3 January 2016

Uganda: Who Will Manage Uganda's Oil Better?


Charles Onyango-Obbo, a veteran journalist and editor of South African online newspaper Mail and Guardian, in August 2015 wrote in his weekly column published in this newspaper that "oil is Uganda's moon landing."

When you come to look at it critically, the description makes perfect sense. At every debate on Uganda's political economy, you won't miss mention of Uganda's oil and the current 6.5 billion barrels (1.4 billion barrels recoverable so far), the stock tank oil in place/reserves and Uganda's position in its background.

Petro-dollars, which are yet to start flowing when the country starts commercial production around 2018/2019 according to government, Mr Onyango-Obbo said will intensify the race for State House further in future.

"What this means, is that the shape of Uganda over the next 20 years is uncertain," he noted. "This fluidity about the shape of a future Uganda was not there in the pre-oil era when Museveni and Kizza Besigye first tangled in 2001. So write that in your risk analysis."

A lot has been written about Uganda since commercial oil discovery was made public on the eve of Independence Day in 2006; almost a year after Parliament changed the Constitution to lift the presidential term limits, and five months after President Museveni had returned to office for a third term after a 59 per cent poll victory.

Researchers, economists and naysayers alike have since been painting a dark picture of Uganda--plunging into a resource curse, rise of clientelism, economic/financial turmoil, and the black gold effect on the current political setting--that is said to be alternating between democracy and semi-authoritarianism.

But as the presidential race enters the eighth week, the candidates' manifestos so far offer some hope.

President Museveni, the incumbent seeking a fifth term in office until 2021, promises that his government is "consciously and strategically developing the oil and gas sector to ensure that the country gets the maximum possible benefits".

His former long-time friend and former prime minister Amama Mbabazi in his manifesto indicates that the 25 districts in which the oil resource is located will not miss out on the revenue sharing programme.

Four-time presidential contender Kizza Besigye, also the Forum for Democratic Change flag bearer, is yet to release his policy prescription, but in the Leap Forward document the party released recently offers some insight into how the FDC government will lead while basking in adulation of oil production.

Projected revenues/petro-dollars when production starts, according Dr Paul Bagabo, the Natural Resource Governance Institute (NRGI)'s resident coordinator, are estimated will be around Shs11 trillion ($3.3b) annually by 2028.

The plummeting prices for crude currently ($35 per barrel down, the lowest since 2009, and down from the standard $100) notwithstanding, oil remains the world's most indispensable commodity.

Dual transition

Uganda is thus undergoing a dual transition; a political one of power/succession battles in the chequered multi-party system and an economic one, to move to an economy anchored on oil.

And whoever takes the mantle will be at the centre of the transition and will most likely kick-start the next stage at which the oil sector is leaping to--of production.

Dr George Barenzi, a don of political science at Nkumba University, argues that with President Museveni's passion for the country's oil (which he at times refers to as my oil), his government's stance has been somewhat a "cautionary one" to ensure the country is in the right path.

"There are so many things [in the sector] that have been done in order. So you have to give him credit for that; developing local capacity, the refinery and the laws," Dr Barenzi says. "For Mbabazi and Besigye, it is very hard to tell."

True, for example, President Museveni shot down the idea by the International Oil Companies (IOCs) -- UK's Tullow Oil PLC, France's Total E&P and China's Cnooc currently licenced to operate in Uganda -- of exporting crude oil.

Production would probably have started by now, but government in 2010 hired a Swiss engineering firm, Foster-Wheeler, to conduct a feasibility study for the prospect of an oil refinery, attendant infrastructure and the market outlook.

A small size refinery was proven viable, notwithstanding the current fog surrounding its realisation for production to commence by 2018/2019, as technocrats usually argue.

Already, there is an estimated 400,000 barrels of crude in store which were harvested out of the ground during extended well testing (the process of evaluating the characteristics of oil reservoirs) which are yet to be sold.

The first drop of oil, according to the plan, will also go to electricity generation, about 50MW, that will help run the refinery and its attendant infrastructures in Hoima District.

The Petroleum Directorate, the body in charge of oil in the Energy ministry, is also currently handling bidding for six other oil blocks, which will see more companies licenced to operate in Uganda.

The population, the current developments notwithstanding, has been waiting enthusiastically but in vain. Some have actually started being anxious and think oil is being shipped out of the country in tankers.

Oil: The landing on the moon

At last year's Eid -Al-Fitr celebrations in Masaka District, Mr Museveni told Muslim faithful: "We are about to start extracting oil from the ground, which will help us transform the country."

"But then you hear some saying "agende" (retire from politics)."Bagala mafuta gange (they are after my oil)."

In fact, Mr Onyango-Obbo in his opinion argues that: "The 2016 election, therefore, will be partly about what, in his self-indulgent moments, President Museveni refers to as "my oil". That is the patronage pot of the future."

Ramathan Ggoobi, a lecturer at Makerere University Business School, strongly believes had it not been for oil, President Museveni would never have been on the ballot paper again.

"His insistence to remain head of State all this long and craft to purge the term limits was borne out of the desire for something," Ggoobi says.

"That desire manifested shortly afterwards in the announcement of the oil discovery," he argues. "Right now I think his stay is not until he has gotten the feel of an oil sheikh. Do you think it was coincidence to remove term limits and the oil discovery public announcement?"

The story of oil and overstaying in power is familiar on the continent, according to several research articles online.

Ghana is by far the only reference point where black gold has mixed with democracy. But according to Angelo Izama, an independent researcher on oil and governance matters, the argument that Museveni is eyeing Uganda's looming petro dollars before he can retire is more of a "conjecture".

"Then how best do you explain Uganda's delayed production but he [Museveni] has not hurried the process? I would want to think if Uganda gets another president they would actually want to speed up this process perhaps," Mr Izama says.

"I think Mr Ggoobi is confusing the cause and correlation effect. Cause and correlation in the sense that the oil subject has gained momentum at the time when Museveni tired as he looks he is insisting to stand for a fifth term while majority think he should be retiring or supporting a transition."

In fact, a recent working paper from the multinational research network Effective State and Inclusive Development Research Centre, released in October 2015 comparing Uganda and Ghana's management of oil indicates that the classic understanding of good governance may not actually ring-fence a country's oil fortunes against mismanagement.

The research by Mr Izama himself and researchers from Ghana and UK showed that "semi-authoritarian" Uganda seems to be governing oil fairly more in line with its national interest as compared to "democratic" Ghana.

Uganda has since discovery seen only the NRM, while Ghana has seen power swapped between the National Democratic Congress and the New Patriotic Party in closely contested elections, with each bringing in leaders with divergent views on managing the resource.

Whatever the arguments are, Ghanaian technocrats told this newspaper recently in Accra that problems are abound when leaders tend to exclude the rest of the political class from the oil sector and instead focus on promoting their henchmen to ring fence the oil sector.

This is a subject of discussion in Uganda.


The party is yet to release its flag bearer's policy prescription for Uganda's oil management. But the party in its Leap Forward document listed some of the mechanisms for optimising returns from oil and minerals for the citizens.

-Optimising benefits through appropriate policies, laws and administrative actions, taking into account the likely high environmental and social burdens imposed on the local governments within the oil sub-region.

- Adhere to the highest standards of transparency and accountability in the governance of oil and mineral resources and will be an active participant in internationally recognised and legitimate transparency mechanisms such as the Extractive Industries Transparency Initiative and the Open Government Partnership.

- Responsible stewardship of the resources to keep agriculture competitive, mitigate the adverse impacts of climate change, but equally important, create new employment and enterprise opportunities for the population and more especially women and the youth.


- In all 25 districts in which oil and gas resources are located, the local communities shall benefit from a revenue sharing programme.

- Our main goal is to refine enough oil here in Uganda to ensure that we do not import petroleum products and those products like liquid petroleum gas, jet fuel, diesel, heavy fuel oil and others. By products are available.

- We shall encourage the establishment of new industries from petroleum products such as asphalt and tar, lubricating oils as well as insecticides and fertiliser.

- All communities affected by the land acquisition for the refinery in Hoima will continue to be compensated for loss of economic activities and livelihoods on top of being paid the land rates at the prevailing market prices.


- The NRM government will build a refinery with capacity to produce 60,000 barrels per day in two phases. Under phase one, the refinery will produce 30,000 barrels per day, thus meeting the current local demand of 23,000 barrels per day. It will take three years to be constructed while the second phase that will see the refinery produce 60,000 barrels daily will take five years.

- The refinery will be constructed under a PPP arrangement. Investment in the refinery will lead to creation of petrol chemical industries, thus resulting in jobs and supply of petroleum products to the local and the East Africa regional market. Local self-sufficiency in petroleum products will also save the country the foreign exchange we spend on importing petroleum products, hence giving a better balance of trade position.

- The NRM government will build an export pipeline to enable export of oil with the East African (EA) region and international market. Continue collaborating with the EA partner states in the development of shared infrastructure and harnessing of the natural resources.

Uganda's oil journey

The story of Uganda's oil discovery dates back to the beginning of the last century. Drilling of the first oil well on L. Albert shores was attempted in 1913 by a South African company, the Anglo-Europe Investment Company, though unsuccessful.

Sequential developments transpired throughout the years in the sector, but it was in 1983 when the Milton Obote II government, with the help of the World Bank, undertook aerial magnetic surveys in the Albertine Graben to identify major basins.

A petroleum unit was established two years later and the Petroleum (Exploration and Production) Act was enacted.

In his book A Matter of Faith: The Story of Petroleum Exploration in Uganda 1984--2008, Rueben Kashambuzi, the former head of the Petroleum Exploration and Production Department (PEPD), which July 2015 became the Petroleum Directorate, narrates that when President Museveni took power in 1986, "he suspended all negotiations for licensing until some Ugandans were trained in petroleum matters to negotiate agreements that were not disadvantageous to the country."

A group of Ugandans were sent to Europe for further studies in oil matters a year later. The PEPD was established in 1991 to watch over the country's oil, and in 2001 Australian oil company Hardman Resources and the UK-based Energy Africa entered in Uganda.

In 2004, Tullow Oil bought off Energy Africa, taking over 50 per cent stake in Exploration Areas 2 and 3 with the other half belonging to Heritage.

In 2009, Heritage offered to sell its stake, though to Italian oil giant ENI, a matter in which the names of Mr Mbabazi, then Energy minister Hilary Onek and Foreign Affairs minister Sam Kutesa got soiled with claims of bribery. They were, however, cleared by a parliamentary investigation in 2013.

In 2010, Tullow exercised its first tenant (pre-emptive) rights for the Heritage stake, which saw a war over taxes between the Uganda Revenue Authority (URA) and the two companies. The cases have since been disposed of, ruled in a London court in URA's favour.

In February 2012, Tullow sold out part of its stake (66.66 per cent] to Total and Cnooc for interests in the three Production Sharing Agreements (PSAs) the former had signed with government to work in the Albertine region under a joint venture partnership arrangement.

Of the three, only Cnooc has a production licence (a green light to start production) for the Kingfisher field which had been conditionally granted to Tullow before the farm down. The conditions were fulfilled and licence fully granted to Cnooc in 2013.

In 2014, government and the IOCs signed a Memorandum of Understanding which details a commercialisation plan, and agreed on a refinery and a crude export pipeline.

The refinery will be built in phases, starting with one of 30,000 barrels per day to allow early production, but another phase will be added subsequently by 2022/2024. The pipeline will either go through Kenya and Tanzania to the Indian Ocean coast.

Significant amounts of investments are, however, required for the country to start production in the coming years. Between $10 billion (Shs33.7 trillion) to $15 billion (Shs50.5 trillion), almost the size of Uganda's budgets for two financial years is needed.

The tender for the refinery was put out in early 2013, which attracted several companies. In early 2015, RT Global Resources, a consortium led by Russia's Rostec, a defence and technology corporation whose businesses include manufacturing weapons such as the AK-47/Kalashnikov rifles, was announced as the preferred bidder to develop Uganda's Greenfield refinery. Negotiations between the two are said to be ongoing.

The search for a lead investor for the oil refinery, behind closed doors, was alleged to be a contest between President Museveni and Mr Mbabazi. President Museveni is said to have preferred Russian over Chinese and South Korean investors.


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