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Museveni’s bad oil policy

The President has revealed three things about Uganda’s oil sector that are depressing and illuminating

THE LAST WORD | ANDREW M. MWENDA | In his interview with NBS television aired on May 11, President Yoweri Museveni revealed three things about Uganda’s oil sector that were depressing and illuminating. First he said the reason Uganda has not moved fast towards production is because international oil companies (IOCs) want to “cheat” the country as they have done in many other African countries. So Uganda has had to be extremely careful not to fall in the same trap.

The interviewer, Canary Mugume, asked whether these delays do not risk making Uganda’s oil useless due to innovations in electronic cars (making them cheaper) and the dangers of hydrocarbons on climate change (that may lead the world to ban them). The president said that is not a big problem either because if oil becomes useless, the country would continue to survive as it has done before by relying on other resources such as agriculture.

Thirdly Museveni said he did not like the idea of a pipeline and would have preferred IOCs to refine all Uganda’s oil within Uganda and sell all of it to the countries of the East African region. Given that regional consumption of oil is about 200,000 barrels a day and growing, and given that production at that rate would allow optimal exploitation of Uganda’s oil, he does not see a need for a pipeline to the coast. However, he added, he accepted the idea of a pipeline only because it would benefit Tanzania.

These three statements revealed the crisis of Uganda’s oil sector and the mentality that has made it difficult to make progress. The president spoke about the interests of Uganda (as he sees them) and did not make the slightest reference to the interests of Uganda’s business partners, the IOCs. Yet it is the IOCs that have taken the risk to pay for the exploration and discovery of oil, and will risk investing in the production, transportation and marketing of this oil. So we have a government in a business partnership with partners it sees as crooks. Second, it is blind to their interest in the joint venture. How can such an attitude produce a good business?

Why does Uganda have IOCs with their reputation of cheating poor countries at the forefront of her oil industry? Ideally the country should have raised money, done her own oil exploration and discovery, produced and refined her oil and sold it to whomever it wished. It did not have this capacity. Like all other poor countries, it went to the international market looking for companies with the capacity. Contrary to the current self-assured pride of Ugandan officials, IOCs initially showed very little interest in the country’s oil. That is how small companies like Heritage and Tullow came to be the leading players in oil exploration in our country.

It is international oil practice in countries that have not produced oil before that small firms take the risk to do the exploration. When they discover oil, they sell to the big boys, and make a killing. If the small firms don’t discover oil, they lose money. The big boys (IOCs) come and do the production, transportation and selling – plus future explorations. This should alert us as to why it is self-defeating for Uganda to make laws that penalise those who sell oil licenses – it blocks the very investment in exploration we need.

The relationship between oil companies (who have the money and expertise to do oil exploration, production, transportation and marketing) and host governments (who own the resource on behalf of their citizens) is largely managed through Production Sharing Agreements (PSAs). If you want to know whether a country has been cheated or not, look at the PSA. In 2010 Museveni wrote to the IMF to study Uganda’s PSAs. The IMF study found that Uganda’s PSAs were among the best in the world.

The facts are as follows: average revenue share in new oil-producing countries is 48% and 52% in favour of IOCs. For mature oil producing countries it is 70% for host countries and 30% for IOCs. In Uganda, the ratio is 78% in favour of our country. The claim by Museveni that oil companies want to cheat is based on petty disputes over tax. We have sacrificed our strategic aim (to produce oil) at the altar of petty tax claims. The IOCs have severally bent backwards to accommodate Uganda’s unrealistic demands in order to set the oil production ball rolling but our government has remained intransigent, seeing them as cheats.

Uganda and the IOCs are business partners. One party has money, technical knowhow and market connections to explore, discover, produce and market the oil. The other party is the owner of the resource. For the business to work, both parties must accommodate each other’s interest i.e. there must be a win-win result. But Uganda behaves as if the only interest that needs to be addressed is her own.

In the NBS Museveni never addressed himself to the interest of Uganda’s business partners (the IOCs) who have taken the risk, invested large sums of their money in our country’s oil sector and now need to get returns on their investment. Instead, he said if hydrocarbons die, Uganda would go on. Doesn’t Uganda owe these IOCs the responsibility to ensure they recoup their investment? Worse still, Museveni said he accepted the building of a pipeline purely because our neighbour, Tanzania would benefit from it, not because our nation’s business partners (the IOCs) need it.

I was depressed because Museveni came across in that interview as ignorant of basic oil industry issues, cavalier in his attitude towards the prospects of hydrocarbons becoming obsolete, insensitive to the interests of the IOCs Uganda literally begged to come invest in her oil industry, dismissive of the value of oil to our poor economy, and even oblivious of very many other (mostly Ugandan) players who had invested so much money in the hope of our country moving towards oil production and have now gone bankrupt.

It is commonsense that for any business partnership to work there has to be a spirit of give and take i.e. both sides have to try to accommodate each other’s interests. Uganda acts as if there is only one interest – her own. Second, Museveni should know the meaning of a trade-off. If delays to move towards oil production create a risk of oil becoming obsolete, then one has to discount some things to allow the country to make gains from her resource.

Uganda has made the perfect the enemy of the good. How can a country delay an investment of $15 billion to $18 billion in an economy of $30 billion because of a disagreement over $82 million or $183 million? We have done this while knowing that Uganda’s GDP would double in five to seven years if we moved to oil production. And worse still do this while risking the oil resource becoming useless? This is the height of insanity and it is sad our country has an opposition that is oblivious of the actual problems we face.

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20 comments

  1. Uganda’s oil journey right from former President H.E Binaisa’s pronouncement about its exploration 40 years ago to date is dotted with twists and turns enough to qualify the “oil curse” adage on us! However, President Museveni has little to save, superior IOCs were not reluctant to invest in the Country’s oil exploration by mistake because 15-20 years back, Museveni’s hold on power was stronger than ever before, he had an upper hand in delivering the country a better snip (no wonder the 78% PSA traces its background from around that time), therefore, production 10 years back would have enriched Uganda and given less room for IOCs to cheat the Country! So the big IOCs had to wait up to around this time when Uganda’s power to get a favourable bargain is truncated!

    Take heart, Oil is not about to be obsolete, the world needs about 30 years to even start feeling the impact of shifting from usage of fossil oils to other conventional methods of the day. Whereas oil revenue will continue lowering going forward, it will still be lucrative; Uganda’s oil production can get produced as late as 2030 and still remains profitable.

    About your narrative that Museveni’s “interests” are hampering production are not in good faith, a person who secured a good bargain way above the average knows what is good for Uganda, he knows when it is safe to compromise and when to hold on a better position, for example, IOCs pulled out of the agreement with Uganda over a tax dispute late last year, this has not stopped Total EP to buy off struggling Tullow’s shares, and from the President’s interview, a FID is in the offing, the Pipeline is one of the projects that is likely to commence Post-Covid.

    • In a poor country like ours,the economic impact of this delay is significant. An increased government expenditure at the expense of service deliverly has occured in our country because they anticipated commercial oil production many years ago.
      As result we have witnessed enormous government borrowing , mostly from bad guys like China.This means that once production starts, a significant proportion of that revenue will go to servicing debt and Ugandans will gain little. And this is only and only if there is no covert extraction and sale of the crude fuel as it is a do

    • Informative reasoning!

  2. Edward Ronald Sekyewa

    It is becoming more certain that Uganda will not get the initially anticipated amounts of oil revenue due to technological advancements that are going to rapidly lead in the decline in the demand for fossil fuels. However, big expenditures were made in anticipation of big amounts or revenue and some big loans were advanced to the country in the hope that they will be repaid back from the oil windfall. Then there’s the increasing appetite for for cash to cash to sustain patronage and of course the corruption that goes with it. i haven’t yet mentioned the costs for the refinery, pipeline and other massive infrastructural projects that are to be undertaken or being undertaken. With shall be lucky to cover all those costs with the oil revenue. However, plans that oil money would be also invested massively in agriculture, import substitution, development of ICT, etc might remain on paper and never see the light of day. And lastly, I was seriously shocked by the President’s “I don’t care” attitude when he was asked about the prospect of oil revenue not coming in.

  3. Andrew, for now you argue like you just graduated last week. Our president is the president of Uganda, how the hell would you expect him to stead be articulating and promoting the interests of IOCs instead of his country’s and the region’s?

    Oil is a resource and so it will remain. We are not in a hurry to donate it.

    The IOCs that were kind enough to come and invest in our oil did so on our terms and it is those terms that HE promotes and articulates.

  4. Whats has become of this Writer? Should we now be made to understand that IOCs are doing us a favor? IOCs have their interests and Mother Uganda too has her own. The partnership has come about simply because we see our own interests achievable and the IOCs too see theirs achievable. President Museveni fully understands the basics of the oil industry, a honest and transparent oil industry that isn’t exploitative of host countries. Any understanding Ugandan knows that the day the IOCs realize that their interests in the partnership aren’t achievable (profits), they will depart in a blink of an eye. In the meantime, the partnership thrives, stands firm and remains healthy.
    After reading this peace from admittedly one of my favorite writers, my greatest worry dwarfs the three he highlights in the article. Who is going to religiously defend the interests of Mother Uganda tomorrow after our wise Elders are gone? After penning this article, the Writer seems to have disqualified himself from a team of those that Mother Uganda needs on her side today and tomorrow. It’s a pity that we are intentionally refusing to learn from our elders, and only for reasons better known to us.

  5. For the first time in nearly 10 or more so years I have followed you old man, this is your worst analysis and I am starting to think your an enemy of uganda, whatever the case, museveni with all his hidden agendas always wanted an oil refinary so has to maximize the oil output and build a legacy for him self has having secured an oil refinery but because the technocrats near him are bribed by the oil companies he had no way of escaping them but only to allow the construction of a pipeline so when you see him using the word cheats just know he was cornered. and had no escape route but only to cave in for a pipeline.

  6. Andrew and my fellow readers someone please explain to me.. The oil refinery even a small one looks like a great idea. Why didn’t Museveni hold firm on this. There surely must be a way of getting one built. It would be a game changer in Uganda quest to stop exporting unfinished goods (and earning peanuts)

  7. Christopher Musoke

    Good analysis on this Andrew. The slump in crude oil prices means IOCs are reluctant to commit further investments in exploration and production. By playing ‘reluctant bride’ Uganda will be less attractive, especially with our ‘waxy crude’ and IOCs will shift elsewhere. They lose nothing as exploration costs are already written off. The Chinese will be the sole players and be sure they will leverage further indebtedness to the country versus their exploitation of the oil resource! This is a business opportunity and Uganda’s long term interests should overshadow short term URA ‘wins’

  8. The Good Book says that “Thou shalt not muzzle the ox that treadeth the corn”. Uganda not only wanted the corn but wanted to slaughter the ox as well.

    Or to put it another way “Don’t kill the goose that lays the golden eggs.”

    Kagame understands how to harness the power of the private sector for development and had that oil been discovered in Rwanda they would have been in full production years ago and well on the way to middle income status by now.

  9. M9 is spot on and he backs his arguments with facts and credible stats. I’m really disappointed with most of the comments above, and they shed light to how uncritical and low our education system has gone to produce low thinkers like these!
    1-Uganda is already in partnership with IOCs; they are the ones with the capital, expertise and capacity that Uganda needs to produce oil. Without them, Uganda cannot do anything much. So, you people, why do you argue that Uganda ( m7) should not consider their side? Silly, is it not? You forget that Uganda has a good deal already, what else does m7 want or you people want? The so called elite 🤔
    2-Uganda is not the only country with oil deposits , we compete with other countries and technological advancements that relies less on oil, and any unnecessary delays can cause huge loses, mainly on the side of Uganda in this context.
    3-If even these companies have invested quite a lot in Uganda and it would be bad if they pulled out, but even if they did this stage, Uganda would lose more.

  10. Prof. Dr. Eng Kant Ateenyi Kanyarusoke

    Andrew,

    The way you present your arguments on this issue seems to bias sympathies for the multinational oil companies. However, later when you give the specific modus-operandi of letting small western companies do the ‘difficult’ work of initial exploration in uncertain environments, and then let the bigger ones (typically involving one or more of the so called 7 sisters) come in for the ‘simpler’ drilling, refining, marketing and further prospecting, you betray an apparent tragedy for those in the world who simply give up, expecting the developed world to solve every little problem for them.
    That is not all. Issue can be taken with your (and fellow NBS journalist’s) assertion that because oil may become less useful as an energy source in future, we should be stampeded into siphoning the deposits to the developed world right now. First, oil’s use is not just in energy. A whole range of industries ranging from pharmaceuticals, to chemicals to infrastructural developments, to industrial mechanisation and automation etc, simply cannot survive in their present forms without crude oil refinery byproducts. Be informed that the key transport energy products (aviation fuel, diesel and gasoline) you people harp so much about account for less than 40-50% in many drilled crude oil outputs – and for Uganda’s heavy oil deposits (the reason they want to heat the UG-TZ pipeline, they are even lower.
    So, crude oil deposits are not about to become useless. in any case, those of you anxious about mass electrified transport, you have to wait for the extensive infrastructural changes first. Look – how long is it taking us to even get the electrified train connections with Kenya going?
    For me really, what we need is to rapidly develop our local capacity to drill and refine the stuff here with or without involvement of these seven sisters and related cousins – just as we need to develop other technical competencies. There is no magic in this stuff: only our will and initiative seem to be questionable.

    Prof Kant Ateenyi – in Kyegegwa for now.

    • Great point. I still haven’t got an answer into why Museveni gave up on a refinery? I think the refinery idea should be revisited. Ask the Chinese or Iranians to build a small one. Or have Uganda intelligence steal blue prints from somewhere, and get Ugandan engineers to give it a go!

    • What a beautiful mind from an original Ugandan Prof!!!
      We are indeed a great Nation with all the potential that it takes for us to leap forward.

    • “For me really, what we need is to rapidly develop our local capacity to drill and refine the stuff here with or without involvement of these seven sisters and related cousins – just as we need to develop other technical competencies. There is no magic in this stuff: only our will and initiative seem to be questionable”
      Now hear this professor, coming up with suggestions that are not context specific! Which country doesn’t wish to do that? Generally, indigestion and import substitution were the key ideologies of almost all African countries after independence, with a few exceptions such as Kenya and Ivory Coast . But soon they realized they could not do anything without capital and expertise. Uganda has already shown that it is so bad at running any business, so the solution would be to pattern with our indigenous private sector- kutesa? Sudhir? M7 and family? Bitature? Mukwano? Kitaka? Who? When it comes to poor countries, the stereotype aspect all plays a role. Do you think Uganda can go to World Bank and get all the extra money required to produce oil? If you think so, you don’t know how the world and global financial institutions work. Where else can we get all the money and expertise; China? What matters is having good oil production and profit sharing agreement, which Uganda has already.

    • For me really, what we need is to rapidly develop our local capacity to drill and refine the stuff here with or without involvement of these seven sisters and related cousins – just as we need to develop other technical competencies. There is no magic in this stuff: only our will and initiative seem to be questionable”…
      Now hear this professor, coming with suggestions that are not context specific!!! Which country doesn’t wish to do that? Generally, indigestion and import substitution were the key ideologies of almost all African countries after independence. Twenty years down the road, they realized they could not do anything without capital and expertise. Uganda has already shown how so bad she is at managing the business. The alternative would to pattern with indigenous private sector- kutesa? Sudhir? M7 and family? Bitature? Mukwano? Kitaka? Who? When it comes to poor countries, the credit rating and (stereotype aspect) also play a role in accessing credit . Do you think Uganda can go to World Bank with the proposal to produce oil and get all the extra money required to produce oil? If you think so, you don’t know how the world and global financial institutions work. Where else can we get all the money and expertise; China? With big resources such as oil, what matters most is having good oil production and profit sharing agreements and legal framework to protect environmental.

      • Prof. Dr. Eng Kant Ateenyi Kanyarusoke

        Dick brother,
        I do not want to go into a tirade on the capital-knowledge/skills debate. But one can create the other, where there is a will and initiative.

        Relax for now. My wish is to think of other things to do, as we develop capacity in this oil sector (please – with or without the willing companies). There are an infinite number of options for Uganda’s development, while for the seven sisters with their overcapacity in refineries (factor-specific assets), there isn’t much choice for those assets. To our brother Dave, the latter is the reason the oil companies have insisted on the oil pipeline. I could be wrong but I think the president was coerced into allowing the pipeline by the debts his government has acquired in the ‘overpriced’ infrastructural projects he undertook in Energy and Transport (which overpricing is indicative of our insufficient technical knowledge and skills – among other things).

        Cheers,

        Prof Kant Ateenyi.

  11. Mwenda, at the time when Uganda was at the eclipse of success. We lost the game. The court case might not yield much. But these small boys are not good people as we know.

  12. I appreciate you reasoning Andrew and see why you would hold that position. I have often myself wondered if it is wise for M7 to play this game of chicken with rich multinational corporations who have been in this game longer than him. However, while I have never considered M7 savvy in many economic fronts, this time I think he is on to something by refusing to be the first one to blink. The IOCs have the devil in the details and I do not think M7 is stupid as you allude. He knows all the stakes and he is putting these bazungu through their paces. Had M7 signed a deal years ago without arm twisting the IOC you would have complained that he gave away our oil without a fight. The oil is going nowhere ; and yes, I know fear of missing out (FOMO) is a problem to impoverished Ugandans like you Mwenda who want the chicken served now whether it is ready or not. One thing I wonder though, is M7 stalling in Ugandas interest or he is petulant because the IOCs are not giving him a cut that he wants? Over to you Andrew…

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