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Uganda oil a sad story of the three Gs

  • SOURCE: | qwesa2big
  • Oil in Africa tends to depend on the three “Big Gs” of geology, geography and governance and investors in east Africa’s much-hyped finds are discovering the hard way what happens when they are not perfectly aligned.

    Six years after Uganda struck oil in its interior, all of the pieces are beginning to click into place for a boom that holds the promise of prosperity for one of the continent’s poorest states.

    A number of oil firms including Total and Tullow Oil plc are engaging and plans are in place for the infrastructure needed to exploit estimated reserves of around 3.5 billion barrels.

    But production is still not seen before 2015 and may take longer, while the pipeline to get the oil to the coast for export will not be in place before 2018 at the earliest.

    Compare that to the Atlantic coast nation of Ghana 2,000 km west, which took only 3-1/2 years to crank out its first barrel of crude after oil was discovered and is already seeing its first exports, and it looks like Uganda has missed out.

    “Here’s a country that discovered oil in 2006. Hasn’t produced a drop. And they say they will only export crude when they have a refinery and the best estimates for operators like Total is 2017 for production,” said Dr Duncan Clarke, chairman of oil/gas advisors Global Pacific & Partners.

    “So this is 11 years of an interrupted exploration cycle which typically you associate with a war or civil conflict or a meltdown … 11 years of lost impact in GDP growth.”

    On-shore vs off-shore

    Where the geology in east Africa has been favourable for oil, the geography has been less so.

    Huge gas discoveries off Tanzania and Mozambique are extremely promising but the Indian Ocean waters off east Africa have yet to produce a commercially viable oil source.

    Land-locked Uganda’s on-shore oil reserves are certainly on a commercial scale but they lie 1,300 kms from the coast and so a costly pipeline is the only way to export the crude.

    Neighboring Kenya is not land-locked but the oil encountered there at two wells by British explorer Tullow and its partner Africa Oil Corp has also been onshore.

    Ghana’s Jubilee field by contrast is conveniently off-shore and its location places it bang in the heart of a mature oil region where nearby countries like Nigeria have been producing the commodity for decades.

    “Ghana is very familiar with everything to do with an oil economy because of its neighborhood,” said Tara O’Connor, managing director of Africa Risk Consulting.

    For Uganda by contrast – and east Africa in general – everything about oil is new.

    “No matter where you are in the world, where there’s no infrastructure and no history of the oil business, it will take at least half a dozen years to go from exploration phase to development concepts,” Tim O’Hanlon, Tullow’s vice president for Africa, told Reuters.


    Governance also matters – a lot.

    In the case of Ghana, its development into a stable democracy with a relatively diverse economy helped to get the oil flowing.

    “Ghana was in a very good position to meet the challenge of becoming an oil producer because it had already diversified its economy,” said O’Connor.

    Diversification also meant Ghana, a rising gold producer and the world’s second-biggest cocoa grower, did not regard oil as a get-rich-quick fix for the fiscus.

    “Tax stability is important for any investor, and Ghana has maintained a stable fiscal regime for existing investors,” said Martin Kelly, Wood Mackenzie’s lead analyst for Africa.

    In Uganda, analysts say tax disputes point to a growth in “resource nationalism” as the government of long-time President Yoweri Museveni eyes oil as a panacea to its fiscal woes.

    Explorer Heritage Oil and the Ugandan government are in arbitration after the Britain-based firm disputed the tax bill from the sale of its assets there to Tullow for $1.45 billion in 2010.

    The oil explorer has argued its earnings were not subject to capital gains tax because the transaction in question was executed outside Uganda. Critics have said the government appears to be changing the goal posts.

    “In Uganda, you have potential rent seekers emerging out of the political system who see oil as a way to compensate for the lack of fiscal discipline,” said O’Connor.

    Uganda has also thrown another obstacle in the way of actually extracting oil by insisting that any development plan involve the construction of a refinery – a hugely costly undertaking with an estimated $2.5 billion price tag that is fraught with risk.

    The Ugandan government and operators working there disagree over how big the refinery needs to be.

    Operators say its capacity should not exceed 60,000 barrels per day to be attractive to investors but the government insists a facility with a maximum output of 120,000 bpd is viable and can easily attract investors.

    Ghana has also had delays. It began pumping oil from its Jubilee oil field in November 2010 and while it had hoped to hit 250,000 barrels per day by 2013, it has averaged under 80,000.

    Still, the rewards of getting past the barriers to production quickly are evident: Ghana’s economy expanded almost 15 percent last year and the government expects 2012 growth of just over 7 percent.

    Business & Financial Times


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