Oil Trading in Uganda – The First Oil Journey
Oil trade has made some countries wealthy and popular. Uganda is no exception. Most of the African oil trade was at the time off the Atlantic coast. It was the biggest onshore discovery in Africa then. Underneath a national park in Uganda is part of the black gold. Oil trade quantities were finally discovered in three fields in the western part of Uganda in 2006.
The debate switched to asset transfer between the three oil trading companies that are exploiting the oil fields: Total Petroleum Company – a French supermajor, CNOOC – a Chinese state-owned company, and Tullow – a London-based independent. In 2017, Tullow declared that it would sell most of its Uganda project stakes to its two largest partners, reducing its chances to 11.76%.
In August last year, the oil trading companies and the government were still unable to decide on the transaction payment of the $900 m. The sales agreement between the companies has expired. Uncertainties about the oil trade transactions have postponed last year’s long-awaited and expected final investment decision for this petroleum project. The agreement came to a halt.
Irene Muloni, the former Minister of Energy, said that they would decide in April 2020. Usually, the shift from the Final Investment Decision to the first oil trade takes three years.
The country has been waiting for oil for a century. A British team conducted the first formal survey of Lake Albert in 1925. Two weeks after the seizure of power in 1986, President Yoweri Museveni held oil meetings with advisers and soon afterward called off talks with the oil companies while the country built up its inclination to negotiate.
Meanwhile, The Total Petroleum Company has ceased operations on the 1,445 km oil trade pipeline that will transport Ugandan oil to the sea. Total Petroleum manager, Patrick Pouyanné, was back in February to talk about the many challenges they face in the oil trade project. “Lake Albert is full of crocodiles,” he said. He says those “crocodiles” are challenging to tame.
Is Black Gold a curse?
“There is nonsense that oil will be a curse. No way,” Museveni trashed the saying when he revealed the discovery. Intelligibly, the government has not rushed into the sector.
Mr. Museveni took a profound human interest in the proceedings with oil corporations and led a complicated deal. It took him time to establish relevant laws and recruit a team of qualified technocrats.
The tax was the most controversial issue. The company that had done much of the initial exploration work in 2010 – Heritage, agreed to sell its assets to Tullow. The government exacted a tax bill on capital gains of $434 million, challenged by Heritage. A local court and a London arbitration tribunal ruled favoring the government, and Museveni eventually paid a bonus of UgShs6 billion ($1.6 million) to 42 officials who had helped. A similar conflict occurred when Tullow sold part of its interest to Total and CNOOC in a foreshadowing of the prevailing delay. In 2015, they resolved out of court.
Underneath the surface were other tensions. Museveni wanted local oil refining. The oil companies chose to export it, insisting it was economically unviable for a small inland refinery. Conclusively, they conceded that they would refine oil up to 60,000 barrels per day. They will transport the rest through the world’s longest heated oil trade pipeline to the Tanzanian shoreline.
“People view the business we have today through previous transaction lenses,” says Denis Kakembo, of Energy and Tax Cristal Advocates law firm in Kampala. It is also not shocking that Tullow’s 2017 decision yielded no fruits.
Total and CNOOC paid Tullow a total sum of $900 million to cover the development costs of the future. However, disagreements arose over several problems, like the way Tullow accounted for the payments between acquiring and selling his Ugandan assets. Tullow received a $167 million bill in capital gains disputed by the government.
After direct negotiations between Uganda’s President Mr. Museveni and Total’s Director Pouyanné, they reached a compromise. They decided that Tullow would only pay $85 million, with Total and CNOOC signing up to the rest. Nevertheless, they could not agree on whether Tullow’s recoverable losses would be retained by the two giant companies and count them against future tax obligations. The matter remained unresolved when the deal collapsed at the end of August.
In December 2019, Hanns Kyazze, a communications expert at the Ministry of Energy and Mineral Production, told Reuters that the government put forward new oil trade proposals that have since been approved by the oil trading companies.
The original agreement between the petroleum companies is still in place while they settle the dispute, and they may need to draw up another, reasonably in a fresh light. Political focus has already shifted to presidential contested polls in 2021.
The government has spent money on the cost of delay. It splashed money into roads, dams, and airport construction on the promise of an impending oil trade boom.
A study carried out in 2018 by Sebastian Wolf, of the Overseas Development Institute, and Vishal Aditya Potluri, of Harvard Kennedy School, has predicted that oil trade revenue will peak at 73% of the government’s non-oil tax revenue within a few years.
Bank of Uganda has cautioned the debt might become unsustainable in the event of oil delays. It all depends on the Final Investment Decision (FID) now.
“Uganda must change drastically from the moment FID is declared,” said Hanns Kyazze, Energy Department Communications expert. Building the oil infrastructure is estimated to bring a flow of $20 billion in the country. But, once a decision is reached, other problems occur. They have already displaced thousands of people in western Uganda; some are questioning the resettlement package they received.
Six NGOs will challenge Total in a French court this January 2020, arguing it has not expanded and enforced or implemented its strategy for human rights and environmental surveillance. It is just the dawn of Uganda’s oil saga.