Will Uganda’s Oil diversify Its Economy for the Long-Term?

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By Angela Luyiga

In 2006, Uganda confirmed discovery of crude oil reserves of up to 6.5 billion barrels in the Lake Albert basin along its border with the Democratic Republic of Congo. Earlier this year, the government auctioned out several exploration licenses which could lead to more discovery of other reserves. With commercial production in full swing, the country could earn up to $3 billion in revenue from exports of up to 60,000 barrels of oil per day. Some of the crude oil will be used to produce power locally, while the rest will be used to put up a new $2.5 billion refinery.

According to the Uganda Country Economic Memorandum: Economic Diversification and Growth in an Era of Oil and Volatility (CEM), oil production is expected to boost Uganda’s economy from 3.3% in 2013/14 and 4.6% in 2015/16 to 7-10% once oil production starts, the CEM notes.

Despite the slump in global oil prices, the start of commercial oil production in Uganda in 2018 offers long-term prospects to diversity the country’s economy and catapult it to upper middle income status by 2040, according to the country’s new economic memorandum.  This optimism is informed by past trends in oil price volatility and underlines the analysis of the (CEM) and evaluates the prospects of oil and mineral production in the country.

Prepared by the World Bank and the Government of Uganda, the memorandum presents a vision of how the country can leverage its oil and mineral resources to accelerate economic growth, reduce poverty and attain the goals of the country’s National Development Plan (NDPII).

“Although the level of international oil prices are extremely low today, we have reasons to believe that these will rise again, and that Uganda’s future oil production will boost the country’s economic and fiscal performance in the years to come,” said Jean-Pascal Nguessa Nganou, World Bank Senior Country Economist for Uganda and task team leader for the CEM.

“Oil is not a pipe dream; it is an opportunity for us to fuel our economic growth, create employment, foster technology transfer and generate revenues for investments in development of other sectors,” said Keith Muhakanizi, Permanent Secretary and Secretary to the Treasury, Ministry of Finance, Planning and Economic Development in Uganda. “We are also mindful of the risks of letting the oil economy dominate as successful countries are those that have used non-renewable resources to diversify their economies, and we are committed to learning from their success and failure, to ensure we don’t go down a slippery slope.”

According to the most recent forecast from the U.S. Energy Information Administration‘s, crude oil prices are forecasted to average $54.1 per barrel in 2018, a US$ 2.5 increase from the 2017 price of $52.4 per barrel. Oil price has risen by more than 140 percent since the January 2016 collapse that saw oil prices drop to $21.5 per barrel but is up to $38.8 per barrel as of July 2017.

The oil price increase will largely depend on production cuts planned to end in March 2018 and a modest increase in international demand.  This increase is likely to see an intensification of investments in oil and gas activities, especially in new emerging oil producers such as Uganda. Uganda expects a total investment of US$ 20 billion in exploration and production, refinery, pipeline and supportive infrastructure such as an international airport in Kabaale, and the oil roads. Such investments are expected to create more than 300,000 direct, indirect and induced jobs.

Ernest Rubondo, Executive Director, Petroleum Authority of Uganda (PAU), is optimistic 2018 will be big for Uganda’s oil industry.

“The sector will be felt in 2018,” he told the Independent in an interview last year. Rubondo has been at the helm of all the major developments in the sector since the 1990s.

Indeed, days before the interview, Rubondo had just received the last of the eight delegations of investors from several countries—France, Egypt, Russia, UK, Norway and Belgium—that visited Uganda in December alone, which he said was one of the indicators of things to come.  These investors are targeting a piece of the $ 20 billion expected to be invested in the oil development phase, he said.

Other pointers, he added, include; the application for parliamentary approval of a loan to finance the construction of the airport in Hoima targeting the oil industry; the near-completion of front end Engineering designs for the oil fields, among others.

While most of this interest is for the development phase of the 6.5 billion barrels of oil that has already been discovered of which some 1.2 billion is recoverable, the new round of exploration is set to be even bigger.

For the 6.5 billion to be discovered, only 121 wells were drilled.  In the new round of exploration, which begins this year, 400 wells are set to be drilled.

“People keep asking when the oil money is coming,” Rubondo said, “All this activity is oil money. All these people coming in will need food, hotels and many other services. That is money.”

The Oil Pipeline

New details have emerged in the East African Crude Oil Pipeline (EACOP) regarding how it will be financed, run and managed. For starters, Uganda plans to construct a pipeline that will transport its crude oil to the international market through the Tanzanian coastal port of Tanga.

The pipeline is expected to be completed by the year 2020, when the country is scheduled to start oil production. In fact, Uganda’s President, Yoweri Museveni and his Tanzanian counterpart recently commissioned the construction of the East African Crude Oil Pipeline. The two leaders laid mark stones for the crude oil pipeline in Mutukula, Kyotera District and Kabaale in Hoima District.

Uganda’s Minister of Energy and Mineral Development, Engineer Irene Muloni, says that the National Pipeline Company (U) Ltd – a subsidiary of the Uganda National Oil Company (UNOC) will own shares in the pipeline company (Special Purpose Vehicle), on behalf of the government of Uganda. As of now, the pipeline company (Special Purpose Vehicle) is yet to be incorporated.

Eng. Muloni said that there is a possibility of bringing on board investors into EACOP in addition to the governments of Uganda, Tanzania and the Joint Venture partners. Once the pipeline company is incorporated, another sticky issue that will have to be ironed out is how the company will meet its tax obligations both in Uganda and Tanzania.  However, at the moment there is already commitment to exempt it from tax.

Financing

Another issue under consideration is the financing of the pipeline project. At least $ 3.5 billion dollars is needed to finance EACOP. Accordingly, to preliminary information, the funds will be raised through debt and equity from joint venture partners and national oil companies of Uganda and Tanzania. Already, Total E&P Uganda, Tanzania and Uganda have appointed three companies as financial advisors for the pipeline. A consortium of South African based Standard Bank, Imperial Bank of China (IBC) and Sumitomo Mitsui Banking Corporation Europe Ltd, were recently appointed as the financial transactional advisors for EACOP.

Uganda’s oil sector has emerged at a time when regional and global business norms are shifting towards greater transparency. International movements such as the Extractive Industries Transparency Initiative (EITI) have led the way, but Uganda has not yet signed up. The government must prove it is committed to managing its oil and mining sectors in the open if the Ugandan people are to reap the full benefits of their resources.

Uganda’s oil has potential to diversify its economy for the long-term if revenues are invested well in developing key productive infrastructure, commercialization of agriculture, providing skills training and adding value to ensure high-quality exports to regional and international markets.

The country’s fledgling oil and mining industries could transform an economy in which millions live in dire poverty, but only if well managed. Unless deals are done in the open, and steps are taken to protect the local people and the environment, the promise of oil wealth could entrench corruption, fuel unrest and wreck Uganda’s unique natural habitats.

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