Uganda’s ambitious first oil chase

NEWS ANALYSIS: Experts dissect the government’s target of oil finally flowing by 2020

The government of Uganda on Aug. 30 finally issued oil production licenses to Tullow Uganda Operations Pty Ltd and Total E&P Uganda B.V. The move ended a long wait for the oil companies caused by disagreements with the government over tax issues and field development strategy.

The Tullow and Total licenses follow the award to China National Offshore Oil Corp. (CNOOC) in 2013. But the granting of final production licenses also raised a major new question; how soon can oil start flowing?

The government thinks it has the answer. It says oil license holders must start pumping oil in four years’ time, in 2020. That is a timeline that many experts are questioning and some have branded too optimistic.

Tullow Oil Uganda’s General Manager, Jimmy Mugerwa, is cautious.

“This is a complex project in a very environmentally sensitive area; there are a lot of expectations from Ugandans. It is an onshore project. It is 1500km from the sea and it is a new industry for the country,” he told The Independent while commenting on the viability of the timeline.

Henrik Poulsen, the senior vice president of Rystad Energy Insight, an Oslo-based independent oil and gas intelligence data firm also told The Independent in an email that Rystad Energy’s experience is that “many governments by nature seem to be overly optimistic when forecasting something positive to happen”.

He said there are still many parameters which the government cannot control, like oil price, investment climate (complexity to get financing), and geology.

“Geology seems so far to be on the Ugandan side, but low prices and difficulties to get financing are delaying a lot of projects globally,” he said,  “That said, we believe that things will sort out for the Ugandan oil production, but it will take some more time.”

Poulsen said revised postponed dates are not uncommon on such projects.

The granting of production licences has, however, created the belief that the oil production companies have shown the government details of their understanding of the oil and how they will extract it. That is the normal practice.

At the granting ceremony, Energy Minister Irene Muloni insisted that the government is determined to have the oil flow out of the Albertine Graben in four years’ time. Part of the reason for her insistence is, in fact, tied to the government’s political ambitions.

The government has already earmarked 2020 as the magic year by which Uganda should have attained lower middle income status and it expects the oil revenues to fund most of the ambitious projects under the transformation.

Unfortunately, as Henrik Poulsen of Rystad Energy Insight noted, the government does not have complete control of the process. In fact, after years of the oil companies having to wait for the government to act, it is now the turn of the government to partly wait for the companies to act.

Uganda has an estimated 6.5 billion barrels worth of reserves. But the three licensed firms now hold licenses that are a valid for 25 years, up to 2041 and 2046. That implies that they have time to develop the main Exploration Areas EA1, EA2, and EA3 that they hold.

Total controls three fields in EA1; Ngiri, Jobi Rii, and Gunya, while Tullow has five fields in EA2; Mputa-Nzizi-Waraga, Kasemene-Wahrindi, Kigogole-Ngara, Nsoga and Ngege, and CNOOC is in the single Kingfisher field.  They are all located in the so-called Albertine Graben region adjacent to Lake Albert on the Uganda border with the DR Congo. An evaluation of two additional applications for production licences over the Mpyo and Jobi East discoveries in EA1 is still ongoing while the Lyec discovery in EA2 is still undergoing appraisal but the nine areas for which production licences have been granted have Uganda’s most viable oil fields so far.

It is not clear, however, what the oil companies will do with the production licenses that they now hold.

Tullow, for instance, has said it would want to sell its stake. The UK explorer famously farmed down 66.66% of its stake to both CNOOC and Total. So far only CNOOC has shown some keenness on production.

Back to zero?

Under the government plan, the three firms should pump between 200,000-230,000 barrels per day at the start of production.

Immediate activities include carrying out environmental and social impact assessments, construction of access infrastructure, the drilling of production, injection and monitoring wells together with the Front End Engineering and Design (FEED) among others. When this is eventually finalised, the three companies said after the granting ceremony that they expect to reach a Final Investment Decision (FID). The timeline for that is first quarter of 2017.

In the past Tullow senior officials have also said first oil would follow three and half years after the Final Investment Decision (FID). If FID is expected in 2017, it pushes first oil to 2021.  The latest information is that the Front End Engineering Design could now start early 2017. In which case, it could be completed by the second half or even the third quarter of 2017.

So, Poulsen says, even if FID happened by the end of 2017, just adding three and half years would  give late 2020 as a possible start if everything goes smooth.

However, he adds that it would be challenging to get a FID within 2017, so most likely FID would happen sometime during 2018.

“One or even two of the above might happen, but only the bravest would predict that all three would work out in favour of first oil.”

“So considering the likely contingencies, we currently estimate one Ugandan development (Kingfisher South, Phase 1) taking off by 2021 (second half), one more in 2022 (Jobi Rii) before the developments can be said to really take off in 2023.”