Secrecy, woes, war over Uganda’s oil

By Patrick Kagenda

Lead oil exploration firm, Tullow Oil Plc says it has nothing to hide.  But the government continues to hide the Production Sharing Agreements (PSAs) it has signed with Tullow and others. Why?

Research shows that the more resources a country has, the fewer chances it has to economically develop unless it can overcome the so-called ‘resource curse’.  Discovery of oil breeds armed conflict and corruption. In addition, rent replaces entrepreneurship as those in position to do so seek to steal the oil wealth.  Secrecy is the weapon favoured by oil-wealth thieves.  Can President Yoweri Museveni avoid the curse?

The story starts in the former fishing village of Kaiso-Tonya on the rocky eastern shores of Lake Albert. Fishing still goes on today but with little hope of continuing for much longer. Oil exploration activity is rapidly displacing the local fishing community.

Kaiso-Tonya residents still live in squalid, malaria mosquito infested camps tormented by dysentery, bilharzias and other waterborne diseases.

But the former game reserve town on the Uganda side of the border with the Democratic Republic of Congo (DRC) which is six and half hours by road from Kampala has rapidly turned into a drilling rigs village.

Kaiso-Tonya is where Tullow Oil, Heritage Oil and Nabos Drilling Company are based as they prospect for oil in the western Uganda’s Albertine Rift Valley region on behalf of the Uganda government.

Kaiso-Tonya was in the news recently when a near riot broke out on June 17 after journalists and Civil Society Organisations (CSOs) were barred from entering the Tullow Oil drilling area.

Tullow is in the eye of the storm as the dominant oil exploration company in Uganda. It holds interests in three licences on the Ugandan side of the Albert Rift Basin EA 1 (Block 1), EA 2 (Block 2) and EA 3 (Block 3A).

Uganda also has oil exploration, production and sharing agreements with Heritage Oil Ltd (HOIL.LN) and Tower Resources Plc (TRP.LN).

The journalists travelled to Kaiso-Tonya on invitation by the African Institute of Energy Governance (AFIEGO). Together with members of the East African Legislative Assembly, they expected to see first-hand progress made in the oil sector which has been shrouded in secrecy. But it was not to be.

Unknown to the group, their visit coincided  with unprecedented challenges being faced in the Uganda oil sector

Tullow is under pressure from the government over disagreements on whether a huge refinery, a pipeline, or a pipeline and a small refinery is the best route for exploiting Uganda’s oil.

Disagreements have led to a delay and shift in plans on at least two occasions. Now the early production scheme that was projected to start this year has been pushed to next year, or even 2012.

‘We are in the process of finalising details to put together a power project in 2010.What we are aiming at is to provide an early power project in the Kaiso-Tonya area. With the construction commencing in 2010, hopefully we shall have a transmission line by the end of 2010. That would mean that gas and oil would be the basis of power generation in that area and that is what we are working towards. At this stage we won’t be producing petrol or diesel,’ Brian Glover, Tullow’s Business Unit Manager for Uganda and East Africa told The Independent last week.

Observers say if differences on production are not resolved amicably, Tullow could find itself looped out.

But while commenting on the long-running debate, Tullow chief executive Aidan Heavey told the Irish Times: ‘If they want the oil refined locally that’s what we will do. It’s their oil, we don’t own it; we are essentially a service company working for the country.’

Tullow’s style is to try to please governments in the countries where it operates in order to avert political risk like having its assets seized by an angry government.

In a recent interview, Heavey recalled an experience in Congo. Tullow had an 11% share in the M’Boundi field and was getting 4,000 barrels a day. It decided to sell to the Koreans for a very high price. The government refused to approve the deal. Tullow is still stuck there.

The same applies to how it handles its production sharing agreements (PSAs). Heavey is on record saying that in a major change from previous decades, the bulk of oil money would now go to the government.

‘It used to be 70-30 (in favour of the oil companies) now it’s the reverse of that.’

But that is only part of the story.

Heavey, for example, dismissed claims of a ‘political risk’ looming over the oil sector in Uganda. But just a week before, on Friday June 12, the Wall Street Journal had run a headline: ‘Uganda-DRC: Tensions mount over Lake Albert resources, oil and gold deposits in a border town breed confusion’.

The story claimed tensions were mounting between Uganda and DRC because the DRC government had put up a checkpoint at Goli, a major commercial town in its territory of Mahagi, Ituri.

The story quoted Betty Adima, the Resident District Commissioner (RDC) of Nebbi district in Uganda (which is adjacent to Congo’s Ituri region) fuming: ‘I believe this is just aggression. It is provocation. That is the simplest way I can put it.’

The story re-awakened similar tension in August 2007 when a British engineer exploring for Heritage Oil on the Ugandan side of Lake Albert was killed in armed clashes between Uganda and DRC armies. The two countries almost went to war.

Tullow holds rights to Block I on the DRC side of Lake Albert, which straddles the border with Uganda.

On March 4, the DRC President Joseph Kabila and Museveni on March 4 agreed to accelerate the planned joint exploration of oil in the region.

Meanwhile, activists have since threatened to sue the government for failing to make public the contents of the oil production agreements signed with exploration companies operating in the Albertine Region.

When asked about the secrecy surrounding the agreements, Energy Minister Hillary Onek waves the government’s oil policy which he claims is a public document having been debated and passed by Parliament.

‘All the members of Parliament know it and for negative political motives they create the impression that whatever this ministry is doing is secretive,’ he says, ‘As government we don’t really have anything to hide.’

Even Bukhooli South MP Patrick Ochieng, the vice chairman of the Natural Resources Committee of Parliament, said there is nothing secret about the oil deals.

‘The only issue is that there are some clauses in the production sharing agreement which are not supposed to be disclosed to everyone. The Albertine Graben was divided into many blocks and some have not yet been given out. When they are all given out these clauses will be made public.’

Despite the official claims of transparency, even people who closely watch the Ugandan oil sector are in the dark.

AFIEGO chief executive Dickens Kamugisha says the ‘government’s refusal to make public the contracts contravenes the constitution and the Access to Information Act’.

Kamugisha says the CSOs and the National Association of Professional Environmentalists (NAPE) with funding from the National Democratic Institute of the US government wants the Constitutional Court to order the government to make the agreements public before oil production starts.

The activists are asking questions like when is the EPS likely to start, when is the New Petroleum Bill likely to be tabled in Parliament, are there any revenues the government of Uganda is getting as signature bonuses on licences with the oil exploration, how many licences have been issued so far, how many PSAs have been concluded and which law in Uganda regulates the importations of oil companies, and what law regulates developments by oil companies under corporate social responsibility?

There are concerns about how the 2008 Oil and Gas policy of Uganda is being implemented and also practical concerns like ‘if oil companies insisted on exporting crude oil instead of building a refinery, what will the government do considering that the companies are spending their own money? Will the government pay off the companies?

In fact, President Yoweri Museveni has been accused of personalising the oil finds. He has deployed Uganda’s elite troops from the Presidential Guard Brigade to guard the oil wells.

But Onek defended them: ‘If we leave those rigs open for anybody to walk in and out, suppose they throw bombs there to undermine and destroy them? We must be sensible because security forces are there to protect strategic installations of our economy. Right now, because of protecting peace in Somalia our country has earned problems with Al-Qaeda. Kony rebels here were being helped by Al-Qaeda to destabilise the country and oil rigs which are going to bring prosperity here are a primary target by terrorists.’

Then there is the issue of the tensions emerging among the main players i.e. the government, the oil exploration companies, and the so-called oil majors.

Tullow Oil was initially expected to embark on an early oil production scheme at the start of next year, which has been postponed following the discovery of further oil reserves, now estimated at two billion barrels.

Royal Dutch Shell is among the western oil majors who, favoured with fat bank accounts and the latest oil mining, refining, and transporting technology and networks, once ruled the oil world.

Increasingly, however, they are being beaten to the prize by minnows. Take Tullow Oil Plc which is leading the exploration enterprise in Uganda.

Starting small 26 years ago in the Irish town of Tullow Co Carlow, Tullow Plc’s worth has swollen to billions of dollars and a presence on all continents but with success mainly in Africa where it processes 38,000 barrels of crude a day.

‘We are the African player, we dominate Africa. The majors know they would have a huge fight on their hands and they also know that they are better off having us there, they can work through us,’ Tullow chief executive Heavey is quoted to have told the Irish Times newspaper when asked about a persistent rumour that his company is about to be gobbled up by a major.

When Shell Uganda chairman Ivan Wambuzi Kyayonka was asked about the huge oil finds and apprehension over the government’s secret deals, he was curt.

‘I cannot comment much because Shell is not involved,’ Kyayonka said. That sounded rather cold. What is going on?

Part of the answer could lie in an emerging feud over who should extract the huge oil deposits that Tullow and others have found.

Tullow completed a huge ‚¬1.6bn refinancing and a surprise ‚¬430m rights issue early this year but it still faces major funding issues and observers say it requires a major partner.

Even in Ghana, where Tullow plans a $3.1 billion investment with its partners and appears set to start extraction of crude by mid 2010, the government is yet to give the project a go-ahead citing absence of guarantees of Tullow’s financial stability.

Uganda, poses a special financing challenge for Tullow on two fronts: first Uganda’s oil infrastructure has to be developed from scratch, and two, initial indications are that the government is opposed to the cheaper option of building a pipeline for crude to be refined outside the country.

Instead, the government, which has an eye of supplying the regional fuel market, favours building a giant refinery. This not only costs much more but it could take longer for production to start.

Tullow would have faced immense challenges in building a pipeline. It cannot attempt building a refinery on its own.

That is where the oil majors come in.

Globally, Tullow’s output is 66,000 barrels per day but this is from just 7% of reserves from its successful exploration campaigns.

It is now talking of a switch from exploration to production with a focus on Ghana and Uganda.

If it chooses to sell, Tullow has two options; either to sell a field or part of a field.

Royal Dutch Shell whose local operator Shell Uganda Ltd is the dominant oil sector player would be an ideal Tullow partner.

But that is only part of the story.

In Ghana, the Dow Jones reported on June 20, Shell has expressed interest in buying a stake in a Tullow-led venture, the offshore Jubilee deposit. Heavey was quoted saying Shell was interested in a 30% stake in the venture held by the Dallas-based Kosmos Energy LLC.

In Uganda, however, Shell appears to have been locked out.

Instead, Industrial and Commercial Bank of China has been singled out as a potential backer for the development of Tullow’s oilfields.

Even the Iranians have been mentioned.

President Museveni last month asked a visiting 16-member delegation of the Industrial and Commercial Bank of China (ICBC) to help set up the oil refinery and a pipeline, according media reports attributed to Craig Bond, the chief executive of Standard Bank.

China is said to be looking for oil acquisitions in sub-Saharan Africa and that a Chinese state oil company approached Tullow with an offer in March but was snubbed.

Details are scanty, but China’s oil exploration and production empire is split into three entities: China National Petroleum Corporation, Sinopec and CNOOC.

In the same month, oil producing Iran promised to jointly fund the construction of an oil refinery and also train Ugandans in relevant fields of petroleum.

The same Iran is China’s top oil supplier. According to The Petroleum Intelligence Weekly, China imported an average of 4.04 million b/d of crude oil in May, up 5.5% from a year earlier. This means Iran and China could work together to lock out Tullow and Shell.

That may explain Shell Uganda boss Ivan Kyayonka’s lack of enthusiasm when asked why Shell is not involved in the oil exploration and extraction ventures.

‘Shell expressed interest in prospecting for oil in Uganda in the 1980s but never signed any agreements,’ he said, ‘about the ongoing explorations, I don’t have any comments because Shell is not involved’.

But Tullow claims it is not worried about the entry of the Chinese and Iranians. Instead, this prospect seems to have brought it closer to the government’s position of processing the oil domestically.

‘I think it’s very positive that the government is learning and listening to other countries experiences. There are many companies which are coming to Uganda and want to help and I think that is a very positive sign. We are an upstream company and we are ready to develop and produce the oil and I hope our refinery can be built quickly in Uganda,’ Glover told The Independent last week.

The World Bank wants Uganda to join the Extractive Industries Transparency Initiative to ensure that the exploitation of oil reserves is ‘managed wisely and contribute to sustainable economic development while safeguarding the environment and impacted communities.’

‘We will also seek to support the government in evaluating and designing petroleum revenue management arrangements by reference to international experience,’ said World Bank’s Uganda country representative Kundhavi Kadiresan.

Meanwhile, the skepticism is mounting over whether Ugandans will benefit from the oil.

A resident of Kyehoro Trading Centre is angry about the crumbling wooden structures of the area school that Tullow built and politicians jubilated over. ‘The whole oil business is a nightmare to Ugandans. People doing on job training are all whites. Where are the Ugandans who are supposed to be doing this training?’

Another person complains: ‘Tullow subcontracted a company called Nabors  to drill oil wells at the Mputa sites and Nabors is deducting NSSF (National Social Security Fund) from the workers and when they go to the Hoima NSSF office to check whether their money is there, they don’t find it because Nabos doesn’t remit it. Both the politicians and the bureaucrats fear confronting these Tullow people because of President Museveni.’

The National Oil and Gas Policy for Uganda published in February 2008 emphasises ‘transparency and accountability’ as Principle iii of the goals, objectives and actions of the oil policy framework.  The government’s hiding of signing bonuses paid before companies are allowed exploration rights, and the revenue sharing agreements when the oil companies hit oil does not reflect transparency.

Such secrecy by the Museveni government requires the international oil firms operating in Uganda to step up to the plate and insist on following the international best practices. The centre piece of these practices is transparency and good governance.   Such action would lead to other practices, including the setting up of an independent, constitutionally non-private state-owned oil company and an oil-revenue stabilization fund.

Despite the skepticism, Stuart Bigirwenkya, a resident of Kakindo village in Buliisa County which has been described as ‘land floating on oil’ remains hopeful. Recently, his tiny village has become a small oil exploration town.

Bigirwenkya’s interest in oil led him to apply to be on an International Visitor’s Leadership Programme organised by the United States of America Department of State through the US embassy in Kampala.

The programme allowed Bigirwenkya and five others to tour some oil states in the USA. He now wishes Uganda could adopt some of the methods used by the US government to manage oil revenues.

‘Up to one third of the oil revenue is left for the community through the state government,’ he says, ‘unlike here, the oil money is controlled by the states not the central government. Our hope of any good coming out of our oil depends on the oil and gas law that is being formulated by the government.’