11 December 2017

Uganda: Museveni Enters Fight Over $ 20bn Oil Deals

Photo: The Independent
President Yoweri Museveni

Kampala — Oil companies - Total E&P, Tullow Oil and CNOOC - are locked in a bitter fight for control of Uganda's oil sector. The coveted prizes are deals worth about $20 billion.

The three entered a partnership in 2012 when Tullow Oil, which was the sole exploration company farmed down 66% of its stake, in equal 33% portions each, to the Chinese and French biggies. The Irish minnow bagged $2.9 billion in the farm-down and still retained a 33.3% stake in the deal. Up to that point, it looked like a great deal.

But insiders tell The Independent that if the three companies do not resolve their current disagreements, their joint venture might collapse, and Uganda's bid to start oil production might be delayed once again.

The French company and the Chinese have been squabbling over control at almost every turn since the government allowed them to acquire stakes in the oil fields from Tullow. With the coming production phase and the prospect of mega oil deals, the fights appeared to intensify this November.

The Independent has learnt that senior executives from the companies have had to seek frantic meetings with President Yoweri Museveni to resolve their issues.

The Independent has learnt that Total S.A's Vice President for Africa, Guy Maurice and another top official flew into Kampala mid-November to meet the President.

Sources say Maurice's delegation camped in Kampala for about half a week until it met the president. It was the second time Maurice was coming into town in a few months.

And his meeting followed another by CNOOC's Vice-President Xu Keqiang from China, who together with the Chinese ambassador, met Museveni and raised concerns over Total.

The Independent understands that Total's delegation after meeting Museveni "left unhappy".

Sources have told The Independent that Tanzanian President John Pombe Magufuli and Equatorial Guinea's Teodoro Obiang Nguema have cautioned Museveni to tread carefully on Total.

Magufuli and his technocrats disagreed with Total officials during the negotiations for the pipeline and Equatorial Guinea revealed in August that Total misrepresented fuel sales figures in a fraud case in which Equatorial Guinea now demands 73 million euros from Total. The incident reportedly occurred between 2010 and 2012.

It is not yet clear whether these concerns have had a chilling effect on Museveni's relationship with the French giant.

Insiders say, this information might feed into Museveni's decision regarding the fight between CNOOC and Total.

The current fight was sparked by a $ 900 million deal in which Tullow Oil is selling 22 percent of its 33.3 percent stake after being frustrated by Museveni's decision to build the Ugandan oil pipeline to the Indian Ocean through Tanzania instead of through Kenya.

Tullow Oil, which also operates oil fields in Kenya, was lobbying for the Kenyan route because this would allow it transport both its Uganda and Kenya oil cheaply and conveniently. On its part, CNOOC stood to secure the pipeline construction deal for Chinese companies.

Total, on the other hand, was pushing for the Tanzanian route through the port of Tanga and demonstrated, through a feasibility study carried out by Houston-based Gulf Interstate, that this route was easy to complete, and safer and cheaper to operate.

The Total study, upon which Museveni based his decision, showed that the Lamu port was insecure because it lies near the border with Somalia, which is al-Shabaab terrorist group territory. The study also showed that the Lamu port required more work compared to the Tanga port which is already operational. Unlike in Kenya, land acquisition would be easier in Tanzania as land there is owned by the state unlike in Kenya where land is owned by individuals and its acquisition tends to be disrupted by compensation disputes.

On top of all this, the cost of the Lamu route had been estimated to be US$5.1 billion compared to $3.55 billion for the Tanga route.

Total also promised to mobilise the finance for the construction of the pipeline and, as an inducement, pledged to contribute 10% towards the cost of President Museveni's US$4.5 billion oil refinery on the shores of Lake Albert. A group led by General Electric and another led by China's Dongsong Guangzhou Energy Group are competing for the deal after negotiations with Russian firm Global Resources collapsed in 2015. With all these pledges Total won the fight over the pipeline.

Although Total won the battle, the war is still raging. A few months ago, CNOOC flew in their Vice President, Xu Keqiang, to meet Museveni over concerns with Total.

Apparently, apart from disagreements over the implementation and financing of the pipeline, CNOOC was unhappy that while in Tanzania to launch the pipeline works in August, Total officials blocked a high powered Chinese delegation from meeting Museveni. Matters were not helped that Total had snatched the Pipeline deal from under CNOOC's belly.

Meanwhile, with the pipeline going through Tanzania, cash-strapped Tullow was left in a latch. Without much interest left in Uganda, Tullow decided to reduce its footprint in the country even further; the reason it is farming out. But Tullow's move now appears to have emboldened the Chinese to take on Total.

As part of this fight, CNOOC is now demanding operatorship of Exploration Area 2 (EA2), the same area Tullow had already agreed to sell to Total. In March, CNOOC notified Tullow that it was exercising its right to acquire 50% of the interest Tullow is transferring to Total. The case has gone to President Museveni.

Abdul M Kibuuka, the Public Affairs and National Content Manager of Tullow Uganda, confirmed to The Independent that the companies had concluded negotiations and entered an agreement.

"We are now waiting for government approval," Kibuuka said.

By press time, both CNOOC and Total had not responded to our queries.

Energy Ministry Permanent Secretary, Robert Kasande, also confirmed that the companies had submitted the transaction paperwork for approval.

"We are in the process of reviewing the transaction," Kasande said.

But since the negotiations of these agreements lasted months from March until October, insiders say that government asked the companies to focus on the 2020 deadline as they iron out their other differences.

Enerst Rubondo, the Executive Director, Petroleum Authority of Uganda (PAU), told The Independent that as he sees it, the disagreements amongst the companies would not affect the production timelines.

"The companies will resolve the issues," he said sounding upbeat about 2018, which he said promised to be a super active year in the oil industry.

A quick decision on the government's side will also depend on whether the deal will not attract tax disputes as the ones before it.

There is hope that since the farm-down is seen as a critical stage before the Final Investment Decision (FID), which is expected to unlock billions and kick-start production, President Museveni will act swiftly.

Uganda discovered commercial oil reserves -6.5 billion barrels-over 10 years ago but has not been able to produce oil.

Fights between government and the oil companies over taxes and the requisite infrastructure and amongst oil companies themselves for dominance are part of the problem.

Embedded in the current fight are concerns by CNOOC that most of the deals are going to Total. Apparently, CNOOC's concerns are due to the fact that Total is already selecting companies that will carry out the next big thing in Uganda's oil sector; the Engineering, Procurement and Construction (EPC) for the two main projects.

It is the EPC contracts that will swallow the biggest chunk of $ 10 billion for the development phase.

The Chinese have reportedly told Total that if it takes the lead on the pipeline, CNOOC should take the lead on the upstream--oil fields.

After taking the pipeline and eyeing a stake in the refinery, Total has a firm grip on the mid-stream. If it snatches Tullow's stake in the farm down, it will dominate the oil fields also and leave CNOOC with crumbs. Already, Total commands the biggest market share in Uganda's petroleum distribution segment.

Total has already been flexing its muscle. It has reportedly already code-named its Tullow EA2 deal under the Tilenga project and is excited about it because it stands to give them the leading role in the entire project.

In February, it picked three companies to carry out FEED studies for this Tilenga project. These included; Technip (French), Fluor (U.S. and partnering with China Petroleum Engineering and Construction Corporation-CPECC) and the Chicago Bridge & Iron Company (CB&I).

Insiders say CNOOC had also picked a Chinese company for the FEED studies of the Kingfisher project. FEED studies define cost and construction designs for facilities required for oil production.

CNOOC is fighting to ensure that with the farm down, it is not left operating only the kingfisher field as a minority player in Uganda's oil sector.

Under the current arrangement, CNOOC operates Kingfisher, Tullow EA2 and Total EA1 and EA1A.

But with the $3.55 billion pipeline deal in the bag too, Total is in a dominant position.

Total chairman and chief executive, Patrick Pouyanné, made this point when he said "following the agreement on the Tanzanian export pipeline route, this transaction gives Total a leadership position to move this project efficiently toward FID in the current attractive cost environment."

But Total must also tread carefully - because it needs the oil held by CNOOC for production to be viable in the short-run.

At stake are deals about $ 20 billion. Apart from the $3.55 billion pipeline, there is the $ 4.5 billion oil refinery, and the over $ 10 billion expected to be invested in the infrastructure required to get the fields ready to start producing oil.

It is no surprise for some, therefore, that CNOOC also announced it wanted a share of the Tullow farm down. That meant the deal had to be renegotiated.

The fighting phase of the type going on appeared to have been overcome in August last year when government awarded the oil companies eight oil production licences. The licences came after almost two years of intractable negotiations over the oil companies oil production plans.

At the time, President Museveni desire to have oil pumped by 2020 appeared achievable. That timing is very critical for Museveni; it is the campaign year for the 2021 elections, in which he has showed he is keen to seek reelection. Getting oil cash would be a major boost and the fights amongst the oil companies are making this prospect harder.

The deadline already looks unrealistic because the oil companies need at least three years after making the FID to start pumping oil. The FID is now expected between June and December next year. This would mean that at the very least, Uganda can only be able to pump oil after well after 2021.

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