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State of Oil and Gas in Uganda - 2017

Uganda is currently described by the World Bank as the hottest inland exploration frontier in the world and the country to watch in the oil and gas space, due to the commercial discovery of an estimated 6.5 billion barrels of oil, 1.4 billion of which are recoverable.

Against this backdrop, the major players in the Oil and Gas market are Total E & P Uganda, Tullow Uganda Operations Pty Limited and China National Offshore Oil Corporation (CNOOC) who are all holders of production licences issued in respect of six (6) exploration blocks (the Blocks) in Albertine Graben (located in the western arm of the Great East African Rift, which they operate under the terms of a joint venture in accordance with a Joint Operating Agreement.

With oil production expected to begin in 2020, there has been a hive of activity in the oil and gas sector. Some of the notable developments are discussed below:

Local Content

The Petroleum (Exploration, Development and Production) (National Content) Regulations 2016 came into force on 6th May 2016 and are intended to ensure participation of indigenous Ugandan entities in the oil and gas sector.

In brief, the regulations require any licensee, contractor and sub-contractor to give priority to goods and services that are produced and available in Uganda and which are rendered by Ugandan citizens and companies during procurement.

In addition, they are required to reserve the contracts for ring fenced goods and services like security, foods and beverages, hotel accommodation for supply by Ugandan citizens and companies.

A Ugandan company is defined as a company incorporated under the Companies Act No. 1 of 2012 and which provides value addition in Uganda, uses available local materials, employs at least 70% Ugandans and is approved by the Petroleum Authority of Uganda.

Several concerns have been raised regarding this definition of a Ugandan company as it does not guarantee that indigenous Ugandan companies will benefit from the sector. In effect, the definition seeks to suggest that a fully owned foreign owned entity incorporated in Uganda but employing 70% Ugandans would qualify as a Ugandan entity.

This may mean that locally owned companies could be outcompeted by the foreign owned entities when it comes to bidding for contracts and confirming capacity and experience.

The regulations were recently discussed at the 4th National Content Conference on Oil and Gas held in Kampala. The major sentiment at this conference was the need to amend the regulations and ring fence more goods and services for local contractors.

Issuance of exploration licenses

In February 2015, the Government of Uganda (the GoU) announced the first open competitive licensing round for the Blocks. Armour Energy Limited of Australia, WalterSmith Petroman Oil Limited, Niger Delta Petroleum Resources Limited of Nigeria and Oranto Petroleum International Limited were the 4 shortlisted firms with whom the GoU will negotiate and sign other production sharing agreements.

Issuance of production licenses

A total of 9 production licenses have been issued so far in Uganda. The first one was issued to CNOOC in 2013. Tullow Uganda Operations Pty Limited and Total were issued with 5 and 3 licenses respectively in August 2016.

The issuance of these production licenses was a huge milestone and is expected to fast-track the foreign investment decision of the 3 joint venture companies which is expected by the end of 2017.

In February 2017, Technip, Fluor and Chicago Bridge and Iron Company were awarded a contract for the first phase of the Front End Engineering Design (the FEED) on 2 of the exploration areas.

This is intended to continue for a period of 6 months and aims to determine the technical aspects, cost estimates and implementation schedules for the production phase. Upon successful completion, the 2 successful companies will be required to compete for the Engineering, Procurement and Construction contract.

Oil refinery

The GoU previously entered into negotiations with RT Global Resources for the establishment of a local oil refinery. Negotiations with RT Global Resources failed and the GoU turned to SK Engineering Limited, the alternate bidder.

These negotiations also yielded no results. The GoU is currently back to the drawing board in search of a new partner for the oil refinery project.

Approximately forty (40) unsolicited bids were received and evaluated last year. Currently they are shortlisted to 4 consortia and the winner is to be announced soon. The project structure has since changed with the GoU now favoring a public led as opposed to a private led partnership.

Once completed, the refinery is expected to produce 60,000 barrels of oil per day.

Crude oil pipeline

The much anticipated crude oil pipeline is now set to run from Hoima in Uganda to Tanga in Tanzania. This was a shift from the agreed position in the Memorandum of Understanding signed between the GoU and the Government of Kenya which preferred the route from Hoima 7 to Lokichar to Lamu in Kenya.

The revised decision was taken after feasibility studies showed that the Hoima to Lokichar to Lamu route was more costly and insecure due to potential exposure to Somali Al Shabab terrorist activities along that route.

A FEED study on the pipeline was launched in January 2017. Gulf Interstate, the contractor is required to map out the actual route, technical designs and cost for the pipeline which is currently estimated to cost about $ 3.55 billion.

The MEMD received several bids for the crude oil pipeline project that are currently under evaluation.

The Future

While Uganda waits with bated breath for its first drop of oil in 2020, it is under scrutiny over how it will handle a natural resource that is both considered a blessing and a curse.

The question whether Uganda will use its” black gold” to propel her economy to a much desired middle income status by 2020 depends largely on GoU’s commitment to among other things prioritize national participation, promote environmental sustainability especially in ecologically sensitive exploration areas and the strategies in place to avert the oil curses that has struck other oil rich nations.

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