Will Uganda’s Oil diversify Its Economy for the Long-Term?

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By Angela Luyiga

In 2006, Uganda
confirmed discovery of crude oil reserves of up to 6.5 billion barrels in the
Lake Albert basin along its border with the Democratic Republic of Congo.
Earlier this year, the government auctioned out several exploration licenses
which could lead to more discovery of other reserves. With commercial
production in full swing, the country could earn up to $3 billion in revenue
from exports of up to 60,000 barrels of oil per day. Some of the crude oil will
be used to produce power locally, while the rest will be used to put up a new
$2.5 billion refinery.

According to the Uganda
Country Economic Memorandum: Economic Diversification and Growth in an Era of
Oil and Volatility
(CEM), oil production is expected to boost Uganda’s
economy from 3.3% in 2013/14 and 4.6% in 2015/16 to 7-10% once oil production
starts, the CEM notes.

Despite the slump
in global oil prices, the start of commercial oil production in Uganda in 2018
offers long-term prospects to diversity the country’s economy and catapult it
to upper middle income status by 2040, according to the country’s new economic
memorandum.  This optimism is informed by
past trends in oil price volatility and underlines the analysis of the (CEM)
and evaluates the prospects of oil and mineral production in the country.

Prepared by the
World Bank and the Government of Uganda, the memorandum presents a vision of
how the country can leverage its oil and mineral resources to accelerate
economic growth, reduce poverty and attain the goals of the country’s National
Development Plan (NDPII).

“Although the
level of international oil prices are extremely low today, we have reasons to
believe that these will rise again, and that Uganda’s future oil production
will boost the country’s economic and fiscal performance in the years to come,”
said Jean-Pascal Nguessa Nganou, World Bank Senior Country Economist for Uganda
and task team leader for the CEM.

“Oil is not a pipe
dream; it is an opportunity for us to fuel our economic growth, create
employment, foster technology transfer and generate revenues for investments in
development of other sectors,” said Keith Muhakanizi, Permanent Secretary and
Secretary to the Treasury, Ministry of Finance, Planning and Economic
Development in Uganda. “We are also mindful of the risks of letting the oil
economy dominate as successful countries are those that have used non-renewable
resources to diversify their economies, and we are committed to learning from
their success and failure, to ensure we don’t go down a slippery slope.”

According
to the most recent forecast from the U.S. Energy
Information Administration
‘s, crude oil prices are forecasted to average
$54.1 per barrel in 2018, a US$ 2.5 increase from the 2017 price of $52.4 per
barrel. Oil price has risen by more than 140 percent since the January 2016
collapse that saw oil prices drop to $21.5 per barrel but is up to $38.8 per
barrel as of July 2017.

The oil
price increase will largely depend on production cuts planned to end in March
2018 and a modest increase in international demand.  This increase is likely to see an
intensification of investments in oil and gas activities, especially in new
emerging oil producers such as Uganda. Uganda expects a total investment of US$
20 billion in exploration and production, refinery, pipeline and supportive
infrastructure such as an international airport in Kabaale, and the oil roads.
Such investments are expected to create more than 300,000 direct, indirect and
induced jobs.

Ernest Rubondo, Executive Director, Petroleum
Authority of Uganda (PAU), is optimistic 2018 will be big for Uganda’s oil
industry.

“The sector will be
felt in 2018,” he told the Independent in an interview last year. Rubondo has
been at the helm of all the major developments in the sector since the 1990s.

Indeed, days before the interview, Rubondo had just
received the last of the eight delegations of investors from several
countries—France, Egypt, Russia, UK, Norway and Belgium—that visited Uganda in
December alone, which he said was one of the indicators of things to come.  These investors are targeting a piece of the
$ 20 billion expected to be invested in the oil development phase, he said.

Other pointers, he added, include; the application for
parliamentary approval of a loan to finance the construction of the airport in
Hoima targeting the oil industry; the near-completion of front end Engineering
designs for the oil fields, among others.

While most of this interest is for the development
phase of the 6.5 billion barrels of oil that has already been discovered of
which some 1.2 billion is recoverable, the new round of exploration is set to
be even bigger.

For the 6.5 billion to be discovered, only 121 wells
were drilled.  In the new round of
exploration, which begins this year, 400 wells are set to be drilled.

“People keep asking when the oil money is coming,”
Rubondo said, “All this activity is oil money. All these people coming in will
need food, hotels and many other services. That is money.”

The
Oil Pipeline

New details have emerged in the East African Crude Oil
Pipeline (EACOP) regarding how it will be financed, run and managed. For
starters, Uganda plans to construct a pipeline that will transport its crude
oil to the international market through the Tanzanian coastal port of Tanga.

The pipeline is expected to be completed by the year
2020, when the country is scheduled to start oil production. In fact, Uganda’s
President, Yoweri Museveni and his Tanzanian counterpart recently commissioned
the construction of the East African Crude Oil Pipeline. The two leaders laid
mark stones for the crude oil pipeline in Mutukula, Kyotera District and
Kabaale in Hoima District.

Uganda’s Minister of
Energy and Mineral Development, Engineer Irene Muloni, says that the National
Pipeline Company (U) Ltd – a subsidiary of the Uganda National Oil Company
(UNOC) will own shares in the pipeline company (Special Purpose Vehicle), on
behalf of the government of Uganda. As of now, the pipeline company (Special
Purpose Vehicle) is yet to be incorporated.

Eng. Muloni said that
there is a possibility of bringing on board investors into EACOP in addition to
the governments of Uganda, Tanzania and the Joint Venture partners. Once the
pipeline company is incorporated, another sticky issue that will have to be
ironed out is how the company will meet its tax obligations both in Uganda and
Tanzania.  However, at the moment there is already commitment to exempt it
from tax.

Financing

Another issue under
consideration is the financing of the pipeline project. At least $ 3.5 billion
dollars is needed to finance EACOP. Accordingly, to preliminary information,
the funds will be raised through debt and equity from joint venture partners
and national oil companies of Uganda and Tanzania. Already, Total E&P
Uganda, Tanzania and Uganda have appointed three companies as financial
advisors for the pipeline. A consortium of South African based Standard Bank,
Imperial Bank of China (IBC) and Sumitomo Mitsui Banking Corporation Europe
Ltd, were recently appointed as the financial transactional advisors for EACOP.

Uganda’s oil sector has
emerged at a time when regional and global business norms are shifting towards
greater transparency. International movements such as the Extractive Industries Transparency Initiative (EITI)
have led the way, but Uganda has not yet signed up. The government must prove
it is committed to managing its oil and mining sectors in the open if the
Ugandan people are to reap the full benefits of their resources.

Uganda’s
oil has potential to diversify its economy for the long-term if revenues are
invested well in developing key productive infrastructure, commercialization of
agriculture, providing skills training and adding value to ensure high-quality
exports to regional and international markets.

The country’s fledgling
oil and mining industries could transform an economy in which millions live in
dire poverty, but only if well managed. Unless deals are done in the open, and
steps are taken to protect the local people and the environment, the promise of
oil wealth could entrench corruption, fuel unrest and wreck Uganda’s unique
natural habitats.

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