Why government of Uganda signed agreements with Tullow oil against parliament’s wish

Was the government of Uganda bullied by big oil companies led by Tullow to sign the new oil agreements, or the government acted in the best interests of the country? Many people continue to ponder on why the government went ahead to sign oil production sharing agreements with Tullow oil and award the company two oil production licenses , despite the Parliamentary resolution halting oil prospecting and production activities until new oil laws are in place.

The government and Tullow oil at the beginning of February 2012 signed the production sharing agreements for Kanywataba and Pakwach basin oil wells in Lake Albert rift Basin. The government also gave Tullow an oil production license for 400 million barrel kingfisher oil well worth 1.5 billion US dollars.

Map shoil Albertine Graben oil fields in Uganda

The Minister of Energy and Mineral Development, Irene Muloni says the agreements were good because they enabled Tullow to farm out some of its stake to Total and CNOOC with each of the three oil companies having share holding of 33.3% to avoid monopoly of Tullow in oil Uganda’s production.

Many Members of Parliament and c civil society organisations have criticized the government move to sign the contracts when Parliament had halted activities in the oil sector. As a show down between Parliament and the Executive became imminent over the oil agreements, President Yoweri Museveni delivered before the Parliament an explanation on why the government sought it prudent to sign the oil agreements. He didn’t say much other than to emphasise it would be a strategic mistake for Uganda to fail to sign those agreements with oil companies, since it would undermine investor confidence in the oil industry and make Uganda lose out on maximum benefits from the key oil resource.

But we have landed on long held intelligence information that explains why the government signed the oil agreements and pushed its NRM MPs to support the move, despite widely held protests earlier.

  • Fear of Tullow Exit due to Kenya oil potential
  • Loss of investor confidence in Uganda
  • Uganda losing position as regional oil hub
  • Missed revenue if Tullow leaves or delays work

 

Fear of Tullow Exit due to Kenya oil potential

There was general worry that Tullow might be forced to give up their operations in Uganda if the company continued to get hard time ascertaining its business and concentrate on its new oil prospecting interests in eastern Kenya.

“…speculation that Tullow might reconsider its business interest in Uganda, if and when it successfully hit spuds North Eastern Kenya and other of its interests elsewhere; to get around meeting your requirement on its overall financial input in Uganda,” reads a government dossier on Tullow prepared a few months before the government offered Tullow new agreements. Indeed, Tullow has announced it has found and successfully tested its first oil well in Kenya. This has serious implications for Uganda given Kenya is a bigger economy and Uganda’s major access to the ocean for exports.

Missed revenue if Tullow leaves or delays work

There was also concern that delay on Tullow oil operations was negatively affecting government’s revenue from the company. The company which had by 2011 invested close to 100 billion shillings in Uganda is reported to be paying USD 20 – 25 million US dollars per month in PAYE tax, Withholding tax and NSSF contributions for its workers.

This economic argument was made stronger by the fact that Uganda through licensing Tullow was about to get two additional big time oil operators in CNOC and Total.

“When one takes those numbers of Tullow and multiply them by the potential of three operators, 25 major service companies such as OGEC, Wheatherfords, Halliburton, Slumberger, Baker Huges and others and then add a lost potential from another 100 smaller direct local service companies such as MSL, SIL, Three Ways, Bemuga and others…the “loose loose” scenario of lost time due to protracted negotiations visa vie this type of investment could remain unnoticed,” the government intelligence brief reads.

Loss of investor confidence in Uganda

Uganda losing position as regional oil hub as explained below by this part of the dossier…

“In simple terms 18 months ago, Uganda was the forerunner to become a “Hub” and the strategic player for Oil and Gas within the region given the recent discoveries of reasonable amounts of extractable crude oil, a strong operator with a proven record and capacity to discover and produce Oil (Ghana was an industry record Greenfield to production project). This position was only strengthened via an open and transparent Joint Venture process which not only portrayed Uganda as an investment destination but of more importance, identified two of the 6 world leaders in development and production, CNOOC and TOTAL, this bringing together all necessary skills deliver Uganda as a Regional Hub” .

However, for this to work successfully, numerous factors have to align:

  • Trust and cooperation between the Oil Companies and the GoU.
  • Robust international and bi-lateral relationships focusing on a mutually beneficial strategy around Oil evacuation routes, pipelines and a refinery to maximize profitability and harness regional stability, especially with DRC, Sudan and Kenya.
  • But most of all, time is of the essence and lost time is our enemy.

The current situation 18 months down the line is at best, erosion of value for Uganda and realistic possibility that sooner rather than later, a ‘loose loose’ situation for both Uganda and the Joint Venture. The ‘deal’ is already heavily weighted in favour of Uganda to the extent that the Oil Companies are severely challenged to find residual value yet still the bottlenecks and negotiations continue and the marginal benefits achieved today are already having negative ramifications on lost time towards development, production and inward investment. The situation only made worse by the current Global financial crisis”

 

Also see more of our stories and documents on oil in Uganda

Download Forsterwheeler report on Uganda Oil Industry

Key Issues of contention in Uganda’s oil sector

Members of parliament up in arms against government agreements with Tullow Oil

Tullow oil to sell stake after getting license and agreements from government of Uganda

Tullow risks losing assets in Uganda following suit to halt oil activities

Uganda government production sharing agreements with oil companies

Uganda government approves Tullow oil takeover of Heritage assets

Ugandans ponder oil benefits

Fosterwheeler final report on Uganda oil industry refinery

Parliament pins Bank of Uganda Governor for spending first oil money on buying fighter jets

Government of Uganda outlines oil production program

Parliament calls for censure of key ministers Sam Kutesa, Amama Mbabazi and Hillary Onek over oil bribery allegation

Uganda urged to invest oil revenues in income generating activities

Uganda buoyant over oil prospects as Museveni outlines key strategy

Government asked to solve land purchase conflicts in oil producing areas

Tullow oil investment profile in Uganda

Ultimate Media

 

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