http://www.theafricareport.com/East-Horn-Africa/east-africa-kenya-or-uganda-who-gets-oil-first.html


Posted on Friday, 25 April 2014 17:54

By Jeff Mbanga in Kampala and Parselelo Kantai in Nairobi

Oil companies are keen on Kenya's prospects while firms in Uganda engage in long and difficult negotiations on infrastructure and production contracts. Kenya could edge Uganda out with first exports in 2016.

The race is on between Kenya and Uganda to become East Africa's first commercial oil producer. Both countries plan to start oil production within the next few years, and regional cooperation will be necessary for infrastructure projects to move ahead.

The Ugandan government signed a memorandum of understanding with France's Total, the United Kingdom's Tullow and the China National Offshore Oil Corporation (CNOOC) on 5 February, after more than a year of slow negotiations.

In Uganda, Tullow discovered an initial field containing an estimated 1.1bn barrels in 2006, but current plans call for production by 2018 at the earliest. CNOOC signed a production contract for the Kingfisher field last year, while Tullow and Total await the signature of a series of contracts.

Rather than jumping into action following the signing of the February memorandum, Total has been cautious, while Tullow has been confrontational, showing its frustrations at the pace of development.

Tullow's chief operating officer Paul McDade told the Wall Street Journal on 12 February that the company could reduce its activities in Uganda to finance its projects in Kenya because the fields there are easier to exploit and the government is more supportive.

Tullow said that Kenya could beat Uganda to become East Africa's first oil exporter by starting exports in 2016.

When asked for comment on the developments, Total Uganda's corporate affairs manager, Ahlem Friga-Noy, urged patience and said: "Detailed discussions will soon take place between the government of Uganda and the partners to identify the concrete steps and actions to be taken to ensure a smooth implementation of the memorandum."

One of the causes of delay has been the Ugandan government's insistence on building an oil refinery. The planned refinery will have an initial capacity of 30,000 barrels per day, which could be raised to 60,000.

The government has shortlisted six companies that could build the plant and expects to announce a winner in the first half of this year. It wants a privatesector company to take up a 60% shareholding, while the government takes the remaining share.

Progress on the refinery is not going according to plan, however, owing to difficulties in compensating families living around the 29km2 site in Kabaale, Hoima District, in western Uganda.

A draft December 2013 report on development in the region around Lake Albert, where the oil is found, said that many households were dissatisfied with the payout, while others quickly spent the money without developing plans for re- settlement. It suggests that this could further delay the refinery.

President Yoweri Museveni's government wants countries in the region to purchase small stakes that will reduce its total shareholding in the refinery. At least $12bn of investment is needed for Uganda to produce oil by its target year of 2018.

That includes a planned pipeline, which is expected to cost between $2.5bn and $5bn, to reach the Kenyan coast at Lamu or Mombasa.

Talks on the Lamu pipeline have stalled because of fighting in South Sudan, where the Juba government could use the export outlet to reduce its reliance on pipelines through Sudan.

Construction of the pipeline and refinery could begin next year. The government has not decided if it will insist on owning part of the pipeline.

"The decision on whether the government will invest in the pipeline or not is dependent on the structuring of the investment [...] This decision will therefore be made later when the financing structure has been decided," explains commissioner Ernest Rubondo of the energy ministry's petroleum explora- tion and production department.

With production yet to begin, the government is already showing signs that it will have difficulty managing the oil revenue.

Parliament is set to debate the amended Public Finance Bill 2012, which seeks to create a petroleum fund, among other things, under the auspices of the central bank. The government's first proposal was to split the fund into two accounts.

A reserve account would hold money for future generations, with strong limitations on who could access it, while a holding account would be used to support the national budget.

The government no longer sup- ports protecting revenue for future generations.

In October 2013, finance minister Maria Kiwanuka argued: "The split effectively prohibits the government from ever accessing the principal of the Petroleum Investment Reserve for budget financing. This is likely to prove incredible in a country with relatively limited oil reserves and large long-term development needs."

Civil society groups are opposed to the government's change of position.

There has been more momentum on the Kenyan side of the border after Tullow made its discovery at the Ngamia-1 well in 2012.

Tullow and its Canadian partner African Oil Corporation are in talks with the government to launch field development and the construction of an export pipeline by next year. Africa Oil announced in February that it will drill 20 wells in Kenya and Ethiopia this year.

Despite companies' statements about the government's support for the industry, it has been slow to set up frameworks.

While Kenya's constitution makes sound provisions for the equitable sharing of mineral resources, the laws that give the executive a broad discretionary mandate on how to exploit the country's natural resources have not been updated for close to 30 years.

"The upstream game is shrouded in secrecy. We know that the Turkana Basin alone contains about 10bn barrels of oil – that's between three and five times Uganda's known deposits. But the government is yet to clearly articulate what it is going to do with the oil, for the country generally and the people of Turkana specifically. What, for instance, are the terms of the production-sharing agreements with Tullow?" asks Mohamed L. Baraka, a petrochemical engineer with decades of experience in the oil sector who now runs a downstream oil company.

But secrecy should not be understood to mean inactivity. In February 2012, then finance minister Njeru Githae requested a visiting International Monetary Fund (IMF) mission to draw up a fiscal policy framework for the country's extractive industries.

The IMF team delivered its confidential 81-page report last April. It makes a number of recommendations on how to design production-sharing agreements.

Notably, the report's authors introduce what they refer to as the 'R-factor' – a built-in ratio that automatically adjusts revenue shares after tax when oil prices rise above existing or anticipated prices.

It is not clear how far the government has gone in implementing those recommendations.

While a review of the Mining Act is close to being tabled in parliament, there is no word on the progress of a Petroleum Act that would shape the emerging upstream oil sector.

But the unaddressed issue of resource sharing is making little progress.

Indeed, as the country moves into production mode, the questions of regional equity are only likely to grow stronger.

Last year, Tullow's operations at its Ngamia-1 well were shut down for a month as locals picketed the company's office demanding jobs.

As an indication of the rapidly changing infrastructure terrain, oil services companies – notably Halliburton, Baker Hughes and the Egyptian firm Saxon Energy Services – have set up shop in Turkana, expanding from their Uganda operations. ●