Delays in Uganda’s oil

Here are the likely impacts of delays in making the Final Investment Decision after seven postponements

| CORTI PAUL LAKUMA | Yet again the final investment decision (FID) on oil production in Uganda was delayed in August 2019. The delay meant that the date for first oil had to be pushed for the seventh time since 2006. The government had initially hoped that the first oil would come out in 2013 but the deadline is now 2022.

The latest delay is due to a dispute between the Government of Uganda on one hand and Tullow, Total and CNOOC on the other.  The two latter companies have pulled out of the deal to buy Tullow Uganda’s interest following a capital gains tax dispute.

Other contentious issues for which the government of Uganda and the oil companies have dispute is on when and on what to charge recoverable costs. Recoverable costs refer to all expenditures made during exploration. These costs are claimed by the oil companies and paid back by the government during production. These disputes, according to experts, are likely to delay the commercial production of Uganda’s oil.

The delay could hurt Uganda’s economic growth prospects because the Government’s medium-term strategy was premised on assumptions that oil production proceeds as planned. Indeed, the Ministry of Finance has revised the 2019/20 GDP growth estimates to 5 percent from an over optimistic 6 percent largely due to delays in FID. It follows that the current account deficit will widen further from the current 11 percent of GDP largely due to investment-related imports.

Also, the nominal Public Debt is expected to rise to 45 percent of GDP over the medium term and put more strain on the budget as more resources are need to be allocated for interest payments. Currently, 20 percent of national revenue is used in servicing debt. According to the International Monetary Fund (IMF), this rate of debt servicing is consistent with countries with high risk or in debt distress, for one shilling paid for debt service is one shilling less going to a school or a health clinic.

In addition, the delay in first oil production is a setback on many planned investments, key among them is the construction of the pipeline and the refinery. The pipeline and related facilities are being designed to be built to export the Lake Albert crude oil reserves to the Indian Ocean port. While the refinery is expected to satisfy domestic demand and to cushion against the impact of fluctuation in global oil prices.

The delays in the pipeline, dubbed the East African Crude Oil Pipeline (EACOP) project, is bound to negatively affect projected  benefits in Uganda and Tanzania such as promotion of local content, building new infrastructures, logistics, technology transfer and the enhancement of the “Central Corridor” between Uganda and Tanzania. Perhaps worst of them all, the EACOP was supposed to create about 10,000 jobs during the three-year construction period of the crude oil pipeline running from Hoima in Western Uganda to Tanga Port in Tanzania.

Similarly, the delay will also affect projects that were meant to contribute to economic gains for Ugandans such as the construction of the refinery, which was estimated to create 4,000 to 6,000 temporary jobs during construction and create over 650 permanent jobs on completion and operation. Not forgetting that the government has poured money into other infrastructural projects such as roads, dams and airports on the promise of an imminent oil boom.

The delay in FID also affects the compensation of project affected persons (PAP) in the ten districts where the pipeline is going to pass. Land and property of persons in the vicinity of the pipeline was taken, with promise of compensation, to facilitate the passage of the crude oil pipeline. The delay in compensation affects the welfare and poverty status of those agricultural households.

However, the delay in the FID could turn out to be a blessing in disguise, for there is a need to align the interests of oil companies with those of the people of Uganda. In this case, the government must strive to build a water-tight relationship with international oil companies and to extract maximum benefits for both parties and reduce future challenges. This is pertinent given that Uganda’s oil production will last for a minimum of 25 years. It follows that FID cannot be made on oil fields before there is assurance that a pipeline and a refinery will be made available and vice versa. This suggests that the two seemingly distinct projects are interlinked.

Uganda must also use this opportunity to build needed infrastructure, prepare the skills demanded in the oil sector, upgrade standards and certifications, create meaningful mergers to raise the required capital and develop a strong extractive sector fiscal regime. However, there is need for government to announce when it expects to take a position on FID. This announcement will remove the uncertainty surrounding the sector and create a pathway for more than US$20 billion of investments both in the oil and gas sector and other sectors.

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The author is a Research Fellow, Economic Policy Research Centre