OPINION: Uganda’s Oil and Gas Projects: The Value at Stake

By Peninah Aheebwa: an Energy Economist and the Director Technical Support Services at the Petroleum Authority of Uganda

The East Africa Crude Oil Pipeline project (EACOP), which is meeting resistance from opponents of Uganda’s development, is one of the projects Uganda has planned to monetize its oil and gas assets, which are currently valued at US$ 116 billion (gross). These assets are certainly among the country’s biggest economic assets in terms of value.

Some of the strategic reasons for choosing to export about 57% of the crude oil to be produced in the country are to access the international market, enhance the country’s export base and the trade balance which is currently in deficit.

The other project for monetizing the country’s oil and gas assets is the Refinery, with a strategic objective of meeting Uganda’s petroleum products needs that are currently estimated at 36,000 barrels/day and growing at an annual rate of about 7%. This would also save the country foreign exchange expenditure of over US$ 1.23 Billion per year.

Among the main petroleum products expected to be produced under the oil production (Tilenga and Kingfisher) and the refinery projects is Liquified Petroleum Gas (LPG). Production of LPG, which is mainly used in households and would be a key replacement to the use of charcoal and firewood is expected to be produced at a scale of over 300,000 tons per year at peak production. This amount is close to the total amount of LPG currently being consumed in the whole of East Africa.

The life cycle of the above projects is under 30 years, which is far below the target by the most radicle energy transition pledges.

The size of Uganda’s economy as reported by the Ministry of Finance Planning and Economic Development is US $ 45.7 billion, with expected domestic revenue of US $ 6 Billion (13% of GDP) in 2022/23.  The economy is dominated by the services sector at 41.5%, followed by industry at 26.8% and the agriculture sector at 24.1%. The country recorded a trade deficit of US$ 413.80 Million in May 2022. In addition, the country has very high levels of unemployment.

Economies like the United Arab Emirates (UAE) and Norway, among others, were not in a different situation from the above at the start of their oil and gas industry. These economies were able to leverage on their oil and gas resources to achieve economic take off. Uganda’s oil and gas projects can significantly contribute to the country’s economic takeoff, given the fiscal and non-fiscal benefits expected to accrue to the country.

The key drivers include:

• The magnitude of the expected investments, estimated at $15 – 20billion, in a space of 3 – 5 years which will triple the country’s Foreign Direct Investments during this period.
• Reasonable in-country capacity to ensure a significant share of the investments in form of employment and provision of goods and services is retained in the country.
• A fair share for government from the expected oil revenues (close to an average of 70%)
• The institutional, regulatory and governance infrastructure to ensure government’s share in the oil revenues is secured and put to good use.

The frameworks for the country’s oil and gas sector now in place together with the activities being implemented make it clear that the oil and gas industry is going to be transformational on Uganda’s economy and in improving the wellbeing of its citizens. It is therefore only rational that this upcoming transformation is welcomed and supported. The benefits are coming in a number of forms; i) revenue from the agreed fiscal regime; ii) the participation of Ugandans and Ugandan Enterprises through employment and provision of goods and services also known as National Content; iii) local social and economic development; iv) sectoral linkages to ensure broad based growth; and v) improved investment rating of the country, among others.

Fiscal benefits through the agreed regimes (US$ 70 Billion)

Pre-first oil Tax and Non-Tax Revenues

From 2017 to 2021, a total of UGX 577.4 million was paid by the five Oil Companies licensed in the country. The revenue was in the form of Income Tax, PAYE, Stamp Duty, Value Added Tax and Withholding Tax.

During the same period, US$ 7,662,580 was received from the Oil and Gas Sector in form of Non-Tax Revenue (NTR). These payments were received with respect to Application fees, Bonuses, Data sale, Surface rentals and Training fees.

Expected revenues through the agreed fiscal regime after first oil

The fiscal regimes between the upstream (Tilenga and Kingfisher) and midstream (EACOP and Refinery) projects differ and so are the expected returns to government from the same.

The Upstream projects are run under a Joint Venture arrangement with TotalEnergies holding an interest of 56.66% in all the projects, CNOOC holding a 28.33% interest and the Uganda National oil company (UNOC) holding an interest of 15% on behalf of the Government of Uganda.

The pipeline project is managed through the EACOP Company with shareholding from the Uganda National Oil Company (15%), the Tanzania Petroleum Development Corporation (15%) and the two oil companies; TotalEnergies (62%) and CNOOC (8%). Government will hold a 40% share in the refinery project.

Using the prevailing assumptions, government is entitled to a net Take of 75% from the upstream projects which translates to US$ 66 billion (US$ 2.6 billion per year) with the 25% going to paying the investors’ return. From the EACOP, through dividends and applicable taxes government is expected to earn US$ 400 million. From the refinery, through dividends and applicable taxes, government is expected to earn US$ 3.3 billion.

In this regard, from the three main projects as indicated in the chart below government earns a total of US$ 69.7 billion over the projects’ life and an average of US$ 2.8 billion per year. This expected average annual income to government is 47% of the projected domestic revenue collection for the 2022/2023 (US$ 6billion). It is expected that in line with the Public Finance Management Act 2015, this money will be earmarked for investment and infrastructure development therefore, bridging the infrastructure financing gap estimated at US$ 400 million per year.

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