The discovery of black gold in 2006 by Anglo-Irish Tullow Oil, in the Lake Albert Basin on the border with the Democratic Republic of Congo, has already started to transform the fortunes of the impoverished East African country – even before the first barrel of oil has been pumped from the ground.
The wave of small-cap pioneers led by Tullow has now been followed by many of the big players, as the Western oil majors along with China, France, Norway, Libya, south Africa and even Iran have piled in behind them hoping to snap up a piece of the East African hydrocarbons boom before all the exploration acreage and development contracts have been sewn up.
For a country whose history is still scarred by the memory of Idi Amin and Milton Obote, the 500,000 people who died in state-sponsored violence during their brutal dictatorships, and the years of civil war and turmoil that followed until Yoweri Musevenei emerged as president in 1986, the transformation has taken place in the blink of an eye.
A decade ago, Uganda’s economic outlook did not extend much beyond how much coffee, tea, fish and timber it could export. While the landlocked country has enjoyed relative stability for two decades, most of its 33 million people have been condemned to live on less than two dollars a day. Now, billions of petrodollars are about to flow in.
By global standards, Uganda’s oil endowment, like that of Ghana’s to the west, is very modest. One, maybe two billion barrels. Lake Albert production is expected to begin at very low levels sometime in 2011. But it could rise to 350,000 barrels a day by 2015, and stay there for the estimated 15-year life of the field.
The World Bank calculates that the Lake Albert find could bring the government about $20bn dollars in new revenues over the next two decades. But that is likely to be a gross under-estimate. Tullow has now drilled some 30 wells, from Kingfisher 1 in the south, to Buffalo 1 in the north. All but one of the Tullow wells have encountered oil and/or gas.
Moreover, there are nine exploration blocks stretching from the Sudanese border in the north to Lake Albert in the west, and on to Lake George in the south. Less than a third of the licensed areas have so far been explored. The prospects for further finds along the East African Rift Valley system – which also extends into Kenya, Sudan and Ethiopia – are considerable. Uganda’s overall oil endowment might be two, three or more times current estimates. The former humble coffee grower is about to enter the ranks of the world’s top 50 oil producers.
If the rest of the world will take time to adjust to the idea of the impoverished former British colony becoming a significant oil exporter, so too will Ugandans. The discovery of oil has triggered an uncomfortable mixture of excitement and trepidation as the prospects of rapid economic growth, development and jobs on the one hand, are balanced by the challenges of managing vast capital inflows without an explosion in graft, conflict and environmental damage that have led other “resource-rich” countries down the road to perdition on the other.
Dispute
A first taste of what lies on the horizon came in July this year when Heritage Oil, Tullow’s joint venture partner, sold its stake in the Lake Albert fund to Tullow for $1.45bn. The Uganda Revenue Authority demanded $404m from Heritage in unpaid capital gains tax. But Heritage insisted that the tax claim was bogus.
Uganda had threatened to withdraw Tullow’s licence to one of the blocks until the tax bill was paid. Such a move would have prevented Tullow selling on a one third share each of the Lake Albert find to the China National Overseas Oil Corporation (CNOOC), and Total of France.
The three joint venture partners will have to raise an estimated $8-10bn to develop the field, and bring the oil to market. That funding effort could not even begin until the Heritage tax dispute was resolved, and the license to all the Lake Albert blocks are confirmed.
Tullow and Uganda resolved the dispute in October after Tullow agreed to cough up. However, Uganda, stung by allegations that its tax law was flawed, and embarrassing claims that its tax authorities were just trying it on in an effort to bridge a shortfall in tax receipts, announced its intention to compel foreign firms to pay capital gains tax on the sale of exploration rights to third parties.
A new Income Tax (Amendment) Bill 2010, which will not be applied retroactively, will in future ensure that foreign firms cannot escape their tax liabilities. It will also grant the Ugandan Revenue Authority powers to conduct impromptu tax audits on all oil firms to verify tax compliance. Kampala may have been caught off guard by Heritage’s nimble corporate tax lawyers, but it is learning the rules of the game very fast indeed.
With the dust from the tax dispute finally settling, Uganda must now turn its attention to how it intends to exploit the Lake Albert find, how it is going to transport the oil to Africa’s Indian Ocean coast, and how it intends to spend its pending mountain of petrodollars.
Kampala appears to have taken a decision in principle already to build its own mini oil refinery to extract high value diesel, kerosene and gasoline from Lake Albert’s heavy black oil. Uganda currently imports about 13,000 barrels per day of refined products – mostly from the Kenyan refinery at Mombassa.
A Ugandan refinery to service its domestic needs, which would cost about $1bn to build, could save it about $1bn a year in imports, and prevent any reoccurrence of the interruption in supply that followed Kenya’s 2007-08 post-election violence, where shipments of refined products dwindled to a trickle, bringing the Ugandan economy to a standstill.
The mini refinery would consume only a fraction of Lake Albert’s production, so the government must still decide on whether to build a bigger refinery to export refined products to regional and international markets, build a pipeline across Kenya to the Indian Ocean coast to transship refined products, or just export crude oil.
Kenya, already facing the prospect of the loss of a key importer of its refined products, hopes Kampala will opt for the pipeline. It has already proposed the construction of a new $22bn port at Lamu for the new trade route to Southern Sudan and Ethiopia – the existing port of Mombassa has already exceeded its design capacity – which could also serve as an exit point for Ugandan crude oil or refined products.
As the money from the new oil exports starts to pour in, the Ugandan government – which for decades has struggled to find the money to build new power stations, road and rail networks, schools and hospitals and agricultural development programmes – will soon find it has far more hard cash than it is able to spend.
Preventing large-scale waste and theft will be a formidable undertaking.
Pressure is already growing to ensure that a portion of the new oil wealth is kept in a stability fund to protect the government’s new revenue streams from the fluctuations of the economic cycle. Demand is also increasing for the creation of Uganda’s own sovereign wealth fund – a so-called future generations fund – where a portion of the oil revenues would be sequestered for investment in world stock markets, which would generate additional revenue streams to help bolster the budget and boost future spending on infrastructure and education long after the oil has gone.
Nature’s largesse will not solve all of Uganda’s problems. The rebel Lord’s Resistance Army, the messianic cult whose massacres and mutilations have blighted the lives of millions across a swath of the north, has yet to be extinguished. The twin bombings that took place in Kampala in July, killing 70, that were carried out by Somalia’s al-Shabaab Islamic militants in retaliation for Uganda’s support of the African Union’s attempts to help bring peace to the troubled Horn of Africa region, signaled an alarming regionalisation of Somalia’s chaos.
President Museveni is now seeking a third term, amid growing international concerns of a drift towards authoritarianism. Nature’s bounty may be mismanaged, as it has been in countless other African countries blessed – or cursed, depending on your point of view – with resource wealth. Nevertheless, there is a prospect, and a good one, that the past errors of others will not be replicated. The future for ordinary Ugandans may now offer considerably more than the prospect of two dollars a day.
