Africa: Uganda’s Slow Oil and Gas Infrastructure Development

Following the withdraw of the Russian-led consortium RT Global Resources, from the oil refinery construction in July, the government is looking for a new investor to partner in the project by mid-2017

This year marked a decade since the government announced the discovery of commercially viable oil and gas resources along Uganda's western frontier.

But even with the 6.5 billion barrels of crude oil confirmed so far of which about 1.7 billion barrels is ready for production, Ugandans are still waiting for the day they will earn petroleum dollars-- thanks to a combination of factors.

For starters, depressed international oil prices over the last two years have made investors hold back their money meant for venturing into new oil and gas frontiers like Uganda, choosing to wait for the industry to recover.That stance has had ramifications for Uganda's nascent oil sector.

But the government appears to have taken full advantage of the uncertainty in the industry by going ahead to make laws, policies and regulations as well as put in place institutions that could ensure thel industry is well governed once production starts.That has been the case over the last two years.

Crude oil pipeline route

In April, the government finally chose the Indian Ocean port of Tanga in Tanzania as its preferred end point for its $4b crude oil pipeline. That decision came following two years of protracted negotiations involving officials from Uganda, Kenya, Tanzania and the oil companies.

A route survey has been ongoing and is expected to be completed by the end of this year while the contract for the Front End Engineering Design for the pipeline has also been awarded and is expected to be ready by the end of 2017. The government also says negotiations of an intergovernmental agreement between Tanzania and Uganda are progressing well.

"We are in fast-track mode to build the crude oil pipeline from Hoima to Tanga Port in Tanzania," Irene Muloni, the Minister of Energy, recently told the government-controlled newspaper, The New Vision.

TheFrench oil company, Total E&P Uganda B.V which had never been shy of their preference for the southern route, has already expressed interest to finance the construction of the pipeline.Ugandan officials had always insisted that they would go for the route that ensures the country's oil is sold onto the international market using the least cost means.

This year, the government went ahead and constituted the three important oil institutions--the Petroleum Authority of Uganda (PAU), the Uganda National Oil Company (UNOC) and the Directorate of Petroleum in the Ministry of Energy and Mineral Development.

In June, the Uganda National Oil Company's (UNOC) Board of Directors appointed Josephine Wapakhabulo as the first chief executive officer. She is a 40-year old PhD graduate of Information Science.Wapakhabulo is expected to lead the setup of UNOC and manage its transition into a world class oil and gas company to prepare for oil production.

Established under the Petroleum (Exploration, Development and Production) Act, 2013, UNOC is mandated to ensure an adequate, reliable, and affordable supply of quality petroleum products in the country.

But in future, UNOC will be expected to participate in oil production on behalf of the state. The government, according to the existing production-sharing agreements with the oil exploration companies, can participate with between 15-20% in production.

In August, Ernest Rubondo was appointed the executive director of the Petroleum Authority of Uganda (PAU). Rubondo who until recently was the director of the Petroleum Exploration and Production Department in the Ministry of Energy has been heavily involved in the formulation of the country's legal and regulatory framework including the 2008 National Oil and Gas Policy and the recently enacted petroleum industry legislations. He took on his new assignment at the beginning of September, 2016.

Eight production licences

In late August, the government issued eight production licences to Tullow Oil and Total E & P Uganda B.V in a move that was intended to revitalize the sector.

The government issued five production licences to Tullow Uganda Operations Pty Ltd, the operator of Exploration Area 2 and three to Total E&P Uganda B.V, the operator of EA1.

With the issuance of the licences came the government's bold statement that they now expect oil production to start around 2020.

Still in August, there was news that the government would issue four oil exploration licences to four new companies; three of which are Nigeria-based.But in a brief presented to Parliament on Dec. 8, Peter Lokeris, the State minister for mineral development said the licensing round has progressed to the stage of negotiation of production sharing agreements (PSAs) with three of the companies.

These include; Armour Energy Limited for the Kanywataba Block, Waltersmith Petroman Oil Limited for Turaco Shallow and Deep Plays and Oranto Petroleum International Limited for the Ngassa Shallow and Deep Plays.

Lokeris said upon conclusion of negotiations this year, the government expects to award a total of five new exploration licences following Cabinet approval. Licensing of more acreage in the country is aimed at expanding the country's hydrocarbon resource base; enhance sustainability of oil and production and the revenue from oil and gas activities.

Refinery still in doubt

But while the issuance of the production licencles and exploration licences lifted spirits in the sector high, the withdrawal of the Russian-led consortium RT Global Resources, from the oil refinery construction negotiations in July was a major setback in Uganda's mission to become an oil producing nation in four year's time.

In February, 2015, RT Global Resources, a subsidiary of Rostec, a Russian state corporation had been chosen over South Korean firm, SK Engineering and Construction Co. Ltd by the government to serve as the lead investor for the refinery but pulled out 16 months later after failing to agree with the government on several negotiation claulses.

As a result, the government has restructured the oil refinery project and is now in a new search for a lead investor.

"Initially we had a public-private partnership but with Rostec (RT Global Resources] leaving, we are looking at restructuring the project to bring it to a public-led instead of private sector-led investment," Dozith Abeinomugsha, the Assistant Commissioner in the energy ministry told an annual general meeting of the Uganda Chamber of Mines and Petroleum (UCMP) in September.

The government is now expected to take the majority of the shares unlike the earlier arrangement where the private developer would have taken the lion's share.

In the previous arrangement, the refinery was to be constructed on a Public-Private-Partnership (PPP) with a private led investor owning 60% stake while the remaining 40% would be owned by the government including the EAC partner states. It remains unclear how the government intends to fund the $4b refinery expected to produce 60,000 barrels-per-day.

Interestingly, the government insists on having the oil refinery in place before commercial production of oil can start in earnest.

Experts say even though arrangements for crude export pipeline have been agreed upon, the fact that the government insists on holding out for a refinery as a prerequisite for any commercialization remains a stumbling block.

However, Eng. Irene Muloni, the Minister of Energy and Mineral Development told The New Vision in November that the government is working closely with its partners to ensure oil flows by 2020. She said preparations are ongoing about the refinery. Muloni said the Russian firm set new conditions, which were not favourable, so negotiations with them ended.

Lokeris told Parliament on Dec.8 that close to 25 companies/firms have since expressed interest in the project. The selection process is to progress with a view of selecting the most suitable partner for the project by mid-2017.

Kabagambe-Kaliisa exits energy ministry

On the flipside, in November, President Museveni reshuffled his Permanent Secretaries of key ministries and after 40 years of service in the energy and mineral sector, Fred Kabagambe Kaliisa, 62, left office and was replaced by a more youthful Stephen Robert Isabalija.

Kabagambe-Kaliisa had moved up the ranks initially starting out as a fresh graduate in 1976 before becoming a Commissioner of Petroleum Exploration and Production Department in 1991, to the Director of Energy and Mineral Development in 1994 and finally to the position of Permanent Secretary in 1997.

Kabagambe-Kaliisa who always talked about the local oil industry with passion and nostalgia spent close to 30 years overseeing the development of the sector.

"My happiest moment will be when I see our country getting and utilizing the first spoils from our oil," Kabagambe said in 2011.