Uganda’s oil journey to a $15 billion investment

There was palpable excitement in 2006 when Uganda found oil that the government organised national thanksgiving prayers on October 8, 2006 to celebrate this feat.

To the ordinary folk, an immediate economic bonanza that is yet to materialise was imminent! As a nascent country finding oil for the first time, it is not surprising that it has been a long journey to the Final Investment Decision (FID).

There was lot of work to be embarked upon putting in place the necessary legislative framework and enabling infrastructure. Uganda’s petroleum discoveries were made at a time of rising oil prices and raging resource nationalism.

Governments were tightening further their grip on the sector to extract as much economic rent and major disagreements between the international oil companies (“IOCs”) and host governments were common at the time. Uganda too adopted a hardline stance.

It was government’s irreducible demand for all the crude oil to be refined locally, a position that was contested by the IOCs. Generating consensus on the matter was long and protracted. It took more than 10 negotiation meetings chaired by the President of Uganda to find the compromise recorded in the memorandum of understanding (“MOU”) signed on 5th February 2014 between the government and the IOCs.

This MOU provided for the building of both an inland refinery and export pipeline to monetise the country’s hydrocarbon discoveries.

Production Sharing Agreements (PSA) transfers and tax disputes

Major IOCs rushed to acquire a stake in Uganda’s oil and gas sector following the 2006 discoveries. Unfortunately, the government misunderstood this interest leading to amendments in the law to tax the windfall profits that were “apparently” being made by the IOCs on the oil license transfers.

As such, transactions for the transfer of PSA interests that followed were marred with major disputes over tax issues between the government and IOCs. This partly contributed to the delay in commercialising Uganda’s oil discoveries.

Countries customarily achieve growth in their oil and gas sector through the transfer of interests in oil licenses. Smaller players have more risk appetite to explore countries that are yet to make any discoveries. Once oil finds are made, the interest of the bigger players with the financial and technical ability to propel further the industry is awakened.

Countries that place onerous requirements on such transfers are inadvertently obstructing the growth of the sector. Oil rights not relinquished back to government are transferred to other interested parties keen to participate in the country’s oil and gas industry. This has in fact been the trend in Uganda’s oil and gas industry.

Petrofina SA, a Belgian petroleum conglomerate acquired by Total S.A in 1999, had signed a PSA with the government in 1991 to carry out exploration activities in the Albertine graben but withdrew two years later without any tangible works.

The oil rights reverted back to the government. In 1997, the government entered into two PSAs with Jersey-domiciled Heritage Oil (“Heritage”) and Australian-incorporated Hardman Resources. Heritage carried out the first seismic survey in Uganda in 1998. Hardman Resources did not start exploration operations until 2001 with its new partner Energy Africa. Heritage continued with its exploration activities in concert with its new partner Energy Africa.

The promising prospects and the rising crude oil prices enticed Irish-founded Tullow Oil (“Tullow”) to purchase the entire shareholding in Energy Africa, giving it a 50 per cent stake in the blocks that Energy Africa co-held with Heritage. Hard-

Hardman Resources found Uganda’s first crude oil in June 2006 at the Mputa well. Other finds by Tullow and Heritage at the Kingfisher well followed and by 2009, Uganda had passed the threshold for commercial crude oil discoveries. In 2007, Tullow acquired Hardman Resources.

In 2009, Heritage announced the proposed sale of its 50% stake in the blocks it held to Italian oil major ENI but Tullow exercised its pre-emptive rights acquiring full ownership of the rights in these blocks. This transaction triggered off a long-standing dispute for capital gains tax (“CGT”) which Heritage contested but was won by the government.

Tullow remained holding 33.334% when it divested two thirds of its interest in blocks 1, 2 and 3A to Total and CNOOC in 2012 with each party holding 33.333%. Either party became an operator of one of the three blocks. This transaction too triggered off a tax dispute that Tullow eventually settled with the government.

On 23rd April 2020, Total agreed to acquire the entire Tullow oil interests in Uganda. It is understood that a payment of $500 million was paid to Tullow on the completion date. A further $75 million will be paid to Tullow upon achieving FID for the Tilenga and the export pipeline projects.

When oil production commences, Total will further pay Tullow up to 2.5% of its annual profit oil, from the Interests acquired therefrom, when the oil price is above $ 62. The 2020 sale differed from the aborted 2017 deal where Tullow was to remain in Uganda but with significantly reduced footprint.

It is understood that the CGT that was payable by Tullow to the government on this transaction was about $ 14.5 million compared to the $167 million which would have been payable under the 2017 Sale and Purchase Agree-ment. The Government also earned about $9m as stamp duty from the sale. 


Enduring disagreements between the government and IOCs in 2019 prompted Tullow Oil to call off its intended sale of stake to Total and CNOOC. Total followed suit by suspending procurement activities for the EACOP project.

Both Tullow and Total attributed their decisions to the unresolved tax disagreements with the government. This impasse cast doubt on the future of Uganda’s oil and gas industry. Both the IOCs and government were, however, cognizant that a lasting standstill would benefit none and re-engaged behind the scenes to search for a win-win resolution of the outstanding contentious matters.

In November 2019, Total’s President and Chief Executive Officer made his third visit to Uganda in the year to meet President Yoweri Museveni. Total highlighted that there were legitimate fiscal issues that had to be dealt with if Uganda’s oil project was to move to FID stage especially around how the fiscal regime affected the project return on investment.

This fiscal regime concern is understood to have been an issue with the IOC’s from as back as 2010 but had never been formally raised with Government! This meeting renewed intense behind-the-scene negotiations between Total representing the other IOCs and the government to narrow down further their positions of disagreements.

These deliberations moved on to 2020 and by the time the coronavirus pandemic disrupted global travel and business in March 2020, a framework agreement on major issues had been reached between Total and the government. While details of the agreed positions are not in the public domain, it is speculated that the government conceded on a majority of fiscal issues that had led to a breakdown of relations with the IOCs in August 2019 with agreements reached to amend the subsisting PSAs and the Income Tax Act.

In September 2020, Total and Uganda initialled the Host Government Agreement (HGA), a key agreement for the progress of the EACOP project. It is now anticipated that all agreements for the project to move to FID have been substantially finalised or close to finalisation.

A key meeting between the oil companies and the presidents of Uganda and Tanzania is expected shortly to sign off all these agreements and announce the final investment decision to launch Uganda’s oil project.


As earlier noted, monetising Uganda’s crude oil discoveries would involve a simultaneous FID for both the oil field production facilities and the EACOP. The absence of a pipeline would mean that there is no evacuation route for crude oil to the export markets.

While efforts are underway to ensure that the construction of a crude oil refinery also goes ahead, there are strong headwinds in the way of unlocking financing for the project.

It is understood that all the requisite upstream commercial agreements have been substantially finalised. These include a new Joint Operating Agreement between CNOOC, Total and UNOC, the Power Purchase Agreements for excess electricity produced by the production facilities, the Common Development, Production and Cost Allocation Agreement.

The evaluation of major upstream procurements has also been completed with announcement imminent of the successful Engineering, Procurement and Construction (EPC) contractors amongst other vendors. 


The late president of Tanzania John Pombe Magufuli pulled off a major coup when he convinced Uganda and Total at the East African Community bloc in March 2016 to route the crude oil pipeline through Tanzania.

The pipeline had originally been intended to go through Kenya and this seemed like a foregone conclusion at the time. Uganda and Tanzania signed the Intergovernmental Agreement (“IGA”) for the EACOP in 2017. The IGA is the agreement between the states through whose territories a pipeline is constructed and operated.

Some of the issues dealt with by the IGA include cooperation, the provision of land rights, and harmonization of tax structures applicable to the project and other issues relevant to the implementation of the project.

Both Uganda and Tanzania have ratified the IGA and in the processing of pushing through their legislature the requisite EACOP enabling laws that will include an EACOP Act. Total also completed negotiating HGAs separately with the governments of Uganda and Tanzania.

The HGA is an agreement between the IOCs or project investors and the government within whose territory the pipeline traverses. The HGA expands on some of the issues identified in the IGA including the various governmental obligations, investor duties, environmental and other relevant standards, liability, termination and issues relevant to the implementation of the project in each specific territory.

The other commercial agreements required to move forward with the EACOP project have also been substantially finalised. These include the shareholders agreement between the shareholders to the EACOP Company, the tariff and transportation agreement and the primary capacity rights agreement.

The marine services agreement for using Tanga port in Tanzania has also been finalised. The evaluation of major pipeline procurements has also been completed with announcement imminent of the successful EPC contractors amongst other vendors.


The timelines envisaged in the previously signed project framework agreement between the government and the Albertine Graben Refinery Consortium comprising Yaatra Africa LLC, Lion Works Group Ltd, Nuovo Pignone International SRL and Saipem SPA for completing key project development activities, including conceptual engineering studies, front end engineering design (“FEED”) and the environmental social impact assessment (“ESIA”) have since expired.

An addendum was signed in August 2020 giving the consortium an extra 18 months to complete the project ESIA and FEED. Until these works are completed and the financing structured, timelines for the construction of Uganda’s refinery cannot be determined.

At the completion of the preparation studies and designs, the consortium is expected to announce a final investment decision for the 60,000 barrels per day refinery worth about $ 3-4 billion.


At least 16 years later after making its crude oil discoveries, Uganda is on the cusp of the final investment decision for developing the necessary infrastructure for crude oil production. This FID is coming at a time of completely different market fundamentals compared to when oil was first discovered.

In 2006, it was a bullish market with rapidly rising oil prices while today the market is bearish with depressed oil prices. Countries are also rethinking their energy strategies focussing more on cleaner renewable energy and reducing their dependence on fossil oil.

Uganda could not afford any longer to delay the development of its oil project even if it meant ceding ground to some of the IOC’s demands. For support with structuring commercially focused local content compliant investment structures for Uganda’s oil and gas business opportunities, please contact your usual Cristal adviser for further information.

Cristal Advocates is a law firm, which, among other sectors, covers the oil and gas industry.

© 2016 Observer Media Ltd