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Bad oil deal

President Museveni and his counterpart John Pombe Magufuli launching the EACOP as officials and oil executives witness last year.

But according to insiders, the oil companies say this is too small and does not make financial sense given at they are investing $3.35 billion in the pipeline. As a result, the oil companies are pushing for more oil to be pumped through the pipeline.

They are arguing higher volumes to exploit economies of scale; as higher volumes will reduce the cost of moving the oil through the pipeline and potentially lower the tariff. Initially, the oil companies had proposed a tariff of about $ 12.2 per barrel.

This figure was arrived at before the companies carried out the Front End Engineering Designs (FEED) whose results came out last December. Now the tariff is estimated to hit even $18.

Already some Ugandan officials say the oil companies used the $12.2 figure as a technique to lock the government into the deal well knowing that they would later renegotiate the figure. It is, therefore, unclear what they will be asking when production starts; possibly seven years from now.

Total’s hardline position has infuriated government officials and is attracting some equally extreme responses.

One of the extreme positions by government is that the pipeline should be abandoned all together. This position is informed by a sense that the oil companies want to kill the refinery—Museveni’s pet project.

The more moderate position is that the oil companies should consider building a smaller pipeline and as a result carry less oil and also use the available new technologies to keep the cost of the pipeline low.

But, having carried out studies for a bigger pipeline, the oil companies are not keen on reducing its size. Also, the oil companies favour a bigger pipeline because it means shipping out as much oil as possible in a short period of time and as such makes it easy for them to recover their investment fast enough.

From the oil companies’ perspective, this is a less risky alternative compared to supplying a refinery. They say many oil refineries around the world are loss making and Uganda, which continues to be a risky business environment, is unlikely to be an exception.

Because of all this, there is currently a stalemate over the project—with officials working around the clock to reach a compromise.

The only positive around the pipeline-refinery issue, according to insiders is that the government is now exploring some new technologies that can be exploited to keep the cost of exporting the oil low.

Uganda’s challenge is that the oil is heavy, waxy and quick to solidify at room temperature.

To export it, the pipeline has to be heated and kept at above 50 degrees Celsius for the crude to flow from Hoima in mid-western Uganda to Tanga port in Dar es Salaam.

This explains why the 1143 km long pipeline—the world’s longest electrically heated pipeline—was planned to have 48 independent power generation stations, 23 trace heating stations, and six pumping stations. That could now change if some of the chemical interventions are used, according to informed sources.

The view is that some chemicals can be mixed in the crude to make it lighter and thus easy to transport without heating the pipeline to the levels earlier projected.

Total E&P neither denied nor confirmed these issues. In response to our questions on the disagreement over the pipeline, Ahlem FRIGA-NOY, the company’s Corporate Affairs Manager only said that both the companies and government “are committed to ensuring that the commercialization of the Ugandan oil resources is conducted in the most viable manner”. On government’s push to get the companies to reduce the cost of the pipeline, she noted that the pipeline design studies have been completed in accordance to the technical requirements of the project.

The tax dispute

The case of the Capital Gains tax is less clear. And it is partly coloured by previous CGT disputes between the government and Tullow.

The current tax dispute is being impacted by what happened when URA in 2012 levied a $473 million CGT bill on Tullow Oil’s initial sale of concession to CNOOC and Total for $ 2.9 billion.

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3 comments

  1. Dr. Eng. Kant Ateenyi

    Countrymen and pan Africanists elsewhere:
    This is the tragedy of our failure to develop our engineering skills and continental integration.
    I have said this a thousand and one times – and will never tire of it: For our continent to free itself from these exploitative practices of being a mere source of ‘low value’ commodities and labour but a consumer of ‘extra-high value’ products and services, we must prioritise both engineering education/training and political integration. I can tell you with authority that this is what has made the difference in China and India. In both, huge initially poor and illiterate populations were deliberately tuned to nurture mathematical and psycho-motor development minds that combined to develop hand – and (for China), other limbs skills. Then, craftsmanship, understanding of and making good use of the physical sciences followed just as – water flows down hill (unless forced otherwise). The two countries are now harvesting that investment to the ‘bewilderment’ of others.
    For Uganda on oil, it would be best to hold our ground and work tirelessly now to develop our refining skills. This nonsense of shipping the little oil reserves all the way to outsiders has to be checked. I know we have over committed ourselves on infrastructural financing in expectation of the pseudo ‘oil boom’. But now, we need to understand that the same infrastructure can still be used on other economic activities in the meantime (as we develop our internal oil refining skills – not rocket science – which in itself, is not necessarily out of reach anyway). We can for example, patriotically work on our Agriculture and food processing and marketing to feed the hungry of the world; we can work on our relatively superior education (compared to many surrounding countries) to attract other African learners, the brightest and ablest of whom, we should deliberately integrate in our own as highly skilled labour force. I can go on and on —-. The opportunities minus crude oil donations to outsiders are limitless. It is just our collective will that limits us.

    • Brother you’re right…so right
      But don’t forget there’s none more impatient than a fast aging men.
      HE is bound to throw in the towel for the sake of setting foot in “Cannan” during his lifetime.
      Unless he opts for new partners

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