Uganda’s Oil still far from production due to infrastructure challenges

Output from Ugandan crude deposits being developed by companies including Tullow Oil Plc and Total SA is unlikely to be exported as soon as the nation expects because of the scale of the infrastructure projects required to transport the fuel out of the country, bloomberg reports.

The government of Uganda, where oil was discovered in 2006, has said it expects to begin shipping crude within five years.

“Everything being done in Uganda is for the first time ever, everything can be a risk,” said Will Hares, an analyst at Bloomberg Intelligence in London. “Timetables are prone to slipping, especially in frontier regions. All stakeholders would suffer from project delays.”

Uganda has an estimated 1.7 billion barrels of recoverable oil at fields in the Lake Albert basin that the government expects Tullow, Total and China’s Cnooc Ltd. to start pumping by 2021. The government has estimated it will receive $43 billion of revenue from the resource over 25 years.

-Work Beginning-

Developing the fields to commercial production requires about $8 billion, though engineering design work on the project has “yet to start,” said George Cazenove, a spokesman for Tullow. For production to begin in 2021, Tullow would have to make a final investment decision on the project by 2018, according to Cazenove. The crude would then need to be ferried along a yet-to-be constructed 1,400-kilometer (870-mile) pipeline to the Indian Ocean port of Tanga in neighboring Tanzania. The Ugandan government this week opened a tender for surveys of the route for the conduit.

Uganda expects the pipeline, which is backed by Total, to be completed in three years, according to Robert Kasande, the acting head of the state-run Petroleum Directorate. The government is considering building an airport in the oil region to speed up logistics, he said in an interview Nov. 10.

Total spokeswoman Ahlem Friga-Noy and Cnooc spokeswoman Aminah Bukenya didn’t respond to e-mailed requests for comment.

The development of Uganda’s oil industry has been slow when compared to other sub-Saharan African producers like Ghana, where output started three years after discoveries were made. The Ugandan government took 10 years to issue production licenses to Tullow and Total. In addition, in April it reversed a decision made eight months earlier to route the pipeline via Kenya, deciding to go via Tanzania instead. The challenges of coordinating the cross-border project between Uganda and Tanzania has “substantially raised the probability of a delay,” BMI Research said in an e-mailed note.

-Refinery Talks-

In July, Uganda also halted talks with Rostec State Corp. of Russia to build a $4 billion refinery, postponing the production of refined oil for two years until 2020.

“A multitude of projects that need to be completed significantly increases chances of development bottlenecks,” Jacques Nel, a senior economist at Paarl, South Africa-based NKC African Economics, said in an e-mailed response to questions. “The government has more to lose than oil companies regarding the risk of delayed oil production.”

There is the potential for further “politically driven delays” in Uganda should the government insist that oil production be preceded by the proposed 60,000 barrels-per-day refinery, said Clare Allenson, an Africa analyst at Eurasia Group. Uganda is targeting production of 200,000-300,000 barrels per day by 2021-22.

“Market realities will also likely contribute to delays,” with crude prices having dropped 45 percent in the past two years, she said.

Brent crude, the benchmark for more than half the world’s oil, traded at $44.55 a barrel on the London-based ICE Futures Europe exchange by 10:47 a.m. local time. West Texas Intermediate, the U.S. marker, traded at $43.18 in New York.

“Low oil prices will be a drag on project timelines as operators grapple with a difficult financing environment,” Allenson said.

Source: Bloomberg

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