Tuesday 1st of December 2015 02:39:02 PM

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Oil firms plan new investments

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Tullow Oil Uganda’s General Manager, Eoin MekieThe deal between Tullow and new partners Total and CNOOC could bring US$ 10 billion in new investments

Regardless of the governance questions still to be addressed in the management of Uganda’s oil resources, the sale of 66.7 percent of Tullow Oil’s oil assets in the Lake Albert region to France’s Total and China’s CNOOC (China National Offshore Oil Corporation) has galvanized a new burst of optimism and activity.

The partner companies and government have begun negotiations on how investments in the exploitation of the estimated 2.5 billion barrels of oil in the region - including infrastructure like the refinery - will be shared.

Tullow Oil Uganda’s General Manager, Eoin Mekie told The Independent recently that completion of the farm-down and entry of the two players was a boon for Uganda’s oil industry.

“What happened to us and our partners in the last year had created uncertainty amongst the wider international investment community about the status of Uganda as an investment destination,” Mekie told The Independent in an interview. “We have seen investment levels falling.”

“My sincere hope is that what has happened in the past few months, with the signing of new PSAs [production sharing agreements] and the farm-down going on with the blessing of the government, sends a clear message that that situation is over. As investors we have solved our differences and are willing to move forward. You can look forward to oil production.”

He was talking about the delay of more than a year at Tullow waited for government approval of its farm-down deal.

Unique skills

Mekie said the entry of new players with unique competencies also augurs well for the industry. Tullow has invested over US$1bn but together the trio is expected to sink over US$10 billion.

“Total has extensive experience in Africa on both sides of their business,” says Mekie.

“As a super major, they bring with them access to resources, access to research, and extensive experience that Tullow has not had,” he told The Independent,

“Tullow’s exploration and appraisal success which has been our strength so far, also continues to be necessary and CNOOC brings with them refining experience, pipeline experience, and complementary skills.”

Indeed, the new entrants in Uganda’s nascent oil production sector - Total and CNOOC, are already marking their ground in the industry.

Total spent US$1.5bn to acquire Exploration Area-1 and CNOOC US$1.467bn for the Kanywataba and Kingfisher production licenses in EA-3A,   leaving Tullow with EA-2.

Total, which boasts of a long history in Uganda “since 1966 through marketing operations and with more than 20% of the market share” - has set up an office in Uganda and deployed a team to oversee its exploration and production investments in Uganda.

CNOOC’s Chief Executive Officer, Mr. Li Fanrong, said “…CNOOC Limited will work closely with our project partners and the Government of Uganda to expedite the development program.”

The three companies are already in high-gear negotiations with the government to construct Uganda’s first refinery, whose construction is expected to start this year.

Elly Karuhanga, Tullow’s Uganda President and Chairman of the Chamber of Mines, was reported recently saying that CNOOC, Tullow Oil and Total, would co-invest in the refinery, projected to cost about US$1.5 billion, and were already negotiating details of how that investment would be managed.

This – in addition to President Yoweri Museveni’s recent statement on the oil developments – appears to settle the debate of whether Uganda would invest in a refinery or pipeline, with oil companies said to disagree with the option of a refinery.

Mekie says there was no such disagreement as the companies had always accepted that the first substantive production would go straight into the refinery to feed Uganda’s domestic consumption.

He says the only debate had been about what size the refinery would grow into and whether or not there would be an exportation pipeline.

“Our view is that with production expected to peak between 150,000 and 200,000 barrels per day, you cannot have that size of a refinery,” Mekie told The Independent.

“First of all you are putting all your eggs in one basket, relying on a market that is far bigger than Uganda. If those markets disappear - for instance Kenya finds oil - it’s not going to buy petroleum products in Uganda. You end up with a refinery that is operating inefficiently.”

Mekie argued that unlike Saudi Arabia or Kuwait, Uganda’s oil is a finite resource, and infrastructure investments must be tempered with the awareness that the future of the economy lies in other sectors.

“What you need to do is use the oil revenue to build infrastructure in the other industries that will sustain you when the oil is gone and for that you need high levels of foreign revenues coming in to invest in education, power distribution, roads and industrializing agriculture,” he said.

These considerations are at the forefront of the negotiations between the three companies and government as they consider investment options in the course of this year, that, in view of Tullow’s projections, will see Uganda become a small-scale oil and gas producer by 2013 and a major one by 2016.

The companies are planning an ambitious exploration and appraisal program from 2012 onwards. Tullow for instance plans to drill more than 8 wells between now and 2013.

East Africa frontier

Mekie said both Total and CNOOC have extensive East African interests and were looking at the industry as an opportunity to develop regional infrastructure and to help Uganda position itself as larger than just developing its oil fields.

“Total and CNOOC bring complementary skills. They both look for long term futures in East Africa, and see Uganda’s resources as being complementary to the wider regional resources in Southern Sudan, Kenya, Tanzania,” he said.

“There is a lot of effort going on and you can see that the whole region is poised for significant development and at the centre of it, the country that is most advanced in its oil and gas is Uganda.”

The Tullow boss discounted concerns that new discoveries of oil and gas in neighbouring countries like Kenya, Tanzania and Ethiopia – coupled with disruptions in Uganda – may force oil companies to shift their interest to those countries.

“We have interests in East Africa, but Uganda represents the start of an East African oil strategy that will take us a long time if we are successful in those places,” he said. “We wouldn’t have undertaken further exploration with Total and CNOOC if we wanted to shift focus.”

Mekie says instead focus should shift to the studies done by the companies and government to start mapping out the short term and long-term future.

“If we are to be efficient in this - to minimize the environmental footprint, we have to take a broad holistic and wide view of what the development will look like, what the market routes are,” Mekie says.

“You have oil here but no means of moving it to the market. Ghana was different, it was blessed with a coastline and the fact that their oil was discovered offshore—technologically difficult to drill because of deep waters but very easy to move to the market. It goes straight out to the international market. Uganda has different geographical situation and it creates intricacies around how you develop it.”

Despite Mekie’s optimism, it is important to take account of the obstacles that in the past have slowed Uganda’s progress, including corruption scandals, tax disputes and the slow development of a regulatory regime, including contestation by Parliament of contractual provisions in the PSAs like stabilization and confidentiality clauses.

President Museveni’s unilateral decision to ignore Parliament’s objections and sign the agreements has led MPs to call that his recent address about oil exploration developments be expunged from the records of Parliament and to seek censure of Energy minister Irene Muloni.

Tullow must share some of the blame for the foot-dragging. The company’s challenge of Uganda Revenue Authority’s assessment of US$472m as the duties due in the US$2.9bn sale of assets to Total and CNOOC is currently being heard in the Tax Appeals Tribunal. The oil company has paid US$141m, 30 percent of the taxes due, with the rest pending a ruling.

The US$404 million dispute with Heritage Oil also continues in a London Court. If Heritage wins, Uganda will have to pay back US$313 million that Tullow advanced to government against the case.

Mekie says Tullow is seeking to exercise its right to question tax assessments, and extends this liberal view to the broader debates about oil.

While time-consuming, he argues, debate is healthy as it helps to clear a lot of misinformation and entrenched interests related to transparency, the legislative framework, revenue sharing, and other issues.

“People at the recent URA conference were discussing how to avoid the oil curse, and it is exactly by doing all this,” he said.

Nonetheless, Mekie admits that there is a price to this debate, conceding that Uganda may have lost a couple of years from the foot-dragging.

“There is a time value for the Ugandan economy and for us,” he said. “Some people can argue that oil doesn’t go away. But if Kenya discovers oil they would move fast. If Tanzania discovers gas, they will move fast and certainly they will become the technological hub rather than Uganda.”

For the three key investors and government, this may be a cue to move faster.

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