UGANDA: An Introduction to General Business Law

Uganda’s Oil Project Closing in on FID and First Oil – Finally?

An Overview – Oil and Gas in Uganda
The prospects for the long-awaited first oil in Uganda are looking favourable with an imminent Final Investment Decision (FID). The Ugandan Minister of Energy and Mineral Development has been quoted as saying that the FID is indeed scheduled for the second quarter of 2021, which position is endorsed by the Petroleum Authority of Uganda, the Uganda National Oil Company, and international oil companies (IOCs) like Total E&P and China National Offshore Oil Corporation (CNOOC). These pronouncements have been prompted by notable progress on key negotiations between government and the IOCs under the pending project agreements, that have in turn led to a hive of activity to finalise land acquisition, facilitate infrastructure development and settle the review of the applicable regulatory landscape.

Oil was discovered in Uganda in 2006 with estimated reserves of 6.5 billion barrels, 1.4 billion of which were recoverable. The discovery caused great excitement in Uganda with prospects of oil production at 200,000 barrels per day estimated to translate to USD14,000,000 per day in Uganda’s economy. Given the magnitude of these numbers on the country’s economy, Uganda seems poised to become a middle income country with a marked increase in GDP, income per capita, industrialisation, improved balance of payments and governance, and standards of living, as well as greater access to jobs and cross border markets.

The Project
The oil project comprises wells in the upstream referred to as Kingfisher (40,000 barrels per day (bpd)), and Tilenga (190,000 bpd), operated by Total E&P and CNOOC. Tullow Plc’s subsidiary in Uganda exited last year following completion of its farm down to Total E&P and CNOOC. The midstream comprises a 1,445 km East African Crude Oil Pipeline (EACOP) running from Hoima to Tanga port in Tanzania, and a first ever oil refinery with a capacity of 60,000 bpd in Hoima – both estimated at a value of USD3.5 billion respectively. A 240 million litre storage terminal will also form a part of the midstream.

After protracted engagements between international, regional and local stakeholders, the Government of Uganda (GOU) has signed and initialled key project agreements including an Inter-Government Agreement with Tanzania in 2017, and Host Government Agreements with Total E&P in 2020. The GOU also settled a longstanding tax dispute on the sale by Tullow of its stake in the upstream to CNOOC, and put in place an enabling regulatory framework with robust laws to cater for the upstream, midstream and downstream activity. The laws address areas such as licensing, national content, environment and health and safety among others – all critical to the project.

New Developments 

With the now concluded presidential and general elections in January this year, the respective projects across the value chain have gained a new momentum on the promise of stability, with the following significant developments:

Refinery project
A Project Framework Agreement (PFA) for this project was signed on 10 April 2018. The planned 60,000 bpd, inland refinery in Hoima is a private sector led project under the Albertine Graben Refinery Consortium (AGRC), comprising General Electric, Saipem SpA, Yaatra Ventures LLC and Lionworks. The GOU’s 40% share in this project will be held by a subsidiary of the Uganda National Oil Company (UNOC).  

While there is progress on the land acquisition and feeder infrastructure (including a 211 km petroleum products pipeline) to support this project, the Final Investment Decision (FID) for the refinery is pending for various reasons, some of these discussed below.

East African Crude Oil Pipeline Project (EACOP)
The 1,445 km pipeline will take the crude oil from Uganda’s oil fields starting from Hoima, to the Port of Tanga in Tanzania for shipment to other countries. UNOC, together with the Tanzania Petroleum Development Corporation (TPDC) and the two international oil companies, CNOOC and France’s Total E&P, will be the shareholders in EACOP.

In 2017, both Uganda and Tanzania agreed to expedite the implementation of the EACOP, and while construction in Tanzania was set to launch on 22 March 2021, this has unfortunately been delayed by the recent passing of the Tanzanian president John Pombe Magufuli. Construction of the pipeline in Uganda is set to begin shortly after EACOP FID is concluded.

EACOP FID was held up by a prolonged taxation dispute on the capital gains tax applicable to the farm-out by Tullow to CNOOC and Total, and while this has recently been resolved, questions remain on the financing required and the finalisation of agreements including the Transport Tariff Agreement, Host Government Agreement with Tanzania and the Shareholders Agreement.

Notwithstanding the above hurdles, GOU is looking to raise domestic funds to finance its stake in EACOP, and the oil companies are optimistic that sufficient project finance will be raised. Uganda’s Ministry of Energy and Mineral Development has also advised that the bulk of the legal and commercial frameworks under these agreements have been concluded and that FID is imminent, following conclusion of the FEED study and Environmental and Social Impact Assessment (ESIA) consultations on this project which confirmed its financial and economic viability. This optimism is evidenced by several tenders for bids for contracts on the pipeline. It is anticipated that the conclusion of the EACOP FID will be a catalyst for construction, which is estimated to take 36–42 months.

Kampala Storage Terminal and Kabaale Industrial Park
There is also a plan to construct a 240 million litre capacity Kampala Storage Terminal (KST) worth USD51 million. The KST will be a storage terminal for refined petroleum products from the refinery in Hoima, also holding part of a national strategic reserve and commercial fuel, and a distribution centre for petroleum products from the refinery to market centres in Kampala and within the East African region. UNOC is looking to develop the KST through a joint venture and is currently in the process of sourcing a strategic partner.

Separately, the Kabaale Industrial Park that will host the Uganda Refinery, the international airport, crude oil and products storage, transmission hub, logistics warehousing, petrochemical industries and associated facilities among others will form part of the wider oil development project. Construction of the airport is well underway.

Perceived Challenges and Opportunities
Uganda is eager to accelerate the plan to begin pumping crude oil and earn petrodollars. While both local and foreign stakeholders have taken preliminary measures to ensure they are capacity building and closing logistical gaps for optimal participation in the sector, there are ongoing concerns.

Some environmental groups continue to be opposed to changes in the ecosystem of the Nile Delta, citing wildlife disturbance and environmental degradation from the pollution arising from oil production activities. There is also the looming question on the global shift towards using cleaner and renewable energy sources, the drop in the oil price per barrel since the onset of COVID-19, etc. We understand that mitigating measures are under discussion to address these concerns.

Overall the benefits of oil production in Uganda are expected to far outweigh any adverse effects. Oil presents vast opportunities to both the public and private sector in terms of expertise, skills transfer and growth under partnerships. It also presents opportunities for both foreign and local investors as the government and the IOCs actively seek for contractors and suppliers across the value chain including but not limited to engineers, housing construction, road infrastructure design and construction, environmental hazard controls, and vocational training services, security, transport, catering, etc.

Conclusion
The Ugandan president Yoweri Museveni is hopeful that oil will revive an economy hard hit by the COVID-19 pandemic and provide early achievement of development goals such as poverty reduction and sustainable use of natural resources.

With the increased momentum towards FID, the promise of commercial crude oil is within reach and the public is encouraged to actively engage, considering its anticipated far reaching and transformative effects on Uganda’s economy and the livelihood of its population.