Recent discoveries in Uganda’s west at Lake Albert are considered to have tipped the ongoing exploration efforts into commercial viability. At the East Africa Petroleum Conference (EAPC) 09, Ugandan government officials spoke about far-reaching changes to become an oil-producing country. By Andrea Bohnstedt.
Revamping the Sector
Now that commercial viability is within reach, the Ugandan government is under pressure to improve or create the policy, legal and institutional environment for both the ongoing exploration efforts and impending oil production. Speaking at the 4th East Africa Petroleum Conference (EAPC 09), the Permanent Secretary in the Ministry of Energy and Mineral Development, Fred Kabagambe Kaliisa, outlined some of the areas that the Ugandan authorities intend to address:
• Management of local as much as regional expectations: Ugandans citizens anticipate a revenue-sharing mechanism, but also expect jobs and investment opportunities. The oil exploration areas are on the border with the Democratic Republic of Congo (DRC), and armed stand offs have occurred on the lake in the past. Regional politics with a neighbour with whom Uganda has not always had an easy relationship need to be taken into account as well.
• Kabagambe Kaliisa emphasised that an open and transparent strategy will help to manage these expectations. Government would develop a communications strategy to discuss these concerns with local stakeholders.
• Uganda intends to set up a royalty share between the central and local governments, and make sure that only qualified expatriates are employed so that a maximum of opportunities will accrue to citizens.
• In addition to keeping as much value addition as possible in the country, Uganda’s government also needs to promote other sectors in the economy to avoid skewed development and the creation of a niche economy.
• Licensing agreements: Now that Uganda’s oil potential has been confirmed, the Ugandan authorities intend to move from direct negotiations with interested parties to competitive bidding, and blocks of 500-1,000sqkm will be licensed for six rather than eight years. Licensees must appraise discoveries within two years of declaring them.
Uganda also needs a new institutional framework and plans to set up a host of new bodies:
• The Directorate of Petroleum within the Ministry of Oil and Mineral Development;
• The Petroleum Authority of Uganda (PAU) to monitor and regulate petroleum operations;
• The Uganda Oil Company; and
• A Petroleum Fund, to be managed by the central bank, the Bank of Uganda (BoU). Oil revenues are to be invested in infrastructure development and knowledge transfers, amongst others.
Uganda’s authorities are currently anticipating an early production scheme based on a capacity of 4,000 barrels per day. Plans are to build a topping plant that will produce heavy fuel oil (HFO) for subsequent power generation in Uganda, diesel and kerosene. It is a policy decision to focus on local refining – overall regional demand is considered strong and growing, and domestic production would both contribute to the development of a petrochemical industry and ensure security of supplies.
Over the past decade, foreign direct investment (FDI) of more than USD500m has gone into Uganda’s oil exploration sector, with a surge since 2005. Especially after the recent discoveries, prospects to attract additional investment are positive, even in a challenging global financial and economic environment – several exhibitors at the EAPC attested to this.
Following the completion of the regulatory framework, additional acreage will be licensed. In addition, there are significant opportunities in the midstream and service sector, i.e. in drilling, laboratory services, infrastructure development and waste management. Supported by donor funding, Uganda is also likely to contract out sector analysis and development work, so the country will be even more attractive to consulting firms – and probably also draw more NGO attention.
Perspectives
The EAPC 09 was well attended and shows that interest in East Africa – previously a marginal region in the search for oil and gas – is growing. Especially the ongoing successes in Uganda’s oil exploration have given new impetus to the search for fossil fuels oil in the region, despite a difficult global financial environment. As the pioneer in East Africa, Uganda’s case also highlights the extensive changes that are required to grow this industry. At the conference, Stephen Okello, the Head of Tax at PriceWaterhouseCoopers in Kenya, spoke in detail about the need to improve the tax and overall business environment for oil and gas exploration, and the need to harmonise it throughout the EAC.
In addition, as newcomers to this business, the East African countries face a combination of risks that countries like Nigeria have battled with at length, and challenges typical to the East African region:
• Governance: Few countries in sub-Saharan Africa have managed turn natural resource wealth into benefits for the wider population – macroeconomic imbalances and civil strife have been more frequent. Will Uganda and other EAC members take on board lessons learned, for example, in Nigeria? The government has stated that it had studied Nigeria’s experiences, but corruption is well entrenched, and power is concentrated at the top, leaving many of the national institutions weak and unmeritocratic. If Kabagambe Kaliisa’s presentation showed that the government was aware of the major challenges and ready to address them, it remains to be seen to what extent this plans can actually be realised. To date, the government has been very reluctant to publish the details of the production sharing agreement.
• Political risk outlook: It is not accidental that Uganda’s president pushes for oil production to begin before 2011 – the election for his fourth (or, rather, sixth) term will be even more challenging than the previous one, and both the public relations boost as well as any cash from the industry will be useful. At the same time, growing resentment against Museveni’s unwillingness to plan for a succession could be exacerbated by perceptions that all the benefits from the developing petroleum industry accrue to a small circle of people.
• Capacity constraints: Just the list of bodies to be set up shows that the Ugandan government, to date, has limited institutional capacities in the oil sector. And this does not only affect government – it is equally difficult to find experienced local staff in the industry. Exploration companies are looking for e.g. tax incentives to train local employees, and there is no formal system, e.g. in polytechnics or universities, to nurture a larger number of industry professionals.
• Cross-border and security issues: Exploration in the Ogaden in Ethiopia’s border region to Somalia has been hamstrung by security concerns, and skirmishes with DR Congo soldiers on Lake Albert show that Uganda’s exploration area is vulnerable, too. Neighbouring Southern Sudan –which received curiously little attention at the conference – is also a warning example.
• Protection of wildlife and the environment: Kenya, Tanzania and Uganda are known for their natural beauty and attract significant numbers of tourists. The drilling at Uganda’s Lake Albert is in the middle of a national park, and Lamu island at the Kenyan coast is a popular tourist destination and world heritage site. How can both industries prosper simultaneously, and how can natural resources that form the basis for much of East Africa’s tourism be protected?
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