Chen Zhuobiao, the president of Cnooc Uganda Limited, confirmed last week that the company had gotten approval from their head office in China to move ahead with investing in the crude oil pipeline between Uganda and Tanzania, and the Kingfisher oil field.
“Tanga in sight,” Ali Ssekatawa, the director of Legal and Corporate Affairs at the Petroleum Authority of Uganda, tweeted after news of Cnooc’s approval broke, in reference to the Tanzania port where the 1,445km crude oil pipeline from Hoima in western Uganda will terminate.
NOT AN EASY RUN
Cnooc’s decision to stick around Uganda’s oil industry should not be taken lightly. The company has not had an easy run, and there have been situations where it has vented its frustrations on the direction Uganda’s oil industry was taking.
From the time when it hit a dry well at the Kanywataba block in Ntoroko district in 2012 to being sidelined during the last stages of the negotiations that unlocked the impasse between Uganda and the oil companies in November 2020, Cnooc’s commitment in the country at times looked questionable.
Take the attempt to find oil at the Kanywataba oil block. The drilling activity there was supposed to build on the success at the Kingfisher oil field, which is about 40km away. Connecting the Kanywataba to the Kingfisher would have widened Cnooc’s fortunes in the area, and pushed up the value of the field.
After hitting a dry well, Cnooc abandoned the field and the license was reverted back to the government. The Chinese company does not say how much money it lost in that drilling campaign although, at the time, the exploration cost on an oil well was estimated at $5 million at the very least.
Cnooc then decided to focus on developing the Kingfisher oil field and the country’s export plans.
Then, all the three major oil companies in Uganda’s upstream industry had agreed that exporting the country’s crude through a pipeline to the coast was the best option. All the three companies – Tullow, Cnooc and TotalEnergies – had an equal shareholding of 33.33 per cent in the three different fields, EA 1, EA2 and the Kingfisher. But it appeared that that was all that kept the three companies together. There were major differences on the export route of the oil pipeline.
Tullow Oil, which was the oldest oil company in Uganda’s upstream industry at the time, lobbied for the export route to Kenya’s Lamu port. It was a selfish decision. Tullow Oil was busy exploring for oil in the Lokichar area in northern Kenya, where the prospects looked good.
An export pipeline through northern Kenya to the port of Lamu would be the proverbial killing of two birds with one stone. The plan for Tullow would be to ship the oil from its fields in Hoima, pick up the crude in northern Kenya, which was said to be similar to Uganda’s, and then head to Lamu.
Cnooc decided to ride on Tullow’s back. Cnooc also had some presence in Kenya.
Around that time, in 2013, South Sudan was experiencing problems with its neighbour, Sudan, as accusations of meddling in each other’s political affairs and support to insurgents deepened. Sudan, perhaps as a punishment to choke South Sudan’s economy, threatened to shut the pipelines that transported South Sudan’s oil.
So, South Sudan lobbied Kenya to build an export pipeline to the East African coast of Lamu. Also, there was a Chinese company – Chinese National Petroleum Company – which was operating in South Sudan. All these factors favoured Cnooc. An oil pipeline route from Uganda through Kenya was ideal for Cnooc.
GENTLEMAN’S AGREEMENT
Everything was going smoothly. Meetings between Ugandan and Kenyan officials looked like they were heading to a deal. In August 2015, President Uhuru Kenyatta and Uganda’s Yoweri Museveni had a gentleman’s agreement to build a pipeline through Kenya. A communiqué about this agreement was issued.
But there was TotalEnergies. The French oil major had long preferred the route to Tanzania. Just like Tullow and Cnooc, TotalEnergies also had its selfish interest. The company owned a license in a huge gas field in Mozambique, which borders Tanzania. Securing its presence in Tanzania and Mozambique would deal with some operational headaches.
There was a problem with Tanzania though. Tanzania had long snubbed the East African Community, and it warmed up more to the Southern African Development Community. Kenyatta, Museveni and Rwanda’s Paul Kagame, always looked at themselves as the coalition of the willing as Tanzania stayed out of that club.
These factors did not deter TotalEnergies. The French lobbied the Tanzanians fast and hard. In December 2015, three days before Christmas, Patrick Pouyanne, the chairman of TotalEnergies, made his first visit to Uganda, where he met Museveni, at the state lodge in Jinja. At the time, Museveni was facing one of his strongest challenges in Kizza Besigye, with the presidential election less than two months away.
By the time the Jinja meeting was done, Museveni had agreed with the Tanzanian route. A technical team later released reports showing the advantages Tanzania had over Kenya, especially on issues such as land rights and terrain. Tanzania became the preferred route. The Kenyans were driven into a rage. Museveni didn’t care that much. He had a presidential election to navigate, plus it was the oil refinery, not the pipeline, that he was keen on.
With Tullow’s Kenya bid collapsing, so did Cnooc’s hopes. Just over a year later, the UK firm announced that it was downsizing its presence in Uganda and that it would sell more of its stake to Cnooc and TotalEnergies.
TAX DISPUTE
A tax dispute would delay government’s approval of Tullow’s farm down for more than three years. Cnooc got increasingly frustrated in the way it had been pushed to the periphery during the negotiations to resolve this dispute.
“With regard to the crude oil pipeline project, which has been led by Total, Cnooc is concerned that the project is not yet investable or bankable and the participation percentage will largely depend on the economic return and the bankability,” Zhao Shunqiang, the president of Cnooc Uganda Limited, wrote to Goretti Kitutu, then Uganda’s minister of Energy and Mineral Development, in early 2020.
Patrick Pouyanne pushed ahead regardless, holding three meetings with Museveni in just 2019. When the approval came, in mid-2020, Cnooc had already backed out, saying it would not buy any of Tullow’s stake, effectively handing over TotalEnergies the lion’s share of Uganda’s oil stake, taking 62 per cent of the shareholding.
This also meant that Cnooc would reduce its share in the pipeline project. Cnooc would retain an eight per cent stake in the pipeline. Attention now turned to the fight over the Engineering, Procurement and Construction contracts in the oil industry. TotalEnergies being the captain of Uganda’s oil industries favoured European companies. Cnooc chose Chinese companies.
With much of the financing expected from China, Beijing dillydallied on sanctioning any oil projects in Uganda. TotalEnergies grew frustrated and made its feelings to the Ugandan government.
Concessions needed to be made. Cnooc was asked to make a decision. That decision came last week, attracting applause from different corners of the top offices in town.
jeff@observer.ug
