Big companies press Museveni for oil deals

By Jocelyn Edwards

Which company has the President’s blessings?

Experts ask why President has locked out Parliament

The wrangle over who will win the right to develop Uganda’s oil has turned from a tussle into an all-out brawl in recent weeks, with the Ugandan government at the centre.

Multinational oil biggies have entered the fray since exploration by relative minnows, Heritage Oil and Tullow Oil Plc of Ireland, confirmed up to 2 billion barrels and a potential for 6 billion in Uganda’s Albertine region, were ready for production.

Tullow and Heritage share two blocks, 1 and 3A, owning 50 percent each. Tullow controls 100 percent of another rich area, Block 2.  Neither have the capacity or resources to go into the production stage and are seeking partners.

The current scramble peaked late last year when Heritage offered to sell its 50 percent share to Italian state-energy giant, ENI, for US$1.35 billion. Tullow exercised its right of pre-emption and matched the ENI offer to Heritage. Tullow is, however, cash-strapped and  aggressively wooing the biggies to invest on its side against ENI. Total, Exxon Mobile, and CNOOC have been mentioned.

No one is sure which deal President Yoweri Museveni will accept.

As a result, major international players have interrupted their schedules to be on a plane to Entebbe at a moment’s notice when it seemed that State House was swaying one way or the other.

First it was the Italian foreign minister that touched down in Uganda, and then it was Irish Tullow CEO Aidian Heavey, then a delegation from the Chinese National Offshore Oil Company (CNOOC).

All were here to court President Museveni for the chance to produce the 2 billion barrels of oil currently estimated in the country’s fields. Set to make a decision within a couple of weeks, Museveni faces a tough choice when it comes to who should develop oil in Uganda.

By early January 2010, it looked like the deal to sell Heritage’s 50% shares in oil to ENI was all but done. The minister of Energy, Hillary Onek, made an announcement January 21 that appeared to favour the Italian giant.

Immediately following the Energy minister’s announcement, Heavey flew to Uganda to meet with President Museveni, presumably to try and avert a decision in favour of Heritage and ENI.

After meeting Museveni, the Tullow chief Heavey told the press that Minister Onek’s comments reflected a ‘misunderstanding.’

‘We had a very positive meeting with the President and His Excellency was supportive of the sanctity of our contract.  The process of partnering shall proceed as we have previously outlined and Tullow continues to view and support Uganda as one of the best investment destinations in Africa,’ he said.

Heavey’s comments were loaded with significance; foreign investors are growing wary of African destinations where reports of contracts being thrown out are an almost daily occurrence.

In his announcement, Minister Onek asserted that Tullow had delayed oil production by several years and threatened to revoke the company’s licence if it obstructed development further.

A week later and after Tullow officials took representatives of China’s third national oil company, CNOOC, to meet with the President, State House issued a press release which said that the president had ‘expressed happiness with the investment proposal (by the Chinese) in the oil exploration sector in Uganda.’

Brian Glover, the Country Manager for Tullow Uganda, took the Chinese delegation to meet President Museveni along with Elly Karuhanga, president of Tullow Uganda.  Karuhanga said that the President was very ‘hospitable’ in his reception of the Chinese.  ‘The Chinese are like-minded with Tullow I’m sure they would make a great team if they are the ones who are finally selected, as I believe they are first in class.  But there is no gainsaying (contradicting) that the others selected by Tullow are equally as good,’ he said.

Following those meetings, Tullow is still very much in the running as a potential buyer for Heritage’s shares, according to the Minister of Investment Aston Kajara.

 Monopoly?

The original objection to Tullow voiced by Minister Onek was that a purchase by the Irish company of Heritage Oil and Gas Ltd’s assets would give it 100% ownership of Uganda’s oil fields.  But Tullow officials have since assured the government that that will not be the case, according to Kajara.  ‘Government policy, especially in the oil industry is to avoid a monopoly.  We have been told by Tullow that they always intended to offload their shares so that they wouldn’t have a monopoly,’ said the minister.

According to Kajara, Tullow complained that the statement by the Energy department was ‘extreme and unfair.’  Tullow said that Uganda ‘should have discussed with them what modalities (would be used for share ownership) and whether it was going to be a monopoly or not and they would have told them,’ said Kajara.

In addition to CNOOC, companies being considered by Tullow as potential partners include the French Total and Exxon Mobile.

Still, if Tullow forms a partnership with anyone of these companies it’s unclear how that would address the government’s fears about a monopoly.

Some sources have said that the president is impatient for the first oil royalties to start flowing before the 2011 election.  Success in the oil industry would give him material for his stump speech as well as cash with which to line his National Resistance Movement (NRM) party coffers.

The minister blamed the delays on Tullow not having any strong competitors and, therefore, no worry about being beaten to production. Tullow has since promised that they will start production later this year. But forming a partnership with the Chinese or even the French would still leave the company without anyone to nip at their heels.  And it would also leave Museveni placing all his bets for an oil bonanza by 2011 on one horse.  Bringing in ENI would seem to increase the chances that at least one of the two would make the deadline.

Refined candidates

Besides timeliness, President Museveni has other requirements of the company he lets in. He has been clear that whoever develops Uganda’s oil should not make off as quickly as possible with it to Mombasa.  Museveni wants a refinery so that value addition can be done in the country and Uganda’s national resources not exploited by foreign companies.

Stephen Biraahwa is Member of Parliament for the oil rich region of Buliisa and a member of the Parliamentary Committee on Natural Resources.  He and others don’t want to see Uganda afflicted with the same curse as Angola and Nigeria. The largest oil producing nations in Africa export millions of barrels of crude oil only to have to turn around and buy it back in refined form from abroad.  Nigeria was struck with fuel shortages as recently as this Christmas, a situation which should be an embarrassment for a country so rich in its own natural reserves.

To avoid this, Uganda wants to process its oil into useable form at home.  ‘We are talking about a more sophisticated level in the oil sector, moving from the upstream to more of a production level and therefore we expect a lot of smaller companies being phased out and to see bigger companies coming in,’ said Biraahwa.

Tullow alone does not currently have the experience and capacity to fulfill those expectations. Both Tullow and Heritage are relatively small explorer companies.  They earn their money prospecting and then sell out to the likes of a Shell or an ENI leaving the costly process of production to somebody else.  The Irish company’s decision to try and pre-empt the Heritage sale to ENI indicates a ‘material’ shift in direction for Tullow, management has admitted.  The company wants to stay in Uganda to see the process through.

Tullow may have been able to raise the cash to match Eni’s $1.5 billion bid for Heritage’s interests.  But more cash will yet be required before the taps start flowing.  In order to raise the money for the endeavour, Tullow sold 80 million new shares, or 10% of the company’s total shares, in a bid to raise £925 million.  Heavey said this money would cover the costs of bringing Uganda to production.

So, if Eni and Tullow are both offering the promise of a refinery and equal amounts of cash, who will do it best?  As MP Biraahwa put it: ‘Now that we have competition, let those who are men prove that they are men and not boys€¦Let them now bring out whatever they can bring to Uganda, who can give us the timeliness, how much investment, what the environmental policy is.’

In their meetings with Ugandan officials, the Chinese have emphasised their experience across the oil production chain.  ‘The interesting thing is that this company has an integrated ability and capacity. It does upstream, mid-stream and downstream. They would add extra capacity to Tullow,’ observed Kajara.  ‘(CNOOC) has a big portfolio.  They have a strong financial capability and they have experience in executing such major projects.’

On the other hand, Eni has promised a US$12-13 billion ‘integrated development plan’ that would include the building of a refinery, a power plant, a pipeline to the Indian Ocean as well as a renovation of the rail system and a ‘comprehensive set of social initiatives.’ The company claims to have the largest presence of any firm in the upstream sector in Africa. The company also operates five refineries in Italy and has shares in six other refineries worldwide.

No good option?

While Museveni may be concerned about who will bring the cash in most quickly, Ugandans should perhaps be more worried about which foreign entity will be gaining a significant amount of influence in their country. The two leading contenders both leave cause for question about their potential for affecting human rights and democracy in Uganda.

A recent report by the Sunday Times of London that Eni was prepared to pay a US$300 million ‘sweetener’ to the government of Uganda for control of Heritage’s shares brought back unfortunate echoes of its operations in Nigeria. There the company was implicated in a US$180 million bribery scandal.  Eni and its subsidiary Saipem were part of a consortium that paid to get $6 billion worth of Nigerian contracts.

A document provided to The Independent by campaign group Platform, and said to have reached cabinet and even the president has not helped the Italian company’s image.  Entitled ‘Forces Behind the Battles by Eni and Tullow Oil-Heritage Oil Over Uganda’s Oil,’ the document names Security Minister Amama Mbabazi as Eni’s broker and suggests that he and others stand to profit millions from it. Repeated attempts by The Independent to get a comment on this from Mbabazi failed. The document collects Eni’s alleged misdeeds and accuses Eni of already engaging in corruption.

It reads in part: ‘In Paraa Lodge Eni officials have been receiving visitors who return with fat envelopes. Their guests include Energy ministry officials, Bunyoro Kingdom officials, President’s Office officials and journalists.’

Foreign Affairs Minister Sam Kutesa is among those said to have the President’s ear on oil.

But it’s not clear that CNOOC would provide a much better option. In Transparency International’s 2008 Bribe Payers Index, Chinese companies ranked in second place among firms from industrialised nations most likely to pay bribes.

The entry of such players into the political scene does not bode well for a country already battling corruption.  Oil production promises to yield the biggest foreign investment into Uganda ever.  Such an influx of cash, if concentrated in the hands of the ruling elite in the form of bribes, has the potential to further insulate the country’s ruling class from accountability to the people.

Eni also introduces the influence of a foreign power that has shown a predilection to meddle in affairs of other African nations. Libya recently acquired a 10% share of the company, the second largest after the Italian government. Libya has already won the contract to construct the pipeline from Eldoret to Nairobi. And it’s been reported that it has pledged funds for a radio station for Bunyoro Kingdom, as well as a school and a hospital to be conveniently located in Hoima, the centre of oil exploration in Uganda.

On the other hand, CNOOC admittedly has a record of dealing with regimes that no one else will. As the company’s own Annual Report for the year 2008 filed with the US Securities and Exchange Commission said in its section on risks:  ‘Some foreign countries and regions in which we have operations or may have operations in the future may not have diplomatic or trade relations with other countries and may be subject to trade or economic sanctions imposed by such other countries.’  In particular CNOOC has operations in Burma where it has been accused of confiscating land from citizens as well as polluting soil and waterways.

The Ugandan government already has a dodgy human rights record; a partnership with a company with few scruples in the area, especially when the financial stakes are so high, could cause the citizenry double damage.

Keeping in mind all the various factors that will affect the decision, it’s also worth asking whether or not the right people are making it. Should President Museveni really be sitting in his bedroom making this multi-million dollar choice on the advice of his wife, and whatever self-interested parties have his ear? As MP Biraahwa said, ‘Uganda should not run because of an individual or something.  It has an executive; it has a parliament; it has a judiciary and all the three arms should work together.’

Because of the potential for certain parties to benefit from it, the decision should rightly be made by a body at arms length from government.  Biraahwa pointed out that Uganda’s Energy Policy, set by cabinet, provides for an Act of Parliament creating a national energy company and an oil and gas regulatory body.  ‘Parliament is supposed to play a primary role and that is to make the law.  The law will help us put in place an institution and that will lead us to the regulations,’ he said. So far though, nothing is in place.

The debate on which company wins the rights to the oil here might seem immaterial to most Ugandans.  One name means as much as the other to most people.  But citizens should take care to remember that though it’s Museveni and his advisors making the decision, it’s them that will have to live with the consequences.