INTERVIEW

NEWS ANALYSIS

`We should go Muntu walking

back to the out of Besigyes
Movement shadow
system

BUSINESS

Discontent over oil

local content

Leading Ugandas power

generation efforts

Issue No. 354 February 06 - 12, 2015

Ushs 5,000,Kshs 200, RwF 1,500, SDP 8

Oil investors

fire workers,
close operations
What did the country do wrong


www.independent.co.ug
Issue 354.indd 1

2/2/15 9:11 PM

COVER STORY

Uganda oil now for 2020

t
By Haggai Matsiko
When he arrived in Kampala from Paris in October 2014, the tough talking new Total E&P
([SORUDWLRQDQG3URGXFWLRQERVV)UDQFRLV5DQKDGRQHPLVVLRQRQKDQGVHFXULQJDSUR-
duction licence. Where the man he was replacing, Loic Laurandel, had cooed and purred
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a time they are not making money and, insiders tell The Independent, telling it as it is was
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10

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COVER STORY

An oil well under exploration on the showers of lake Albert

few days after his ar-
rival, however; on
Nov.13, the govern-


face. It announced
Japans Toyota Tsusho
as the winner of the
contract to carry out a feasibility study for
its oil pipeline. For Total, the sting in the
announcement made on centre court dur-
ing the Energy Sector Review conference at
Speke Resort Munyonyo in Kampala was
in the choice of pipeline route. Total had
wanted it through Mombasa; the govern-
ment had pushed it to another Kenyan port;
Lamu.

pushing enough. Whatever the case, few

in mid-January 2015, barely 100 days after
arriving at the French majors Kampala
headquarters on Plot 21, Yusuf Lule Road,


internal dynamic. Apparently, under his
friend, the former Total boss Christophe de
Margerie, who was killed in a plane crash
-

Not with Patrick Pouyanne, who replaced

Christophe.
-
ting costs at Total. Insiders say the company
plans to shed 80 per cent of the expatriate

-
ness since Totals downsizing is following
on the heels of similar action from another
major player in Ugandas oil sector, the Irish
oil explorer; Tullow.
At the peak of activity in 2013, Total had
-

Francois Rafin
triates. Currently, only about 40 of the expa-
triates are remaining and over 30 of these
are set to be recalled by May.
Despite being bigger and richer, Total
E&P is following in the footsteps of Tullow,


Kenya and others in Ghana. And any time
this year, according to a source, London
is expected to give a directive for further
restructuring.

Missing crucial timelines

It is not hard to understand why the com-

panies are sending employees packing. Last
year the two of them were operating a total
of six rigs. Total E&P, the busiest was oper-
ating four and Tullow two. As February
begins, the last of these rigs will be demo-
bilised and dispatched to Kuwait. A source
also intimated to The Independent that
Total and Tullow have also closed camps.
Elly Karuhanga, the Chairman, Cham-
ber of Mines and Petroleum, which brings
several players in mining and oil sectors, is
urging the government to act.
This is a wakeup call for all of us, Karu-
hanga added, Time for excuses is done,

Errnest Rubondo
you cant keep holding back the whole sec-
tor simply because of just 2 or 5 percent of
the oil to be recoverable. What about people
who studied at Kigumba and in Trinidad
and Tobago and Dundee and are now on
the street with no jobs? What about Ugan-
dans who borrowed money and invested
and are now choking on these loans?
The former Tullow Oil President for
Africa likened the recalling of the Total boss
to a recalling of an ambassador by a country
after collapse in relations.
The Oil sector is highly risky, he told
The Independent, and it requires a lot of
money, which these investors borrow from

You cannot go for more than eight years

to these institutions to borrow money.

That is why, Karuhanga said, we are see-
ing companies which used to employ 100
people, now employing 10.
That is why we have been saying that
capital is a coward, capital goes where it
grows, Karuhanga added.
But away from the players, the delays to
issue production licences mean that Uganda
has further pushed behind certain critical
February 06 - 12, 2015

Issue 354.indd 11

11

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COVER STORY

A tanker at the Malaba border point transporting fuel to Uganda. With Uganda set to build a larger refinery, investor interest is heating up for its oil.
timelines.
A source has intimated to The Indepen-
dent that the oil companies were in January
forced to push back till mid-2016 the execu-
tion of the Front End Engineering Design
(FEED), which basically involves the pro-
curement, engineering and construction for
the mid-stream industry.

-
sion (FID). Even if this is approved in 2017,
the procurement and engineering phase
would take another 36 months. That means

Karuhanga added that where the prices
are now it is impossible to make an invest-
ment decision and if the prices stay where
they are for the next two years Uganda
might not be in position to produce oil.
Oil prices collapsed from over $130 just a
few months ago to less than $50 per barrel
because of increased US shale production
and the fact that big producers like Saudi
Arabia, Venezuela and Russia declined to
reduce their production.
There is no evidence prices will go up
again in a short time. Experts say that the
current oil price dip resembles the fall
between the 1980s-1990s, which incidentally
was the longest of all the other oil price falls.

Oil firm hit hard

For now, the Uganda government needs

to award production licences. These have
become problematic because since the US$
2.9 billion farm down three years ago in
which Total E&P and Chinas National Oil
Company (CNOOC) acquired a 33 percent
stake each of Tullow Oil, it is only CNOOC
that has been able to acquire a production

12

Issue 354.indd 12

Tullow Oil Plc share price drop

1,000

1,000

800

800

600

600

400

400

200

200
$SU

Jul 2014

Total E&Ps single application for the


-
tration across the sector.
The tension over the stagnation in the
oil sector in Uganda is worsening a bad
situation. Despite promises by the govern-
ment that Total E&P and Tullow would get

told The Independent towards the end of
the same month that negotiations were not
moving.

and Production Department (PEPD) are still
insisting on details like how many jobs we
will be able to avail and we are saying that
we cant be certain at this stage. All we have

small things that are delaying the whole
process.
Total E&P on its part expected the pro-

come. Tullow on the other hand has so far

Oct 2014

Jan 2014

put in about eight applications for; Nzizi,

Kigogole, Mputa, Nsoga, Ngege, among

CNOOC, which got a production licence for

It is not news that Tullow is the most

billion into Uganda since 2006, its inactive
assets here have meant it has to struggle

share price has been halved. Total has also

invested over US$ 2 billion since it began
operations here in 2012.
A source at PEPD, however, told The
Independent that the percentage that the
companies propose to recover remains
one of the key sticking issues and a major
reason as to why the impasse over produc-
tion licences remains unresolved. If they
could abandon their high horses and agree
to tweak a few things, the source said, the

Apparently, PEPD only accepts a mini-

February 06 - 12, 2015

2/2/15 9:11 PM

COVER STORY
mum of 30 percent of recoverable oil. It
appears Total and Tullow are proposing less
than this percentage.
Tullow, which has never been keen on the
production side of its upstream activity in
Uganda and is looking to sell, has registered
the heaviest of losses. While its share price
has been halved, it has also lost money as a
result of these delays.
As part of its 2012 farm down to CNOOC
and Total, it had agreed that they would
only pay it a certain balance if they got pro-
duction licences and if an investment deci-
sion was reached at a certain point.
In addition, a loss on disposal charge is
expected of $0.5 billion, mainly relating to
an updated assessment of the recoverability
of the Uganda contingent consideration
and the partial sale of the UK Schooner and
-
ary trading statement.
In the same statement, Aidan Heavey, the
Tullow Oil Chief Executive announced that
Tullow would continue to cut expenditure
in East Africa and re-allocate our future
capital to focus on delivering high-margin
oil production in West Africa which will

net to Tullow by the end of 2016 and will

business.
The reduced exploration programme, he
noted, will predominately focus on a num-
ber of high-impact, low-cost exploration
opportunities in East Africa.
In East Africa, Tullow operates in only
Uganda and Kenya. Compared to Uganda,
in Kenya the oil companies are active oper-
ating about 10 rigs. As noted already, in
Uganda only one rig is still active and will
soon be demobilised.
Uganda currently has reserves of 6.5 bil-
lion and this covers only 40 per cent of the
area that has oil. But because of this frustra-

clear they will express any interests in the
expected round of licencing of fresh blocks.

Local suppliers suffer

It is not only the oil companies that have

come under the weight of frustration. Their
foreign and local suppliers are counting
immense losses.
The Independent has learnt that giant
international service providers like Baker
Hughes, Schlumberger, Halliburton and
Weatherford are all shifting their bases to
neighbouring Kenya and other countries.
Emmanuel Mugarura, the CEO of the
Association of Uganda Oil and Gas Suppli-
ers (AUOGS) told The Independent that the
delays are costing not just their members
but government as well.
Our members got loans with very high
interest rates, Mugarura said, They are
supposed to service these loans. They
entered joint ventures and these have obli-
gations, which they cant meet because

President Yoweri Kaguta Museveni

Elly Karuhanga
there is no business.
Mugarura advised that government
needs to sit with the oil companies and talk

You can imagine when CNOOC got its

PL a barrel of oil was $130 and today it is
down to $48 yet our oils breakeven point is
between $50 and $60, Mugarura said.
Ben Mugashas Bemuga Forwarding Ltd
is one of the local companies feeling the
pinch of inactivity.
Bemuga is a company that specialises
in oil and gas, he told The Independent,
with no work in the sector, Bemuga has no
work, Bemugas employees have no work
and cant stay on the job, Bemuga cant get
revenue and cant service loans that were
acquired to grow capacity in anticipation of
work.
For Uganda, the low prices have led
many to particularly question whether

US $ 3 billion would still be commercially
viable.
In the past, whenever that question has
arisen, technocrats have pointed to the Fos-
ter Wheeler Energy Limited (FWEL) report,
which recommended that Uganda could

meantime, 60,000 BPD in the midterm and
up to 120,000 BPD in the long run. But this
was sweet-old-2011 when prices were over
US$100.

Currently, there are doubts the prices at

US$48-50 would even support the cost of
production and other costs. Countries like
Saudi Arabia spend only less than US$ 10
to produce a barrel of oil, meaning they


For Uganda, the cost of producing a bar-

rel is estimated to be over $30 and yet there
are several other costs involved. In short, the
breakeven point for Ugandas oil is between
US$ 50 and 60.
The other costs come about because, for
instance, Uganda is landlocked and its oil
is said to be waxy; needing pipelines to be
-
ing facility or exporting. The export pipeline
alone is estimated to cost about US $4.5 bil-
lion that is US$7.5 billion if you add the US$

the oil companies claim to have also spent
about US$ 7 billion in the past years.
US$7.5billion plus US$ 7 billion gives you
about US$15 billion, which is still on a lower
side given the stage the industry is still at.

and say such projects might not be worth-
while given the current prices.
But it seems for President Museveni and
his army of technocrats the current oil prices
are not the biggest of concerns. On Jan.03,
Museveni while appearing on Capital
radios Capital Gang said Uganda would
-
stances.
Even if you said let us get two billion
[barrels of oil] when the prices were $100 a
barrel that would be $200 billion. But even
if now it goes to $60, it could be $120 billion.
That is a lot of money, he said. He has a
point.
But Ernest Rubondo, the soft spoken but
tough negotiator, who heads PEPD, has an
even greater point. Predicting the impact of
the current oil prices on Ugandas oil and
gas sector is premature, he told The Inde-
pendent, given that oil prices have always
been volatile and that the appraisal of the
discoveries in Uganda is only being con-
cluded now.
With PEPD not badging, however, oil

lobby Museveni directly behind the back of

the tough negotiators at PEPD. But every
time they have scheduled a meeting with
the president, he has surprised them and
invited Rubondo who is usually armed


doing. Even as The Independent went to

government to loosen up through a series

Prime Minister Ruhakana Rugunda and

the President himself. It is not clear what

February 06 - 12, 2015

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