The Independent | Uganda Oil Production Now For 2020

Posted February 9, 2015 by Ugandan Diaspora News Team in Oil & Gas Sector ~ 3,368 views



What did the country do wrong?

When he arrived in Kampala from Paris in October 2014, the tough talking new Total E&P (Exploration and Production) boss Francois Rafin had one mission on hand; securing a production licence. Where the man he was replacing, Loic Laurandel, had cooed and purred in discussions with government officials over the slow pace in the country’s oil sector, Rafin was huffing and puffing against “unfriendly taxes”. Total E&P and its partners are fighting withholding tax and Value-Added Tax which they say has hiked the cost of investment at a time they are not making money and, insiders tell The Independent, telling it as it is was typical Rafin – a known straight talker with 35 years of oil experience.

A few days after his arrival, however; on Nov.13, the government handed Rafin his first smack in the face.  It announced Japan’s Toyota Tsusho as the winner of the contract to carry out a feasibility study for its oil pipeline. For Total, the sting in the announcement made on centre court during the Energy Sector Review conference at Speke Resort Munyonyo in Kampala was in the choice of pipeline route. Total had wanted it through Mombasa; the government had pushed it to another Kenyan port; Lamu.

Some blamed Rafin for allegedly not pushing enough. Whatever the case, few expected this event to seal Rafin’s fate. Yet in mid-January 2015, barely 100 days after arriving at the French major’s Kampala headquarters on Plot 21, Yusuf Lule Road, Rafin was on his way back to Paris.

Some say Rafin’s exit was more of an internal dynamic. Apparently, under his friend, the former Total boss Christophe de Margerie, who was killed in a plane crash in Moscow last year, Rafin’s lack of diplomatic finesse could have been tolerated. Not with Patrick Pouyanne, who replaced Christophe.

Rafin’s departure came amidst talk of cutting costs at Total. Insiders say the company plans to shed 80 per cent of the expatriate staff as it scales back operations in Uganda. Local contractors are jittery over losing business since Total’s downsizing is following on the heels of similar action from another major player in Uganda’s oil sector, the Irish oil explorer; Tullow.

At the peak of activity in 2013, Total had over 160 staff; about 60 of them were expatriates. Currently, only about 40 of the expatriates are remaining and over 30 of these are set to be recalled by May.

Despite being bigger and richer, Total E&P is following in the footsteps of Tullow, which has been shedding staff since 2013. Some of Tullow’s staff have ended up in Kenya and others in Ghana. And any time this year, according to a source, London is expected to give a directive for further restructuring.

Missing crucial timelines

It is not hard to understand why the companies are sending employees packing. Last year the two of them were operating a total of six rigs. Total E&P, the busiest was operating four and Tullow two. As February begins, the last of these rigs will be demobilised and dispatched to Kuwait. A source also intimated to The Independent that Total and Tullow have also closed camps.

Elly Karuhanga, the Chairman, Chamber of Mines and Petroleum, which brings several players in mining and oil sectors, is urging the government to act.

“This is a wakeup call for all of us,” Karuhanga added, “Time for excuses is done, you can’t keep holding back the whole sector simply because of just 2 or 5 percent of the oil to be recoverable. What about people who studied at Kigumba and in Trinidad and Tobago and Dundee and are now on the street with no jobs? What about Ugandans who borrowed money and invested and are now choking on these loans?”

The former Tullow Oil President for Africa likened the recalling of the Total boss to a recalling of an ambassador by a country after collapse in relations.

“The Oil sector is highly risky,” he told The Independent, “and it requires a lot of money, which these investors borrow from financial institutions at high interest rates. You cannot go for more than eight years without business and you keep getting back to these institutions to borrow money.”

That is why, Karuhanga said, we are seeing companies which used to employ 100 people, now employing 10.

“That is why we have been saying that capital is a coward, capital goes where it grows,” Karuhanga added.

But away from the players, the delays to issue production licences mean that Uganda has further pushed behind certain critical timelines.

A source has intimated to The Independent that the oil companies were in January forced to push back till mid-2016 the execution of the Front End Engineering Design (FEED), which basically involves the procurement, engineering and construction for the mid-stream industry.

This affects another key timeline, which is the making of the final investment decision (FID). Even if this is approved in 2017, the procurement and engineering phase would take another 36 months. That means Uganda would see first oil around 2020.

Karuhanga added that where the prices are now it is impossible to make an investment decision and if the prices stay where they are for the next two years Uganda might not be in position to produce oil.

Oil prices collapsed from over $130 just a few months ago to less than $50 per barrel because of increased US shale production and the fact that big producers like Saudi Arabia, Venezuela and Russia declined to reduce their production.

There is no evidence prices will go up again in a short time. Experts say that the current oil price dip resembles the fall between the 1980s-1990s, which incidentally was the longest of all the other oil price falls.

Oil firm hit hard

For now, the Uganda government needs to award production licences. These have become problematic because since the US$ 2.9 billion farm down three years ago in which Total E&P and China’s National Oil Company (CNOOC) acquired a 33 percent stake each of Tullow Oil, it is only CNOOC that has been able to acquire a production licence for the Kingfisher field.

Total E&P’s single application for the Ngiri field and Tullow’s eight applications remain unapproved causing ineffable frustration across the sector.

The tension over the stagnation in the oil sector in Uganda is worsening a bad situation. Despite promises by the government that Total E&P and Tullow would get production licences by December, an official told The Independent towards the end of the same month that negotiations were not moving.

“Officials at the Petroleum Exploration and Production Department (PEPD) are still insisting on details like how many jobs we will be able to avail and we are saying that we can’t be certain at this stage. All we have are estimates,” the official said, “It is such small things that are delaying the whole process.”

Total E&P on its part expected the production licence for the Ngiri field—it hasn’t come. Tullow on the other hand has so far put in about eight applications for; Nzizi, Kigogole, Mputa, Nsoga, Ngege, among others—it is also still waiting. It is only CNOOC, which got a production licence for the Kingfisher field.

It is not news that Tullow is the most affected. Despite investing about US$ 3 billion into Uganda since 2006, its inactive assets here have meant it has to struggle to keep a float also part of the reason its share price has been halved. Total has also invested over US$ 2 billion since it began operations here in 2012.

A source at PEPD, however, told The Independent that the percentage that the companies propose to recover remains one of the key sticking issues and a major reason as to why the impasse over production licences remains unresolved. “If they could abandon their high horses and agree to tweak a few things,” the source said, “the situation would be different.”

Apparently, PEPD only accepts a minimum of 30 percent of recoverable oil. It appears Total and Tullow are proposing less than this percentage.

Tullow, which has never been keen on the production side of its upstream activity in Uganda and is looking to sell, has registered the heaviest of losses. While its share price has been halved, it has also lost money as a result of these delays.

As part of its 2012 farm down to CNOOC and Total, it had agreed that they would only pay it a certain balance if they got production licences and if an investment decision was reached at a certain point.

“In addition, a loss on disposal charge is expected of $0.5 billion, mainly relating to an updated assessment of the recoverability of the Uganda contingent consideration and the partial sale of the UK Schooner and Ketch gas fields,” Tullow wrote in its January trading statement.

In the same statement, Aidan Heavey, the Tullow Oil Chief Executive announced that Tullow would continue to cut expenditure in East Africa and re-allocate “our future capital to focus on delivering high-margin oil production in West Africa which will grow significantly to around 100,000 bpd net to Tullow by the end of 2016 and will generate stable, long-term cash flows for the business”.

The reduced exploration programme, he noted, will predominately focus on a number of high-impact, low-cost exploration opportunities in East Africa.

In East Africa, Tullow operates in only Uganda and Kenya. Compared to Uganda, in Kenya the oil companies are active operating about 10 rigs. As noted already, in Uganda only one rig is still active and will soon be demobilised.

Uganda currently has reserves of 6.5 billion and this covers only 40 per cent of the area that has oil. But because of this frustration, Tullow officials have even made it clear they will express any interests in the expected round of licencing of fresh blocks.

Local suppliers suffer

It is not only the oil companies that have come under the weight of frustration. Their foreign and local suppliers are counting immense losses.

The Independent has learnt that giant international service providers like Baker Hughes, Schlumberger, Halliburton and Weatherford are all shifting their bases to neighbouring Kenya and other countries.

Emmanuel Mugarura, the CEO of the Association of Uganda Oil and Gas Suppliers (AUOGS) told The Independent that the delays are costing not just their members but government as well.

“Our members got loans with very high interest rates,” Mugarura said, “They are supposed to service these loans. They entered joint ventures and these have obligations, which they can’t meet because there is no business.”

Mugarura advised that government needs to sit with the oil companies and talk because both parties are getting hurt.

“You can imagine when CNOOC got its PL a barrel of oil was $130 and today it is down to $48 yet our oil’s breakeven point is between $50 and $60,” Mugarura said.

Ben Mugasha’s Bemuga Forwarding Ltd is one of the local companies feeling the pinch of inactivity.

“Bemuga is a company that specialises in oil and gas,” he told The Independent, “with no work in the sector, Bemuga has no work, Bemuga’s employees have no work and can’t stay on the job, Bemuga can’t get revenue and cant service loans that were acquired to grow capacity in anticipation of work.”

For Uganda, the low prices have led many to particularly question whether Uganda’s refinery estimated to cost over US $ 3 billion would still be commercially viable.

In the past, whenever that question has arisen, technocrats have pointed to the Foster Wheeler Energy Limited (FWEL) report, which recommended that Uganda could even have a refinery of 30,000 BPD in the meantime, 60,000 BPD in the midterm and up to 120,000 BPD in the long run. But this was sweet-old-2011 when prices were over US$100.

Currently, there are doubts the prices at US$48-50 would even support the cost of production and other costs. Countries like Saudi Arabia spend only less than US$ 10 to produce a barrel of oil, meaning they can afford to sell it for even US$30 and still make a profit.

For Uganda, the cost of producing a barrel is estimated to be over $30 and yet there are several other costs involved. In short, the breakeven point for Uganda’s oil is between US$ 50 and 60.

The other costs come about because, for instance, Uganda is landlocked and its oil is said to be waxy; needing pipelines to be heated if it is to be transported to the refining facility or exporting. The export pipeline alone is estimated to cost about US $4.5 billion that is US$7.5 billion if you add the US$ 3 billion for the refinery. Amongst them, the oil companies claim to have also spent about US$ 7 billion in the past years.

US$7.5billion plus US$ 7 billion gives you about US$15 billion, which is still on a lower side given the stage the industry is still at. It is these sorts of figures that critics look at and say such projects might not be worthwhile given the current prices.

But it seems for President Museveni and his army of technocrats the current oil prices are not the biggest of concerns. On Jan.03, Museveni while appearing on Capital radio’s Capital Gang said Uganda would build the refinery under whatever circumstances.

“Even if you said let us get two billion [barrels of oil] when the prices were $100 a barrel that would be $200 billion. But even if now it goes to $60, it could be $120 billion. That is a lot of money,” he said. He has a point.

But Ernest Rubondo, the soft spoken but tough negotiator, who heads PEPD, has an even greater point. Predicting the impact of the current oil prices on Uganda’s oil and gas sector is premature, he told The Independent, given that oil prices have always been volatile and that the appraisal of the discoveries in Uganda is only being concluded now.

With PEPD not badging, however, oil companies continue to make effort to lobby Museveni directly behind the back of the tough negotiators at PEPD. But every time they have scheduled a meeting with the president, he has surprised them and invited Rubondo who is usually armed with figures that convince Museveni that officials at PEPD know what they are doing. Even as The Independent went to press a group of officials hoped to get the government to loosen up through a series of meetings with top officials including Prime Minister Ruhakana Rugunda and the President himself. It is not clear what these efforts will bear.

Source — The Independent

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Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.


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