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‘Oil production delay has been beneficial’

Why has Uganda’s oil production taken so long? Will Uganda escape the oil curse that disorganized some countries? These were some of the questions addressed at the first national oil and gas symposium on July 2 at Makerere University.

Under the theme, ‘Potential contribution of the oil and gas sector to Uganda’s economy’, the symposium was organised by Operation Wealth Creation and Makerere University.

The consensus was that the delay is beneficial because Uganda has been able to build its capacity, not only in activities directly necessary for oil production but also in management, supply logistics and standards areas.

So far, international oil companies have invested $3 billion in the exploration and appraisal phases of the project, government has got revenue from royalties, production sharing and taxes. It was stated that a dollar invested in the oil and gas sector results in four more dollars being invested in other sectors of the economy.

Although existence of oil in the Albertine graben had been ascertained in the 1920s, commercially viable reserves were confirmed in 2006 after efforts started in the 1990s. However, 14 years down the road, there has been no oil production. The date for first was first announced as 2010, but that has been changed several times; the current projection is 2024. Uganda has at least 6.5 billion barrels of commercially viable oil.

Prof Eria Hisali, principal of College of Business and Management Studies, who was the host, said the symposium will be an annual event and a platform for policymakers, technocrats, academia, civil society and the general public to discuss issues regarding the oil and gas industry in Uganda.

Prof Barnabas Nawangwe, the vice chancellor, said immediately after announcement that oil and gas exploration would start, Makerere University embarked on several researches and set up study programmes; right now, Makerere has an institute of Geoscience and Petroleum, a partnership with the China University of Petroleum.

FINAL INVESTMENT DECISION

Kiwanuka Kiryowa, a board member of the Petroleum Authority of Uganda, stressed that Uganda has gained a lot in the 14 years, such as infrastructure and capacity building. He said though the signing of a Final Investment Decision (FID) may appear to have taken long, the FID is a process of multiple negotiations rather than a single event.

He said the figures being discussed in the negotiations are very huge and never imagined before by planners of the Ugandan economy, hence the need not to rush into uncharted territory.

“As a consequence of signing the FID, between $15 billion (Shs 54 trillion) and $20 billion (Shs 72 trillion) is expected to be invested in Uganda through various projects in five to seven years,” he said.

Keith Muhakanizi, the permanent secretary, ministry of Finance and secretary to the Treasury, was optimistic that given the new situation brought about by the Covid-19 pandemic which compels countries to resort to import substitution, the pace of FID has raised. “One opportunity of the Covid-19 period is that we moved faster in three months than the last three years in getting closer to FID,” Muhakanizi said in a speech read by Moses Kabanda.

The FID, now expected late 2020 or early 2021, will unlock capital inflows and boost local demand, bring in international expertise, expand the infrastructure and open up business opportunities in logistics, engineering and construction, insurance and finance, environment management, health care and other services.   

Muhakanizi said much as the FID will lead to the establishment of centres of excellence and research hubs to assist the entire African continent, and a rise in employment and skills, the ball is in the court of those handling the negotiations whom Ugandans ought to trust.

On the emotive subject of the April 2020 farm-down transaction of Tullow Oil’s interest, Hisali said Ugandans ought to recognize the fact that even earlier transactions (Heritage sale to Tullow in 2010; Tullow to Cnooc and Total in 2012 and Tullow to Total and Cnooc in 2017) were subjects of disputes and disagreements.

He explained that there is no perfect deal; the final price of capital gains from a farm-down transaction depends on several factors; for example, Covid-19 brought prices of almost everything down. “Such long negotiations lead to losses to government and international oil companies, e.g the time value of money, the present value of benefits, the investment environment and country risks, revaluations and direct tax revenue losses, etc. It is estimated $500 million present value is lost every year we delay,” Hisali explained. Daniel Muwooya from Uganda National Oil Company (UNOC), put the figure at between $500 million and $1,000 million! 

Hisali argued that the farm-down transaction, whose capital gains tax was first assessed at $900 million but eventually only $14.6 million was paid in by Tullow Oil April 2020, should continue because otherwise, it would spoil the investment environment and reputation of Uganda and disadvantage the project which comprises a crude oil pipeline and a refinery. He argued that taxes are not the main source of revenue from the sector; there are bigger sources such as royalties.

Kiryowa was even more emphatic on this, saying, “We license companies to develop the oil, not to tax their selling of interest in the project. Capital gains tax is a spinoff, not the goal and not the main source of revenue to government or main benefits to the country.”

Muwooya said potential benefits from the sector are many, including value addition such as oil refining and petrochemical industries, jobs and human capital development, balance of payments improvement and household incomes improvement, among others.

Gilbert Kamuntu, senior commercial officer at UNOC, said the fact that Uganda won all the three capital gains disputes proved that government had the correct position.  Robert Kasande, the line ministry permanent secretary, argued that the delay has been put to good use; not only was the National Oil and Gas Policy for Uganda approved in 2008 but it is currently being revised, many regulations have been developed, especially in the year 2016, a number of agreements have been signed, and human resource capital capacity has been built.

ONLY 10% EXPLORED

Kasande disclosed that besides the Albertine graben, Uganda has oil reserves in “Karamoja and other areas”. He said so far only 10 per cent of the areas where oil and gas are suspected have been explored.

“We have just started the second round of licensing for exploration. Of course as we explore the 90 per cent of the areas, there are chances of finding more or less oil than we expect. With our inbuilt national content policy, these activities help our people acquire skills, technology transfer and conduct research,” Kasande said.

Kasande said of the required 14,000 skilled jobs that the project will require, already 4,000 Ugandans have the necessary training. “Uganda will get many direct and indirect benefits besides the 14,000 key jobs. We are currently concentrating on levels II and III of skilling; level IV will be trained when production starts. We have carried out enterprise development through trainings in accountancy, bookkeeping and standards for SMEs. Certification of institutions and enterprises has taken place, though not as fast as we would have liked.”

Prof Pamela Mbabazi, chairperson of National Planning Authority, said a national supplier database so far with 700 companies and a national oil and gas talent register have been created; several international accreditation systems have been domicilized; and oil companies have made social investments outside their project budgets, such as scholarships, schools and health centres that are already benefitting Ugandans.

Philip Andrew Wabulya, executive director of the Petroleum Investment Fund at Bank of Uganda, explained a number of issues regarding revenue from the oil and gas sector. “There are five or six sources of revenue from the sector. Uganda Revenue Authority is responsible for collecting the revenue, which it has to bank at Bank of Uganda under the Petroleum Fund. This fund is managed by ministry of Finance and parliament has to oversee its appropriation.”

Wabulya said the Petroleum Investment Fund which he heads is managed by Bank of Uganda; the ministry makes the policy about its management and parliament carries out oversight of the fund, though they may delegate some of the responsibility to the finance minister. BOU is paid for keeping this reserve and is expected to make regular reports on it. However, since parliament has never allocated money to this investment reserve fund, there is no report to make as yet, he elaborated.

PARADIGM SHIFT

Steven Biraahwa Mukitale, member of parliament for Buliisa, was appreciative that the delay of first oil production has enabled social impact assessment to take place, on top of environmental impact assessments. Thus locals have been compensated. “Uganda now has a big intellectual property; even if the IOCs left, we can still go ahead.”

He, however, observed that foreign companies still have immense advantages, saying government ought to think critically and out of the box, and implement a paradigm shift regarding local content and state participation.

He was of the view that the state, including the army, Uganda Development Corporation and National Planning Authority must participate to lift up the prospects. But above all, there must be a robust industrial policy if we are to escape the oil curse. He noted that misallocation of oil money results from the power relations in a given society, something to look into in Uganda’s case.

jmusinguzi@observer.ug

Comments

+1 #1 Kasiga Martin 2020-07-11 04:21
I appreciate UNOC for the good work expecially keeping ugandans oil safe.So am forward to see that the FID is signed.Thanks
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+1 #2 Joe B 2020-07-12 12:22
Fellow countrymen, this is one area in which we should applaud the president and the entire team of Ugandans that have been working on all matters related to the Ugandan oil resource.

They have been tenacious and wise in ensuring that Uganda gets the best from the oil industry and its development, so far.

Some things may have been done better, especially in hind sight, but looking at the"balance sheet" so far, they have done a good job. Thank you Mr. President, you have definitely earned the credit. To hell with the detractors who see no good in everything you do.
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0 #3 JonSs 2020-07-14 00:32
This is another talking chamber where the elite come to justify why they should leach off the tax payer.

They make it sound like it’s 1965 all over again where Americans find reserves of oil in Stavenger and buy off a whole region which becomes Norway’s oil city.

Unfortunately for Uganda the world is moving to renewable energy, oil prices will recover but not to the level of the 90s,20s. Like cotton and coffee I think we’re arriving late for the feast.
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