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Oil production stalls in 2010 as fuel prices stay up

  • SOURCE: | qwesa2big
  • Uganda missed an opportunity to join the world’s new oil producing countries in 2010 as Ghana accomplished the feat. Oil production was scheduled to start last year, but a tax dispute between the government and two oil exploration firms held the plan in reserve.

    On his visit in January last year, Mr Paul McDade, the chief operations officer at Tullow Oil Plc, told Ugandans that oil production would kick off mid 2010. He projected that Uganda’s initial oil production would vary between 500 and 1,000 barrels of oil per day. Production would then progressively rise to 10,000 barrels in 2011 and to 150,000 after four years.

    Seven months after the assurance, the government, Heritage Oil & Gas and Tullow, were embroiled in a tax dispute over a $404.9 million (Shs910 billion) capital gains tax bill that rendered Mr McDade’s promise null and void.

    The dispute emerged after Heritage sold its 50 per cent interests in Blocks 1 and 3A to Tullow for $1.5 billion. From the transaction, Heritage paid slightly more than $121 million to Uganda holding the balance – about $284 million, in an escrow account. Heritage declined to clear the tax claim in full, arguing that proceeds from the sale were not taxable in Uganda.

    President Museveni demanded that the oil firms pay up all the tax due before any production activities take place. Tullow has since lost its rights to explore Block 3A after it expired forcing it to suspend work on two wells. Yet, it needs the oil block to command viable production in Uganda.

    The deal placed the government and Tullow in tight spots during the last six months, as they pursued answers to the dispute. And while the unsuspecting victims were sent to boardrooms to brainstorm on the issue, Heritage’s shareholders received multi-million dollar bonuses from the transaction.

    Business Power has since established that tax disputed between the government and oil exploration company Heritage Oil and Gas will further delay the production of Uganda’s oil.
    "First oil from Kasamene (an oil well) remains scheduled for 2011 but there may be some delay given the length of on-going negotiations with the government of Uganda," Mr Jimmy Kiberu, Tullow’s corporate affairs manager said in an interview.

    Negotiations over the tax dispute between the oil companies and the government started about five months ago but are far from over. Yet, neither Tullow nor the government is certain of the time the negotiations will come to an end.

    "When you are negotiating you can’t have a deadline. That would be bad for negotiations, we really have to wait. We don’t have a timeline," Mr Earnest Rubondo, the head of Uganda’s petroleum exploration and production department told Business Power in an interview.

    The stalemate means that oil production cannot start before negotiations to resolve the dispute come to an end.
    "Tullow will not move towards oil production until the farm-down (sale of interest in the blocks) has been approved and our partners enter the project," he said.

    Tullow is eyeing a partnership with French company Total SA and the China National Offshore Oil Corporation (CNOOC) to construct a $10 billion oil refinery in Uganda.

    But that partnership is subject to the end of discussions between the government, Tullow and Heritage. Uganda wants Heritage to pay up the tax due to recognise the transaction as binding and permit Tullow to proceed with its exploration and production activities on Block 1 and 3A.

    In Ghana, where Tullow has almost similar operations as in Uganda, the company started oil production of up to 55,000 barrels of oil per day on December 15. Ghana is expected to ship its first oil tanker to the world market this month.
    The first oil in Ghana was pumped just three and a half years after 1.8 billion barrels of oil was discovered in the Jubilee oil field off the shores.

    As the tax dispute ensued, Dominion Petroleum Uganda, another exploration firm was accelerating its drilling activities in Western Uganda.

    Drilling activity was boosted after the firm raised Shs117 billion (£32.7 million) in the United Kingdom, to invest in Uganda. The British firm company is drilling Ngaji-1 well in the Lake Edward basin of the Albertine Rift.

    Dominion estimates that the well contains about 400 million barrels of recoverable oil. Last year, the firm’s discoveries reached 500 million barrels. But in total Uganda has discovered in excess of 2.5 billion barrels of recoverable oil.
    Domestic oil production is expected to enable the economy to shrink its huge import bill which largely constitute petroleum products like; petrol, diesel and kerosene. Uganda spends over $500 million (Shs1.1trillion) on fuel imports annually.

    In history, 2010 will stand out as one of those few years in which Ugandans dug so deep into their pockets to meet high transportation costs.

    A shortage of fuel in Uganda pushed a litre of petrol to as high as Shs4,000 in some parts of the country from as low as Shs2, 400 at the beginning of the year.

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