

Of the four wildcat exploration drills undertaken last December by Tullow in an area operated by Total, oil pay was only encountered at Lyec-1 and the finding is under evaluation and re-mapping, according to Tullow and Energy ministry officials.

Tullow staying put

Tullow General Manager Mugerwa says significant appraisal drilling activities remain in 2013, and denied the company wants out.

"Tullow is not planning to exit Uganda and is committed to Uganda for the long-term," he said.

Bureaucrats and activists speaking about the reported Tullow exit plans have no evidence or credible information to back up their claims. Minister D'Ujanga said he heard about it from the media and "if it [the proposal] is not on our table, we cannot discuss it."

Fresh tax dispute

Instead Tullow on October 31, last year, filed a case at the World Bank-created International Centre for Settlement of Investment Disputes (ICSID), challenging government decision to impose Value Added Tax (VAT) on some of its imports.

"The dispute is unrelated to the resolution of tax disputes on various sales of assets in the Republic of Uganda and the proceedings commenced by Tullow Uganda Limited against Heritage Oil and Gas Limited and Heritage Oil Plc in London," the firm said.

Investment and legal analysts say Tullow could quit Uganda if it loses the arbitration case at ICSID.

The London-listed oil company is represented in the Washington D.C. case by UK's Ashurst law firm and the politically well-connected Kampala Associated Advocates in Uganda.

Tullow reportedly lined up former solicitor General Peter Kabatsi and Patrick Bitature, chairman of Uganda Investment Authority, as 'expert' witnesses. A Uganda diplomatic source in New York, however, says Mr Bitature has opted out.

The arbitration case in Washington is under seal, meaning its details are not public.

"As a neutral organisation, ICSID does not comment on cases," the centre's secretariat said in reply to earlier email enquiries on specifics of Tullow's case against Uganda.

Government has kept details of both arbitration proceedings to itself, and its legal team led by Attorney Peter Nyombi is in London for the first Tullow case.

That secrecy has been a cause of worry, even intense speculation, among Ugandans. The lingering question has been: If there is nothing wrong, why is government hiding information about oil from its citizens?

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